Failure to Supervise: Broker-Dealer Misconduct

Brokerage firms have a legal duty to supervise their brokers and the activity in their clients’ brokerage accounts. When brokerage firms fail to supervise, they can be held liable for any losses incurred as a result. To recover these losses, securities attorneys file arbitrations through FINRA against brokers and brokerage firms.

When you invest with a broker, you should be able to rely on their recommendations. Investors expect brokers to be informed about the investment products they recommend, along with client financial goals and risk tolerance. Firms serve as another layer of protection for investors, and FINRA requires that brokerage firms have systems to supervise and flag suspicious or unsuitable transactions.

Brokerage firms must be accountable when their brokers perpetrate fraud or misconduct towards clients. They must make informed decisions about who they hire and constantly supervise their brokers’ activities—the occasional check-in does not suffice. Failures can have significant consequences for investors, and they entitle investors to file claims to recover their investment losses.

What Constitutes Failure to Supervise?

Failure to supervise violates federal law and the Financial Industry Regulatory Authority (FINRA). Specifically, Section 15(b)(4)(E) of the Securities and Exchange Act of 1934 holds brokerage firms accountable for failing to adequately supervise brokers who commit federal securities law violations. FINRA Rule 3110 requires firms to establish supervisory systems and written procedures to prevent broker fraud and financial misconduct. Under FINRA Rule 3110, brokerage firms must:

“[E]stablish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules… [and] establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.”

FINRA Rule 3110 also requires, “at a minimum,” that brokerage firms:

  1. Designate one or more registered principals who have authority to carry out the firm’s supervisory responsibilities;
  2. Use “reasonable efforts to determine that all supervisory personnel are qualified, either by virtue of experience or training, to carry out their assigned responsibilities;”
  3. Assign each broker to a supervisory registered principal; and,
  4. Require all brokers to participate in annual compliance reviews with their assigned supervisory registered principals.

Examples of a Brokerage Firm’s Failure to Supervise

Brokerage firms’ broad duty to supervise includes several specific obligations. In many of these instances, our team of failure to supervise investment attorneys can represent you and fight for the investment you lost due to a brokerage firm’s failure to supervise.  The following are all examples of violations justifying claims for recovery of investment losses:

  1. Failure to review internal communications
  2. Failure to review the incoming or outgoing correspondence
  3. Failure to adequately monitor transactions in investors’ accounts
  4. Failure to review or respond to investor complaints
  5. Failure to adequately investigate suspected broker fraud or misconduct
  6. Failure to confirm brokers’ experience, credentials, disciplinary history, or registration status
  7. Failure to conduct compliance reviews on at least an annual basis
  8. Failure to adequately safeguard investors’ funds and securities from fraud and misconduct
  9. Failure to maintain adequate books and records
  10. Failure to adopt appropriate supervisory systems and written procedures

Brokerage firms are in a position to prevent and uncover stockbroker fraud and misconduct, and the federal government and FINRA expect firms to use their position of authority to help protect investors. When they fail to do so, they can—and should—be held accountable, and that’s what we do at Patil Law.

In most cases, this means working with a securities lawyer to file a claim for damages in FINRA arbitration. Brokerage firms consent to arbitration as a condition of registration, and FINRA has the authority to issue damages awards to investors who suffer losses due to brokerage firms’ failure to supervise.

How a Failure to Supervise Investment Attorney Makes a Case

How do you prove you are entitled to financial compensation if you suspect your brokerage firm failed to supervise? Filing a successful claim for this type of negligence requires four elements:

1.    An Underlying Securities Law Violation

To pursue a claim based on a brokerage firm’s failure to supervise, it is first necessary to show that your broker committed an underlying securities law violation. These violations can take various forms and range from making false statements or omitting material information about an investment product to excessive trading, selling away, or selling unregistered securities.

2.    Association Between the Broker and Brokerage Firm

Next, you must prove an association between the broker and the brokerage firm. This is relatively straightforward—broker affiliations are listed on FINRA BrokerCheck, and email addresses, website profiles, and various other pieces of evidence can be used to establish the association. There can occasionally be questions about timing (i.e., whether the brokerage firm employed the broker at the time in question), but this is typically among the easier elements to prove.

3.    Supervisory Jurisdiction

If a brokerage firm has the requisite association with a broker, then the firm will also have the requisite supervisory jurisdiction in most cases. Again, brokerage firms’ duties to supervise under federal law and FINRA Rule 3110 are quite broad. Firms claiming not to have supervisory jurisdiction over their brokers will face an uphill battle.

4.    Failure to Reasonably Supervise

Finally, you must be able to prove the brokerage firm failed to reasonably supervise your broker, perhaps demonstrating a specific failure as listed above or another type of failure depending on the circumstances. While the obligation to “reasonably” supervise limits brokerage firms’ obligations to an extent, firms claiming a particular form of supervision was “unreasonable” will typically face an uphill battle as well. Our securities attorneys can help identify supervisory failures and take the remaining steps necessary to pursue a successful FINRA arbitration claim on your behalf.

Speak with a Securities Lawyer Today About Your Failure to Supervise Claim

To find out if you have a claim stemming from a brokerage firm’s failure to supervise, schedule a free, no-obligation consultation at Patil Law. We represent individual investors in FINRA arbitration against brokers and brokerage firms nationwide. To speak with an experienced investment fraud attorney about your situation in confidence, call 800-950-6553 or tell us how we can help with our online contact form.