Failure to Supervise

Investors primarily deal with a single broker or financial advisor who manages their money. These brokers, in most cases, are agents of a financial institution. As agents, the financial institution has an obligation to monitor and supervise the activity of the stockbroker/financial advisor. They are required to monitor financial advisor and/or brokerage accounts for any potential red flags of wrongdoing including the suitability of investment products being offered to clients, the activity in the clients’ accounts, and communications being sent out to clients, just to name a few. Consequently, financial institutions may be liable for failure to supervise their brokers when broker misconduct is found. Financial institutions have a responsibility to have a reasonable supervisory system in place for the protection of investors.

The Financial Industry Regulatory Authority (FINRA) has implemented rules specifically targeting the issue of brokerage firm supervision. FINRA Rule 3110 requires brokerage firms to maintain a supervisory system to oversee the activities of each associated person. The supervisory system must be reasonably designed to achieve compliance with applicable securities laws and regulations as well as FINRA rules. These supervisory systems should be designed to oversee specific activities related to the type of business at each branch office.

The rule requires brokerage firms to establish a registered principal with authority to carry out the supervisory responsibilities. This is usually the branch office manager. Branch office managers are the first line of defense when it comes to protecting investors from violations of FINRA rules and regulations. The brokerage firm and branch office manager are responsible for overseeing various activities, including:

• Financial advisor vetting, hiring and selection;
• Financial advisor training;
• Financial advisor communications with customers;
• Financial advisor presentation materials;
• Financial advisor’s client recommendations; and
• Financial advisor transactions in client accounts.

Often times, an electronic management system is used to assist in overseeing broker activity in client accounts. The electronic management system generates what are known as exception reports. Exception reports are used to flag unusual activity in customer accounts, including the following:

• Large percentage declines in brokerage account equity;
• Levels of margin related to brokerage accounts;
• Excessive trading, also known as “churning”; and
• Securities concentrations.

Sometimes, branch managers are required to reach out to clients to ensure customers understand the investment strategy, risks associated with the strategy employed by the financial advisor and other activities occurring in the accounts. Failure to supervise is a frequent claim against brokerage firms whose financial advisors and registered representatives commit some sort of securities misconduct right under the brokerage firm and branch managers’ noses.

Silver Law Group and its attorneys have extensive experience seeking and recovering losses due to brokerage firms’ failure to supervise its registered representatives. If you’ve suffered losses as a result, you may be able to recover your losses through FINRA arbitration. Our attorneys will evaluate your case at no cost to you and, if we take your case, you pay nothing unless we secure a recovery. Contact our firm for a free consultation.