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Failure to Supervise

At the center of most securities fraud and investment loss cases is a failure to supervise by the brokerage firm. Brokerage firms are vicariously liable for all actions and inactions, representations and misrepresentations and conduct of employees and registered Financial Advisors committed during the course and scope of their employment. It is the responsibility of brokerage firm management to ensure that the account activity is consistent with the needs and objectives of the investor. If “red flags” are (or should have been) detected, the brokerage firm has a regulatory responsibility to take corrective action in order to protect the investor.

FINRA Rule 3110 Addresses Supervisory Responsibilities

FINRA Rule 3110 provides that brokerage firms are required to establish and maintain a system of supervision reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA Rules.

According to Rule 3110

A member’s supervisory system shall provide, at a minimum, for the following:

  • The establishment and maintenance of written procedures as required by this Rule.
  • The designation, where applicable, of an appropriately registered principal(s) with authority to carry out the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker-dealer is required.
  • The designation of one or more appropriately registered principals in each branch office with authority to carry out the supervisory responsibilities assigned to that office by the member.
  • The assignment of each registered person to an appropriately registered representative(s) or principal(s) who shall be responsible for supervising that person’s activities.
  • The use of reasonable efforts to determine that all supervisory personnel are qualified, either by virtue of experience or training, to carry out their assigned responsibilities.
  • The participation of each registered representative and registered principal, either individually or collectively, no less than annually, in an interview or meeting conducted by persons designated by the member at which compliance matters relevant to the activities of the representative(s) and principal(s) are discussed. Such interview or meeting may occur in conjunction with the discussion of other matters and may be conducted at a central or regional location or at the representative’s(‘) or principal’s(‘) place of business.

FINRA Rule 3110 requires the review of communications (i.e., emails and text messages) as well as any written materials provided by the Financial Advisor to his or her clients.

In addition, Section 20 of the Securities Exchange Act of 1933, and the provisions of most state securities statutes, provide for “control person” liability. This means that if a finding is made that an employee or Financial Advisor violates the securities laws, the employer and control persons of the employer are also liable for the same misconduct. These control person provisions provide additional investor protection and further incentive for brokerage firms to properly supervise.

Examples Of Failed Supervision

  • The following are all examples of violations justifying claims for recovery of investment losses
  • Failure to review internal communications
  • Failure to review the incoming or outgoing correspondence
  • Failure to adequately monitor transactions in investors’ accounts through appropriate reports
  • Failure to review or respond to investor complaints
  • Failure to adequately investigate suspected broker fraud or misconduct
  • Failure to follow-up on red flags
  • Failure to confirm brokers’ experience, credentials, disciplinary history, or registration status
  • Failure to conduct compliance reviews
  • Failure to adequately safeguard investors’ funds
  • Failure to adopt appropriate supervisory systems and written procedures

The Wolper Law Firm has extensive experience handling claims involving a brokerage firm’s supervisory obligations. If you believe that you were a victim of securities fraud or investment loss caused by brokerage firm misconduct, there may have also been a failure to supervise. Please contact the Wolper Law Firm at 800.931.8452 for a free consultation and case evaluation.

Attorney Matthew Wolper

Matt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]