You Can Hold Brokerage Firms Accountable for Failing To Supervise
Brokerage firms have the responsibility to supervise the actions of their employees. When they fail to do so, it can have a significant negative impact on the investors. When brokers and advisors act in a way that is detrimental to investors, the broker, as well as his or her employer, can be held directly liable for any losses the investor suffers as a result.
In fact, FINRA Rules impose a duty to establish and maintain supervisory procedures, specifically FINRA Rule 3010(a), which states:
(a) Supervisory System
Each member shall establish 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. Final responsibility for proper supervision shall rest with the member. …
The U.S. Securities and Exchange Commission (SEC) has held that “the duty of supervision” includes the responsibility to investigate “red flags” that suggest misconduct may be occurring and to act upon the results of such investigation. For example, the SEC has upheld sanctions against supervisors for failure to abide by Rule 3010(a) and supervise brokers offering and selling unsuitable investments. The SEC has also held supervisors liable for failing to reasonably supervise brokers who had over-concentrated customer accounts in illiquid and unsuitable investments, which were regularly apparent from a review of customer account records.
Supervision within a brokerage firm can take many different forms, and management’s failure on any front can create grounds for a claim. Among other areas, management should have processes in place for the regular review of investor accounts, quality checks to see that the right products are being recommended to the right investors, audits to ensure that brokers are only selling products approved by the firm, and other considerations.
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