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Failure to Supervise Attorney

Brokerage firms have an obligation to supervise their employees. This obligation, established under the Financial Industry Regulatory Authority (FINRA) Rules, includes a number of specific requirements, and brokerage firms that fall short of meeting these requirements can face liability for investors’ losses in FINRA arbitration. While employers are legally responsible for their employees’ acts and omissions in most cases, the obligation to supervise gives investors a direct claim against their brokerage firms. Thus, claims for failure to supervise can prove highly effective in appropriate cases. If you believe that your brokerage firm may have failed to adequately supervise your broker, you should consult with a failure to supervise attorney promptly.

Understanding Brokerage Firms’ Obligation to Supervise

The obligation for brokerage firms to supervise their brokers exists under FINRA Rule 3110. This Rule provides:

“Each [registered brokerage firm] 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 [firm].”

FINRA Rule 3110 then lists seven specific “minimum” requirements for maintaining adequate supervision. It outlines additional obligations for brokerage firms to adopt written procedures, conduct internal inspections, and review transactions for possible violations of federal law. Among other requirements, to meet its obligation to maintain adequate supervision, a brokerage firm must:

  • Establish and maintain written compliance procedures;
  • Designate one or more registered principals at each office who has the authority (and responsibility) to carry out the brokerage firm’s supervisory duties;
  • Assign each registered broker to a registered representative or principal who is responsible for supervising the broker’s activities;
  • Use “reasonable efforts” to ensure that all supervisory personnel are qualified by virtue of training or experience; and,
  • Interview each registered representative and principal at least annually, “at which compliance matters relevant to the activities of the representative(s) and principal(s) are discussed.”

In short, FINRA Rule 3110 requires brokerage firms to take a number of steps to ensure that their brokers have adequate supervision. Brokerage firms must also adequately document their efforts to comply with FINRA Rule 3110, and they must conduct interviews, inspections and investigations as necessary to ensure that their brokers are not violating the law.

Establishing a Brokerage Firm’s Failure to Supervise

There are four elements to a claim for failure to supervise in violation of FINRA Rule 3110. To pursue a claim in FINRA arbitration based on failure to supervise, investors must be able to prove all four elements, and they must also be able to prove that the failure to supervise is responsible for their investment losses. The four elements of a claim for failure to supervise under FINRA Rule 3110 are:

  • An underlying securities law violation;
  • An association between the broker who committed the violation and the registered firm;
  • Supervisory jurisdiction over the broker who committed the violation; and,
  • Failure to reasonably supervise the broker who committed the violation.

In most cases, the first and last elements are the most important. Usually, the relationship between the broker and the brokerage firm will be clear, and it will be clear that the brokerage firm has supervisory jurisdiction. Proving failure to reasonably supervise involves examining the brokerage firm’s efforts to comply with FINRA Rule 3110, while proving an underlying securities law violation involves examining why the investor’s losses occurred.

There are many types of securities law violations that can support claims against brokerage firms under FINRA Rule 3110. Some common examples of securities law violations in failure-to-supervise cases include:

Failure to Conduct Due Diligence

Brokerage firms have an obligation to ensure that their brokers are recommending valid investments that align with their clients’ investment objectives. To meet this obligation, they must ensure that their brokers are conducting appropriate due diligence. For most investments, this means that brokerage firms must ensure that their brokers have considered the following information:

  • The identity and management of the issuer;
  • The issuer’s assets and business prospects;
  • The claims made in the issuer’s disclosures and marketing materials;
  • The intended use of the proceeds of the investment offering; and,
  • Whether the investor’s money is likely to be applied according to the stated use and whether this use is reasonable in light of the issuer’s business purpose and prospects.

Selling Away

“Selling away” occurs when a broker offers investors securities that the broker’s firm has not approved. It is prohibited under FINRA’s rules and federal securities laws. Whether a broker intentionally sells away or is unaware that his or her firm does not offer a particular security, selling away will generally be considered evidence of the firm’s failure to provide adequate supervision.  

Suitability Violations

Providing unsuitable investment advice is another common form of broker misconduct that will justify a claim for failure to supervise in many cases. Under federal securities laws and FINRA Rule 2111, brokers and brokerage firms have an obligation to provide “suitable” investment advice to their clients. If a broker’s investment recommendation is unsuitable based on an investor’s age, current portfolio, financial needs, investment objectives, tax status or any other pertinent factor, the broker’s firm may be liable for any resulting losses under FINRA Rule 3110.

These are just a few of several forms of broker misconduct that can support failure-to-supervise claims against registered brokerage firms, but many others can give investors grounds to pursue a claim.

Contact the Failure to Supervise Attorney at Zamansky LLC

To find out if you have a claim against your brokerage firm for failure to supervise, call us at 212-742-1414 or contact us online. A failure to supervise attorney at our firm is available to represent individual investors nationwide. We offer free and confidential consultations. 

 

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