Failure to Supervise

Broker-dealers and investment firms are required to establish reasonable policies, procedures and systems to supervise the activities of each of their registered representatives in order to comply with federal securities laws, rules promulgated by the Securities Exchange Commission (“SEC”) and rules established by self-regulatory organizations (“SRO”), like the Financial Industry Regulatory Authority (“FINRA”). Failure to establish and enforce appropriate supervisory policies and procedures may potentially expose investment firms to both regulatory discipline and civil liability.

Specifically, FINRA Rule 3010, Supervision, states, “Each member shall establish and maintain a system to supervise the activities of each registered representative, registered principal, and other associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD Rules.” This rule requires every firm or broker-dealer to adhere to various supervisory responsibilities, including developing systems to monitor financial advisers’ and stockbrokers’ actions to ensure that they are in compliance with industry rules and regulations and the firm’s internal policies and procedures. When a firm fails to adequately supervise its registered representatives, that firm may be liable for damages and losses its customer’s suffered due to their stock-broker or investment adviser’s misconduct.

Generally, as part of a firm’s supervisory responsibilities, broker-dealers and investment advisery firms are required to engage in pre-hire screening of potential hires such as brokers, investment advisers and registered representatives, including vetting prior customer complaints. A firm must establish supervisory policies, procedures and systems to:

  • Review outside business activity and potential selling-away transactions;
  • Approve and monitor correspondence and marketing material sent to customers;
  • Review and monitor email, advertising and social media usage;
  • Review and approve the account opening process;
  • Monitor account activity to avoid unsuitable recommendations, potential churning and other sales practice abuses; and
  • Monitor account performance.

Failure to establish and implement reasonable supervisory policies, procedures and systems could lead to lack of proper supervision which can ultimately result in broker misconduct and sales practice abuses including fraud, unsuitability, unauthorized trading, negligence, churning, breach of fiduciary duty and misrepresentation/omissions.

Because of the sales practice abuses that could result from a firm’s failure to supervise, the SEC and SROs, like FINRA, have established a complex regulatory scheme of rules and laws to protect investors. An investment firm or broker-dealer’s failure to adequately supervise its registered representatives is very serious. In a FINRA securities arbitration, failure to supervise may be asserted by a customer or investor against a broker-dealer or investment firm as an independent cause of action. If a FINRA or American Arbitration Association (“AAA”) arbitration panel determines that a broker-dealer or investment firm failed to supervise a broker or adviser, the arbitration panel may hold the firm responsible for the customer or in the form damages.

Our attorneys at Lax & Neville LLP have the extensive experience in representing customers with failure to supervise claims and can formulate a strategy to potentially recover your losses from damages. Recently, Lax & Neville LLP won a $900,000 FINRA Arbitration, which includes compensatory damages, punitive damages, interest and costs against John Thomas Financial, Anastasios Belesis, George Belesis and Joseph Castellano for churning and failure to supervise after a hearing in New Orleans, Louisiana. Contact Lax & Neville today and schedule a consultation.

New York Securities Lawyer Blog - Failure to Supervise
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