Part of a securities brokerage firm’s duties is to adequately supervise its brokers. Rules the Financial Industry Regulatory Authority (FINRA) have enacted and federal securities laws require firms to reasonably supervise the actions of their brokers, preventing rule violations and keeping the securities industry honest. Every brokerage firm in the U.S. must show that it has supervisory systems in place and that it adequately supervises its brokers. Brokerage firms must also show compliance procedures they have effectively implemented, diligently supervising broker activity.
Brokerage firms may be liable for the actions of their financial advisers and brokers based on provisions involving control person liability. The U.S. Securities and Exchange Commission (SEC) defines control as the power to direct the management and policies of a person. By contract, brokerage firms have control over their brokers. Thus, they may be liable for a broker’s misconduct or bad behavior. FINRA Conduct Rule 3110 specifically addresses this liability, stating that final responsibility for improper supervision rests with the brokerage firm.
What Constitutes Failure to Supervise?
“Failure to supervise” is a broad allegation that encompasses a variety of errors on a firm’s part. In basic terms, failure to supervise is a firm’s failure to impose, enforce, and implement an adequate system of supervision. Unless the broker-dealer firm can establish a good-faith defense showing that it did have a proper supervision program in place at the time of the alleged broker misconduct, the courts will impose civil liability. If a firm failed to comply with its own rules, resulting in client harm, the courts may also impose primary liability.
In addition to these liabilities, a brokerage firm may have vicarious liability of the actions of its employees through the principles of an employer’s liability. A broker’s misdeeds may therefore come down to brokerage firm liability because of the employer-employee relationship. The brokerage firm may be held responsible for a broker’s actions in many situations involving broker misconduct within the scope of employment.
According to FINRA rules, brokerage firms must monitor activities such as:
- Account openings
- Investment suitability
- Account activity
- Overall performance of the account
- Investment adviser outside activity
- Account churning and margin calls
- Customer complaints
The firm branch manager and his or her supervisors may be responsible for supervising and monitoring these activities. FINRA arbitrators may consider failure to do so, intentionally or accidently, as negligence. If a broker fails to perform according to industry standards, causing a client damages, a firm may be liable for failing to supervise the individual.
Brokerage Firm Negligence Attorneys
Erez Law specializes in broker and broker-dealer negligence. We take on cases from around the US, including Puerto Rico and throughout Latin America, including Argentina, Colombia, Venezuela, and Mexico, to serve harmed investors. While not every investment loss points to broker-dealer negligence or failure to supervise, many do. Similar to other types of employers, a brokerage firm must take reasonable care to ensure the trustworthiness of its employees. A bad broker may stem back to a firm that failed to implement or enforce supervisory procedures. Brokerage firms that break the rules that FINRA and the SEC have enacted deserve justice.
Failure to supervise can lead to rogue brokers, acting within their own best interests without consequence. In turn, this can lead to major losses on the client’s end. If you believe your broker, financial advisor, or firm has been careless in some way, and that this caused your losses, contact our broker misconduct lawyers.
We’ll speak with you during a one-on-one consultation to understand the details of your situation and give you our professional opinion on whether or not you have a case. Call 888-840-1571 or contact us online to get started.