Failure to Supervise

Failure to Supervise

Financial and securities brokerage firms have a legal obligation to supervise any financial advisors (FA), brokers, or other agents working for them. This is to prevent violations and ensure the firm is compliant with the Financial Industry Regulatory Authority’s (FINRA) rules.

In other words, these firms have a legal duty to supervise their FAs and are accountable for any subsequent recommendations they make to clients to ensure full compliance with regulations and prevent violations of any established state and federal securities laws. If a FA fails to adhere to FINRA rules or acts unethically in any way, this can constitute a failure to supervise on the part of the broker to catch any irregularities or violations.

The FINRA rules were put into place to keep the industry honest. Firms that violate the rules can be held accountable in a court of law, and this is where the Schwartz Law Firm comes in.

What Is Failure to Supervise?

Brokerage houses have an explicit duty to supervise any brokers, traders, or FAs that work for them to ensure they are compliant with regulatory rules. When one of their representatives breaks rules, displays acts of misconduct, or otherwise fails to act in his/her client’s best interests, the advisors’ firm may be liable for violating its obligation to properly adequately monitor the advisors’ activities. This is known as a “failure to supervise.”

It doesn’t matter which office the individual works in, if they are a part of the brokerage firm, the firm is responsible for monitoring activities. Brokerages that fail to reasonably screen their representatives’ activities can be held liable for their carelessness and/or inaction if they were aware of any rule-breaking activities. Furthermore, victims can pursue claims of negligence or fraud against both the broker and the firm.

Examples of Failure to Supervise

Essentially, “failure to supervise” is a broad allegation that covers a variety of mistakes a firm or its representatives may make. There are many scenarios where a firm can fail to properly supervise, which results in a financial loss to its clients. FINRA asserts brokerage firms must perform the following activities:

  • Rigorous pre-screening hiring of advisors
  • Suitable and thorough training and licensing for advisors
  • Annual reviews of individual brokers regarding FINRA rules
  • Office-wide inspections to identify potential violations

Brokerages are also responsible for reasonably supervising these listed events on the part of the FA, broker, or other agents.

  • Account openings
  • Account activity
  • Investment suitability
  • Improper investment planning
  • Performance of the account
  • Advisor’s outside activity
  • Account churning (buying and selling investments that don’t benefit the investor)
  • Customer complaints
  • Securities fraud

For example, if an advisor decides to sell away from the firm (i.e., sell securities to its clients that are not offered through the firm), fails to execute a proper investment strategy, or fails to properly train the advisors, all of these actions would constitute a failure to supervise violation.

Additionally, brokerage management personnel are supposed to routinely go over computerized reports with the task of spotting abnormalities, or identifying any red flags and, if anything is found, take action. In many instances, this never happens and financial advisors continue improper – and illegal – behaviors.

What Penalties Can Brokerages Face?

Unfortunately, failure to supervise and other types of violations are common. In response to the growing number of instances, FINRA has been tightening rules and also has started to implement harsher penalties to rogue firms and repeat offenders. Firms that fail to notice, ignore, or follow up on any red flags present will be held accountable for their inaction.

Violations brokerage firms face include fines, suspensions, and potential bans from the financial industry. Investors can also pursue recovery options if the misconduct or negligence resulted in them losing money due to the inappropriate actions of the FA or any associated individuals with the brokerage firm.

Cases can be very specific, so it’s always a good idea for investors to get legal advice if they feel they’ve been mistreated or victimized by fraudulent actions.

Victim of a Failure to Supervise? Contact an Attorney Today!

Victims who have suffered a financial loss as a result of a brokerage firm’s failure to supervise should know it’s important to take action right away. The more time that passes, the lesser chance victims have of recovering from losses.

The attorneys at The Schwartz Law are highly experienced with these events and can assist in your investigation of this claim. Our team is happy to answer any questions you have about your experience with a brokerage firm you trusted to perform due diligence with your money.

To learn more about how we can help you, please contact The Schwartz Law Firm at 1-813-226-3372 or fill out our online form today.