What is a Failure to Supervise or Negligent Supervision?

A failure to supervise occurs when a broker’s negligent action cause an investor to suffer investment losses, and the broker’s supervisor responsible for overseeing the broker’s activities failure to supervise contributed to the stockbroker’s negligent act. Failure to supervise can lead to a securities arbitration claim when the investor sustains investment losses as a result of the stockbroker’s negligent act and the brokerage firm’s negligent supervision. 

The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) enacts rules and oversees securities firms and brokers to ensure investors are protected. Section 15(b)(4)(E) of the Securities Exchange Act establishes that brokerage firms are responsible for supervising, with a view to preventing violations of the federal securities laws, persons subject to their supervision.  FINRA Rule 3110 requires brokerage firms to supervise the brokers associated with their firm. Brokerage firms must exercise proper supervision over the activities of the stockbrokers acting on behalf of the firm to prevent violations of the securities laws and regulations, and FINRA rules. Branch managers are the first line of defense responsible for monitoring brokers and investigating red flags suggestive of misconduct. 

Brokerage firms are required to design and implement a supervisory system to protect investors from fraudulent trading practices. An appropriate supervisory system must include a reasonably designed written supervisory procedures (WSPs) tailored to the firm’s business lines. The WSPs must describe mechanisms for ensuring compliance and detecting violations, not simply set out what is prohibited.

When red flags are discovered suggesting that possible misconduct may be occurring, the branch manager must promptly investigate the specific conduct and take action to protect against the wrongdoing of the established standards. Supervisors must act decisively when they are made aware of any indication of irregularity, and take conclusive action. When a supervisor discovers red flags suggesting irregularities, they cannot rely on the unverified representations of the brokers under their supervision.

Brokerage firms fail to fulfill their supervisory responsibilities when its compliance and supervisory policies and procedures are not reasonably implemented to adequately supervise its registered representatives with respect to their recommendations that investors buy unsuitable investment products. Below are some examples of supervisory failures that contribute to the lack of prevention or detection of broker’s unsuitable recommendations to investors:

• Brokerage firm fails to adequately train its registered representatives about investment products so that the brokers understand the products and their risks sufficiently in order to form a reasonable basis that a recommendation to buy the investment product was suitable for some investors. 
  
  
• Brokerage firm fails to develop any mechanisms, such as alerts or exception reports, to assist branch managers in identifying unsuitable recommendations related to investment products or to monitor and surveil recommendations with respect to investment products. 
  
  
• Brokerage firm fails to develop systems to assess whether its registered representatives followed the firm’s general suitability policies and procedures that were then in place and whether the recommendations to buy made by its registered representatives were suitable in light of customers’ risk profiles, relative sophistication, and investment objectives. 

Riera Law is Here to Help Victims Recover Losses Due to Brokerage Firm’s Failure to Supervise

If you believe that you have suffered investment losses due to a brokerage firm’s failure to supervise its broker, please contact Riera Law today. Our team can evaluate whether your investment losses were the result of a brokerage firm’s negligence. If you were the victim of a brokerage firm’s failure to supervise, we may be able to recover the losses through a claim in FINRA arbitration. Click here or call us today 305-204-9779 for a free case evaluation.