Failure To Supervise

When you work with a brokerage firm, they have a duty to supervise the brokers they employ, in regards to their investment recommendations and solicited trades. The investment form must also be able to demonstrate FINRA standards and other industry regulation compliance. In situations where there is misconduct or negligence, which results in losses, the brokerage will be held liable.

What Is Failure To Supervise

Both the New York Stock Exchange and FINRA have created rules and guidelines that govern the conduct and operation of brokerage firms. These rules also require brokerage firms to supervise the activity on the accounts that each of their brokers handles. Additionally, the rules set forth by FINRA state that brokerages are supposed to implement compliance systems that actively monitor the trading activities of their brokers.

The basis of a Failure to Supervise claim is the common-law framework for the doctrine of respondeat superior. This doctrine says that the brokerage is responsible for the actions of its brokers, as their superior, and determines their liability in the case of negligence, misconduct, or other wrongdoing.

As the respondeat superior for the brokers, the brokerage has a significant legal responsibility of supervision. The supervising duties require the brokerage to maintain:

• A working familiarity with each of the broker’s clients or accounts.
• A daily review of all order tickets for each broker.
• Inspection of active accounts on a monthly basis, maintaining a duty to inquire about odd account activity.
• Accurate and complete logs of all supervisory activities.
• Records that fully document each supervisory review.

In a situation where the brokerage or investment firm discovers red flags, they then have a duty to make an “affirmative inquiry”, or an official SEC investigation could result. This means that whenever there are red flags, the firm must make a decisive effort to investigate and prevent any aberrant activity.

Means Of FINRA Compliance

The rules set forth by FINRA dictate that an investment firm or brokerage must implement reasonable systems and procedures to monitor employee activity and prevent fraud. Each brokerage must keep a hard copy of its policies in a supervisory office and must have a supervisor responsible for enforcement. The firms must maintain compliance in new hire screening, adequate training and licensing, annual reviews, communications monitoring, and monitoring of customer transactions. 

New Hire Screening

The regulations for new hire screening make sure that the broker’s background is acceptable. Red flags may include a history of changing firms constantly or having a history of disciplinary actions taken against them.

Training & Licensing

A brokerage should have provisions in place to ensure that its brokers are all licensed to sell securities, and are kept up-to-date on all training.

Annual Inspection & Review

Every year of their employment, brokers at a particular firm should have a meeting with their supervisor about their compliance with FINRA regulations. Each office should also be inspected to ensure compliance.

Broker Communication Monitoring

Official work communications between brokers and their customers or potential customers should be monitored and archived. This applies to current customers as well as those being advertised to. 

Customer Transaction Monitoring

Making sure that customer transaction histories are reviewed periodically can significantly help reduce instances of fraud or misconduct. In many cases, this monitoring is done largely by a computer system or software suite. 

Common Examples Of A Failure To Supervise

There are countless potential scenarios in which you may have a valid Failure to Supervise claim against your investment firm or brokerage. In a large percentage of these cases, it’s highly likely that the brokerage may be able to be held liable for any financial losses suffered during the period.

Some of the most common types of Failure to Supervise claims result from:

• The brokerage or firm failed to completely and properly train the broker.
• The brokerage or firm failed to implement a system for supervising the broker’s trading activity with your account.
• The firm did not adhere to its own supervisory policies and procedures in regard to your account.
• The firm failed to approve or inspect trades made with your account, with the specific aim of finding any industry regulation violations.
• The brokerage failed to supervise trades in and out of your investment account with the aim of preventing theft, fraud, or other unauthorized activity.

The conditions that are required for a Failure to Supervise to occur, and the evidence needed to subsequently prove it are two of the biggest reasons that you should be working with an attorney with experience in filing, and winning, Failure to Supervise claims.

The Challenges Of Proving A Failure To Supervise Claim

In many cases, claims of Failure to Supervise are often added to cases that are focused on other fraud claims. This is generally because proving a Failure to Supervise claim is so factually and labor-intensive. The claimant must fully investigate the brokerage firm and its compliance procedures, as well as its employee communications. This investigation must be able to determine the level of overall supervision of client accounts and must result in proof that the brokerage failed to supervise the conduct or recommendations of its brokers. The damages that are being claimed must also be a direct result of the Failure to Supervise.

Damages Recoverable With Failure to Supervise Claims

If you have suffered losses due to a Failure to Supervise, you may be able to recover significant compensation to cover economic and non-economic losses. Potential damages include:

• Trading losses
• Rescission
• Disgorgement

In some particularly serious cases, the claimant may even be able to request punitive damages.

TorkLaw Can Help Strengthen Your Failure To Supervise Claim

With the considerable challenges inherent in proving a Failure to Supervise claim, investors that want to recover more of the compensation they may be entitled to always have expert legal representation. The first thing you should do is team up with the leading investment fraud and negligence attorneys, like those at TorkLaw. Reach out today to chat with a member of our legal team and discuss the details of your case in a confidential setting.