Failure to Supervise

Generally, a brokerage firm will be liable for a failure to supervise when it fails to implement and carry out certain procedures meant to ensure that brokers of the firm are acting in accordance with the laws and regulations pertaining to brokers and brokerage firms. The responsibility to supervise typically falls on the senior personnel at a brokerage firm.

FINRA has enacted three primary rules that relate to a brokerage firm’s supervisory responsibilities:

Rule 3110 – this rule requires firms to have adequate written policies in place to ensure that their brokers and agents are properly supervised.

Rule 3120 – this rule requires firms to have a supervisory control system in place to test the effectiveness of their written supervision policies.

Rule 3130 – this rule requires firms to provide certain information to FINRA about their supervision policies/procedures and compliance with applicable laws and regulations.

When a broker has a history of misconduct, the broker’s firm is required to implement additional measures to ensure that the broker does not continue to engage in misconduct. If a brokerage firm fails to put a broker with a history of misconduct on heightened supervision, it might be liable for failing to supervise. Investors should consult FINRA’s BrokerCheck to review a broker’s disciplinary history before entering into an investment relationship.

Failure to supervise claims usually occur when a broker engages in wrongful conduct that a brokerage firm knew or should have known about. If a brokerage firm notices red-flags about a broker’s misconduct and fails to take the necessary steps to stop or prevent the misconduct, the brokerage firm may be liable for a failure to supervise. Similarly, if a brokerage firm fails to implement policies and procedures that would detect misconduct on the part of a broker, the firm is also likely liable for a failure to supervise.

If your broker has engaged in misconduct that should have been flagged or prevented by your brokerage firm, it is imperative that you discuss the circumstances of the misconduct with an attorney, specifically the Failure to Supervise attorneys at Malecki Law.