Securities Arbitration

Types of Claims

Failure to Supervise

Investors are the customers of not only their brokers, but also of the firms employing their brokers.  Firms earn huge profits from brokers, and investors place themselves in vulnerable positions by entrusting their savings with brokers.  Not surprisingly, securities regulators and many federal and state laws require firms to protect investors by stringently monitoring and supervising their brokers.  For instance, the SEC requires firms to register with FINRA and follow FINRA’s rules, and FINRA Rule 3110 requires that firms supervise their brokers.  These supervisory rules help investors recover losses because courts and arbitrators use rules like Rule 3110 to define duties that, when breached, give investors a claim to pursue a recovery from a firm.

It makes sense to pursue supervisory claims against firms to recover investors’ losses because firms have more financial resources to compensate investors and can share in the blame for or enable broker misconduct.  Conflicts of interest incentivize firms to not meet their supervisory obligations because firms must spend time and money supervising while they can profit from broker misconduct.  For example, hiring qualified supervisors to ensure brokers recommend suitable investments costs money, and a firm can earn large commissions from their brokers recommending unsuitable investments.  Investors enforcing their rights through private arbitration claims against brokerage firms is a key check on firms that lawmakers built into the securities regulatory system.

Examples of Firms’ Specific Duties to Supervise Brokers

The following are a sampling of the many specific supervisory obligations imposed on firms by specific laws, regulations, and rules.

Rules heighten firms’ supervisory duties, for example, over brokers with past misconduct.  The duty can also be heightened when brokers have the power to make decisions for their clients.  This includes NASD Rule 2510, enforced by FINRA, requiring firms to “approve promptly in writing each discretionary order” made by brokers for investors and to “review all discretionary accounts at frequent intervals.”

Firms must thoroughly investigate brokers’ backgrounds before hiring them to ensure they possess requisite good character, business reputation, qualifications, and experience.  This includes contacting their employers from the three previous years.  Firms cannot hire known bad brokers simply because they have a lucrative client list.

Firms must supervise their brokers’ outside business activities that firms should be aware of, such as selling investments not approved for sale by the firm.  This can make firms liable for failing to supervise unlawful outside activity, like theft or Ponzi schemes.

What Can Investors Do About Firms’ Failure to Supervise?

Firms may try to cover up their failures to supervise by sending investors letters asking them to respond if they are unhappy with their brokers’ or firms’ conduct, knowing few respond to such letters.  It is important to be vigilant if you receive such a letter and to respond in writing if you are not happy, as well as to seek legal counsel if appropriate sooner rather than later.

If you believe your losses were caused by your broker or his or her current or past firms, you may have a claim to recover your losses.  Contact Marquardt Law Office LLC for a free evaluation about recovery options.

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