Failure to Supervise

Failure to supervise is a legal claim based on the doctrine of respondeat superior. This is a legal doctrine that allows for a plaintiff or claimant to hold not just the employee responsible for the wrongdoing, but also the employer. So an investor that has his or her account mismanaged, or is defrauded, can hold not just the financial advisor or broker responsible for this, but also the brokerage firm.

In short, brokerage firms have to supervise their brokers, including the brokers’ recommendations to customers of different securities and investment strategies. That requirement is spelled out under FINRA’s Rule 3110.

FINRA Rule 3110

FINRA’s Rule 3110 requires brokerage firms to have a supervisory system in place as well as written procedures spelling out what the brokerage firm does to supervise its employees. The supervisory system must be “reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.”

At a minimum, having a sufficient supervisory system means:

• Giving someone in the office supervisory authority over the brokers

• Ensuring each broker actually has a supervisor

• Making sure that the supervisors are qualified to be supervisors through experience and training

• Both supervisors and financial advisors meet at least once a year to ensure compliance with the supervisory activities

• Making sure that the supervisory practices are actually written down—they can’t just be informal or word of mouth

• Reviewing all correspondence that financial advisors are sending out to customers, and these reviews must be in writing too

• Reviewing and responding to all customer complaints

How to show a failure to supervise

A failure to supervise claim can happen in many ways. But it always requires an underlying violation by the financial advisor or broker. In other words, the financial advisor or broker first has to commit a violation such as negligence, fraud, unsuitability, excessive trading, or others.

Then, the brokerage firm can be brought in if their failure to prevent or detect the broker’s misconduct is partly to blame.  For example, the firm might have failed to train the broker correctly. Or the firm didn’t supervise the broker’s transactions like they should have.  Or the firm had written procedures, but wasn’t following them. Or maybe it didn’t have any good supervisory procedures in place at all.

Cautionary examples

Many cautionary tales warn against lack of supervision. Here are just a few.

In one case, the Securities and Exchange Commission charged Raymond James & Associates, Inc. with failure to supervise a broker who stole over $900,000 from two elderly customers from 2015 to 2019. The SEC found supervisors at Raymond James did not investigate concerns that the broker was taking the money even after they had been flagged by Raymond James’ Senior-and-at-Risk-Clients group. Raymond James paid a penalty of $500,000.

In another case, LPL Financial, the country’s largest independent broker-dealer, was charged with failure to supervise after one of its advisors took $650,000 of a client’s money and put it into a Ponzi scheme. LPL Financial ignored several red flags that it should have caught.

And in another case, a broker-dealer, Worden Capital Management LLC, was sanctioned over $1.5 million in part for failing to supervise a financial advisor who excessively traded customers’ accounts to make fees. The firm was also required to retain an independent consultant to review the firm’s supervisory systems and procedures.   

Contact us

Feel free to message us if you think that your financial account has been mismanaged. Wilkowski Law will let you know if we think there is a failure to supervise violation as well.