The Financial Industry Regulatory Authority (FINRA) requires that securities firms adequately supervise their brokers to prevent securities law violations.
Investors who lose money as a result of broker misconduct may be able to file a claim for investment losses against the brokerage firm for failure to supervise.
Brokerage Firm Supervisory Requirements
FINRA has three rules addressing brokerage firm supervision. These rules generally require firms to perform:
- Pre-hire broker screening
- Broker training
- Broker-investor transaction oversight
At the time a broker is hired, the brokerage firm should look into the agent’s background for any red flags, such as prior misconduct or disciplinary history.
FINRA is stepping up enforcement against recidivist brokers.
In 2017, FINRA announced that it would emphasize firms’ hiring and monitoring of high-risk and recidivist brokers. Firms may be required to employ extra vigilance when supervising brokers with a spotty track record—and could be held to a higher supervisory standard if a high-risk/recidivist broker engages in misconduct. Research shows that almost half of advisers who are fired for misconduct are reemployed in finance within a year.
Firms must also ensure that new hires are licensed to sell securities and are current on training, including sales and product training and education in administrative procedures and federal securities compliance regulations. Training should include continuing education in FINRA rules compliance.
In addition, broker-client communications and transactions should be monitored. Firms, for example, should identify and investigate suspicious activity such as:
- Unsuitable investments
- Overconcentration
- Selling away
- Not providing accurate information to an investor
- Failure to report securities transactions
Firms Must Adequately Enforce Supervisory Policies
It is not enough for firms to simply put in place procedures that can detect broker improprieties. Firms also must have an adequate system for implementing and enforcing their supervisory policies.
FINRA allows some discretion when it comes to supervisory policies and controls, but firms are required to have:
- Written supervisory procedures
- Internal inspections
- Reviews of internal firm communications, customer complaints, and securities transactions
- Annual compliance reports
Find Out if You Have a Failure to Supervise Claim
The financial industry is largely self-regulated, which can make it difficult for investors to know whether brokers and firms are serving their best interests.
If you suffered investment losses and suspect that misconduct may have occurred, the Business Trial Group’s securities litigation attorneys will review your claim, inform you of your rights, and explain your legal options.
