Securities firms that give advice to and make recommendations to retail customers are required by law and industry rules to supervise their brokers and advisors to attempt to ensure compliance with applicable securities laws, rules, and regulations.
For example, FINRA registered securities firms are required to comply with FINRA Rule 3110 which states as follows:
“Each member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. Final responsibility for proper supervision shall rest with the member.”
A firm’s failure to supervise can lead to their agents, employees, and advisors committing various wrongful acts which result in losses to their customers. For example, if a firm fails to follow up on red flags of wrongful activity, that failure could be considered a failure to supervise which is actionable by the customer that is harmed by the activity.
To properly establish and maintain a reasonable supervisory system, securities firms typically have to adopt a compliance and supervisory manual to be followed, set up automatic electronic report generation based on certain levels of activity in customer accounts, review and approve correspondence and emails, conduct office inspections, review customer and broker files, follow up on red flags of potentially violations, and other reasonable steps to ensure compliance with securities laws.
Some examples of wrongful activity that can be discovered through proper supervision include unsuitable trading, unsuitable recommendations, churning of investments, broker theft of customer funds, the sale of unauthorized investments or ponzi schemes by brokers, and fraudulent misrepresentations about investments, strategies, and risk by brokers.
Although securities firms can and should be found liable for their advisors’ wrongful acts under basic agency and employment law even if the firm was not aware of the activity, they can also separately be liable for the firm’s failure to supervise the advisor. Greco & Greco’s Failure to Supervise lawyers typically bring failure to supervise claims through the filing of negligence, breach of contract, control person, and violation of FINRA rules causes of action.
Most state securities acts provide for “control person” liability of firms and management of firms for the fraudulent acts of their agents. For example, Virginia Code § 13.1-522(C) states:
“Every person who directly or indirectly controls a person liable under subsection A or B of this section, including every partner, officer, or director of such a person, every person occupying a similar status or performing similar functions, every employee of such a person who materially aids in the conduct giving rise to the liability, and every broker-dealer, investment advisor, investment advisor representative or agent who materially aids in such conduct shall be liable jointly and severally with and to the same extent as such person, unless able to sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.”
Our Virginia securities fraud lawyers represent individuals from all states across the country in arbitration and litigation against FINRA securities firms and Registered Investment Advisors. Please contact Scott Greco for a free attorney consultation to discuss your case.