Failure To Supervise
Under FINRA Rule 3010, a brokerage firm owes a duty to all of its customers to properly monitor and supervise its employees. The rule states that “each member shall establish and maintain a system to supervise the activities of each registered representative…that is reasonably designed to achieve compliance with applicable securities laws and regulations…”
The duty to supervise is a critical component of the securities regulatory scheme. Regulatory authorities such as the SEC and FINRA have steadily heightened the supervisory obligations of brokerage firms in recent years. Supervisors have an obligation to respond vigorously to indications of irregularity, often times referred to as “red flags.” A supervisor cannot ignore or disregard red flags and must act decisively to detect and prevent improper activity.
The importance of proper supervision is manifested in various types of securities activities. Brokerage firms are responsible for monitoring a broker’s investment recommendations to clients, outside business activities, and representations to investors among other obligations. In addition, brokerage firms are responsible for conducting due diligence on the securities products they sell and devising a written supervisory system to achieve compliance with the securities laws. Below are ways in which brokerage firms may violate their supervisory responsibilities.
- Selling Away
- Suitability Supervision
- Investment Product Due Diligence