Failure to Supervise
“adequate supervision is the first line of defense to protect the investors”
According to Financial Industry Regulatory Authority (FINRA), brokerage firms are responsible for the supervision of all the activities of its financial advisors. FINRA rules require the supervision of financial advisor as well as compliance with the securities industry standards of care for the handling of customer accounts as reflected in brokerage firm compliance manuals. The financial brokerage firm compliance manuals provide written procedures designed to achieve compliance with security industry rules and regulations by financial advisors of the firm.
Brokerage firm computerized systems monitor the activities of financial advisors designed to supervise the specific activities related to the type of business conducted at the branch office. Branch office managers are the first line of defense to protect the investors from violations of FINRA rules and regulations. Brokerage firms and branch office manager are responsible for the supervision of financial advisor:
- hiring and selection;
- communications with customers;
- presentation materials;
- suitable recommendations; and
- client transactions.
Branch office managers can delegate supervisory tasks but not the responsibilities given to them by the brokerage firm. A large number of financial advisors in a branch office may require delegation of supervisory tasks to front-line managers who supervise the day-to-day activities of financial advisors assigned to them for supervision. Due to the number of financial advisors and the number of transactions at the branch office level, an computerized, management by exception system, is used for the oversight of client accounts. The monitoring and review at the branch office is accomplished through the use of exception reports developed by the brokerage firm to flag certain activities in customer accounts. The activities that are monitored may include:
- percentage decline in financial brokerage account equity;
- levels of margin in brokerage accounts;
- excessive trading or “churning”;
- financial advisor account revenues based on account equity; and
- securities concentration.
Direct communications with customers by the branch managers may be required to determine whether clients understand the investment strategy and the risks associated with the investment strategy recommended by their financial advisor. Investors who have questions about the activity in their brokerage accounts should not be thwarted in their efforts to obtain further clarification for questions that are not fully answered by their financial advisors. Maybe it is time to speak with a securities attorney to determine your rights as an investor.
The KlaymanToskes can help you determine whether an investment loss is the result of a failure to supervise the activities in your brokerage account. If an investor suffers losses as a result of a failure to supervise they may be able recover their losses in a FINRA arbitration claim for damages.