Articles Tagged with Failure to Supervise

Brokerage firms owe its clients the duty to supervise its employees and personnel. This is a very important duty in the financial industry, as it ensures the associated persons under the brokerage firm’s umbrella are compliant with FINRA’s rules. Firms should maintain its duty to supervise, and ensure that it has adequate procedures in place to prevent any potential misconduct that would be harmful to its clients. If your brokerage firm had inadequate supervisory procedures in place, the firm may be subject to failure to supervise claims. You need a New York Securities Industry Lawyer like the lawyers at Malecki Law.

A faulty compliance system can rise to the level of a failure to supervise. Broker-dealer Joseph Stone Capital (JSC) apparently dealt with exactly that. FINRA found that the firm’s compliance system had been insufficient in supervising its brokers, from January 2015 through June 2020. Specifically, JSC received exception reports that revealed potential excessive trading red flags. However, JSC failed to further investigate or prevent such activity.

To prevent this problem from occurring, a JSC supervisor responsible for reviewing the exception reports should have reviewed the clearing firm’s exception report daily. That supervisor would have discovered the possibility of excessive trading. If your brokerage firm failed to further investigate or prevent misconduct like JSC, it may be prone to failure to supervise claims. You need a Regulatory Defense Law Firm in New York, like Malecki Law. Additionally, after discovering these excessive trades, management should have questioned the broker about this trading activity, instead of restricting commissions. Supervisors should have reviewed every trade confirmation in the accounts in question and evaluated whether the trades were solicited (where the broker recommended the trade) or unsolicited (where the client recommended the trade). If the confirmations stated “solicited”, then management could ask for the broker’s thought process for making these trades. This would have identified the crux of the issue more efficiently and would have led to a quicker resolution. One can argue that JSC should improve its compliance software, but the software was not truly at issue during this investigation. According to all evidence, the compliance software seemed to work. The FINRA Order shows that the problem truly stemmed from JSC’s supervisors’ failure to act accordingly to stop their brokers’ activities of excessive trading. If your brokerage firm failed to act accordingly when discovering potential broker misconduct, it may be susceptible to failure to supervise claims. You need a Regulatory Defense Attorney in New York, like the lawyers at Malecki Law. It is unclear how JSC’s compliance software works, but they could also look to incorporate artificial intelligence and machine learning to generate quicker and more accurate compliance reports.

Securities Industry Background

The securities industry is one of the most regulated industries in the United States. Statutes, common law, and federal regulations all govern the conduct of securities firms and their representatives. Securities firms must register with the Financial Industry Regulatory Authority (FINRA). FINRA is a self-regulated organization (SRO) that protects investors by ensuring that the securities industry operates honestly and fairly. An SRO is an organization that has power to create and enforce industry regulations on its own. This means that FINRA has the authority to create and enforce its rules on securities firms that register with FINRA. A broker-dealer is a securities firm that must register with FINRA. Broker-dealers engage in the business of buying and selling securities. Broker-dealers also offer services such as trade execution, selling securities out of inventory, and lending. Since all broker-dealers and its registered representatives (its individual brokers) must register with FINRA, FINRA’s rules and regulations apply to broker-dealers. If you notice all your investments declined at the same time, it may be a clue that your broker engaged in misconduct. Your brokerage firm has a duty to supervise its brokers to detect and prevent misconduct. You may have a failure to supervise claim. You need a New York Failure to Supervise Lawyer like the lawyers at Malecki Law to review your portfolio, at no cost.

Failure to Supervise Broker Misconduct

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