failure to supervise

Brokerage Fined $10M+ for Failure to Supervise Brokers

Many investors are not aware that the broker-dealer firm with whom their financial advisor is registered has a legal obligation to reasonably supervise its employees. Accordingly, firms that fail to adequately supervise agents may be fined and penalized by regulators.

LPL Gets Stung by FINRA for $950K over Alternative Investments

News arrived recently that LPL Financial has once again run afoul of the agency that regulates the US securities industry, FINRA (Financial Industry Regulatory Authority). This time, LPL was slapped with a whopping $950,000 fine for allegedly failing adequately to supervise sales of alternative investment products like non-traded REITs (Real Estate Investment Trusts), oil and gas partnerships, business development companies (BDCs), hedge funds, and managed futures. 

Alternative Investments Have Concentration Limits

FINRA found that from January 1, 2008 to July 1, 2012, LPL Financial was deficient in its supervision and review of especially the concentration limits for investors set forth by the alternative investments themselves, as well as limits that LPL internally set for itself. In their offering documents, many alt investments like REITs will describe concentration and suitability recommendations/requirements for investors. Unfortunately, according to FINRA, LPL’s manual process, its automated system, and its supervisory staff all failed to properly take into consideration suitability standards when evaluating alternative investments.

In addition to the $950,000 penalty, FINRA has directed LPL to conduct a complete review of its policies and procedures, oversight, supervision, and training related to alt investments.

As FINRA pointed out it in its press release about the disciplinary action against LPL Financial, broker-dealers who sell alt investments to customers must evolve a supervisory system to ensure that these customers are not exposed to undue risk in their accounts. They must also meet the suitability requirements obtaining in each state, for each product, and for their own company.

Lack of supervision of this kind is a very common form of broker misconduct. If you or anyone you know has suffered losses due to unsupervised alternative investments such as REITs, you may be able to recover through the FINRA arbitration process. Please contact us immediately for a free consultation at 1-877-462-3330 or via email by clicking here and sending us a note.

Brokerages Can Point the Finger But They're Still Liable

Just the other day, a FINRA (Financial Industry Regulatory Authority) arbitration panel found Wells Fargo liable for $2.8 million because Wells Fargo failed to adequately supervise a major account in which there was significant fraudulent activity. As we've mentioned in previous posts, even though Wells Fargo did not perpetrate nor was it a party to the misconduct itself, the fact that Wells Fargo (back then it was Wachovia) served as the supervising broker-dealer of the investment accounts in which fraud was taking place under FINRA's regulations means that it's on the hook. This is important from the standpoint of fiduciary responsibility and internal financial industry checks-and-balances, as well as from the practical legal and economic standpoint of recovering losses suffered due to financial misconduct of various kinds. From a fiduciary standpoint, it's vital that brokerage firms and not just individual brokers or investment advisors (or in the Wells Fargo case, a secretary at a law firm representing the aggrieved Boca Raton-based family investment partnership) be held accountable for misconduct occurring within client accounts. When something goes wrong, in the eyes of FINRA, brokerages cannot simply point the finger at rogue brokers or scheming secretaries and say it's strictly the other guy's/gal's fault. Now, not only is this good internal practice, forcing brokerages to monitor and regulate themselves as the first line of defense against misconduct, but legally it often enables clients who lose money--in this case, some $6 million--at the hands of crooks to go after the brokerage firm, too. In the Wells Fargo case, the family investment partnership successfully prosecuted the secretary who perpetrated the fraud against them in civil court. Unfortunately, the secretary was unable to pay the damages. Surprise, surprise. The partnership's legal team then smartly took their case to FINRA, and shined the spotlight of accountability on Wells Fargo. Although the secretary was the agent of fraud and not working for Wells Fargo, the bank was found by a FINRA arbitration panel to be liable for negligence to the tune of $2.8 million, since they didn't catch the fraud and losses in the accounts as soon as they should have. Obviously, the partnership has a much better chance of recovering money from Wells Fargo than from a disgraced secretary.

If you or anyone you know has been the victim of broker misconduct of any kind, please contact us immediately for a free consultation.