FAILURE TO SUPERVISE
All FINRA registered broker-dealers and their financial advisors or brokers are subject to FINRA's rules, including rules pertaining to liability. Luckily for investors, FINRA continues to hold brokerages liable for the conduct of their registered brokers. This means that in cases when something goes wrong - when an individual broker, say, makes unsuitable investments on behalf of a client, losing that client their life-savings - the investor and whoever may be representing them throughout the FINRA arbitration process can not only hold the broker accountable for those unsuitable investments, but the sponsoring or supervising brokerage firm as well.
Investors May Recover Losses from the Supervising Brokerage Firm
We say "luckily for investors" because in many FINRA arbitrations, the rogue broker guilty of one form of misconduct or another is broke or bankrupt by the time arbitration occurs. Good luck getting your life-savings back from him or her! On the other hand, many broker-dealers are well-funded banks or national investment brokerage company franchises that anticipate and provide financially for the inevitable liability litigation. For them, it's part of the cost of doing business.
Thanks to FINRA's enforcement of the supervisory role of broker-dealers in relation to their registered brokers, even if you cannot recover your money through the rogue broker, you've got a shot at making the broker-dealer pay. All you have to do is prove that the brokerage failed to adequately supervise its broker while he or she was losing lots of your money for you.
Lack of Brokerage Supervision and Broker Misconduct
In the vast majority of credible broker misconduct cases that we see, there is a direct line between the misconduct perpetrated by a broker and the failure to supervise on behalf of the brokerage firm. After all, losing a client enough money to instigate securities litigation in the first place generally requires a rather lengthy campaign of bad and/or unsuitable investments and/or bad or improper behavior by a broker. In other words, typically there are plenty of red flags along the way that brokerage firms miss or ignore. Now, some broker-dealers rely on technology called a trade blotter to supervise their brokers' investments in order to ensure they are properly aligned with their clients profiles, risk tolerances, and objectives. But as the $1.65 million in fines FINRA brought against several firms using trade blotters back in 2009 indicates, using intermediary technologies like trade blotters is imperfect and, more importantly, does not exculpate brokerages from liability in the supervisory role.
At the end of the day, rogue broker or no, trade blotter or no, broker-dealers have an obligation under FINRA regulation to supervise their brokers and protect their clients. Failure to fulfill that obligation is seen by FINRA to open up the brokerage to liability to the same extent as the broker who conducted the trades.
Pennsylvania & New Jersey Securities Law Firm
Our securities attorneys have over a decade of experience helping retail investors recover losses from stock brokers and national brokerage firms. We understand complex financial products and appreciate how stressful losing your wealth to an unscrupulous or negligent advisor can be. If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately for a free consultation at 1-855-462-3330 or by using our online contact form.