California Failure to Supervise Attorneys
Brokerage firms are required under FINRA Rules 3110 and 3120 to supervise the activities of their registered representatives. That means monitoring trading activity, reviewing customer accounts for red flags, enforcing written supervisory procedures, and following up when something looks wrong. When a firm fails to do any of these things and its broker harms an investor, the firm itself can be held liable for the investor’s losses.
Failure to supervise is often the claim that makes an investor whole. A rogue broker who churned accounts or sold unsuitable investments may lack the personal assets to satisfy a judgment. The firm that employed and failed to supervise that broker often does not.
What Reasonable Supervision Requires
FINRA expects brokerage firms to maintain and enforce written supervisory procedures, designate supervisory personnel for each office and registered representative, conduct periodic reviews of customer accounts and trading activity, investigate red flags such as excessive trading, high complaint volume, or outside business activities, and take corrective action when problems are identified. A firm that had procedures on paper but never enforced them, or that ignored obvious warning signs, has failed to supervise.
Elements of a Failure to Supervise Claim
To hold a firm liable, an investor must show that an underlying securities violation occurred (churning, unauthorized trading, selling away, breach of fiduciary duty, or similar misconduct), that the firm had supervisory responsibility over the broker, that the firm failed to exercise reasonable supervision, and that the failure to supervise was a proximate cause of the investor’s losses.
FAQs
Can I sue the brokerage firm instead of the individual broker?
Yes. In most cases, the firm is the more valuable defendant. FINRA rules impose supervisory obligations directly on the firm, and firms are generally liable for the acts of their registered representatives when those acts occur within the scope of the broker’s association with the firm. We typically name both the broker and the firm as respondents in FINRA arbitration.
What if the brokerage firm had compliance procedures in place?
Having written procedures is not enough. The firm must actually enforce them. If the firm’s compliance department had access to trading data that showed red flags (excessive trading, concentration, high complaint volume) and did nothing, the firm can be liable regardless of what its procedures manual says.
Talk to a California Failure to Supervise Lawyer
If your investment losses were caused by a broker whose firm should have caught the misconduct, contact Rosenberger + Kawabata. Call (310) 894-6921 or submit an inquiry through our contact form.