Israels & Neuman Can Help Recover Investment Losses for Failure to Supervise Financial Advisors
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What is a Brokerage Firm’s Duty to Supervise?
A brokerage firm’s duty to supervise refers to its legal and regulatory responsibility to oversee the activities of its employees, particularly advisors and registered representatives, to ensure compliance with applicable laws, rules, and ethical standards. This duty is crucial to protect investors and maintain the integrity of the financial markets. Brokerage firms are subject to supervision rules imposed by regulatory bodies such as the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), and State Securities Regulators.
What are the Key Elements of A Brokerage Firm’s Supervisory Duty?
Some of the key elements of a brokerage firm’s duty to supervise include:
Establishing Written Procedures
Firms are required to implement written supervisory procedures that detail how they will monitor compliance with securities laws and regulations, as well as internal policies. These procedures must cover the supervision of trading activities, communication with clients, handling of customer funds, and any other relevant activities.
Supervision of Personnel
Brokerage firms must properly supervise their employees and associated persons. This includes assigning supervisors to registered representatives and conducting regular reviews of their activities to detect and prevent misconduct, such as unauthorized trading, fraud, or conflicts of interest.
Monitoring Transactions
Brokerage firms have a duty to supervise the transactions carried out on behalf of clients. This includes ensuring that orders are executed properly, commissions are fair, and investment recommendations are suitable for the client’s needs and financial situation.
Ongoing Education and Training
Firms are expected to provide continuous training and education to ensure that their employees are updated on regulatory changes, ethical practices, and best market practices.
Handling Customer Complaints
Firms are required to have a system in place to handle customer complaints in a timely and appropriate manner. This includes investigating complaints and taking corrective actions where necessary.
Ensuring Suitability
Brokers and advisors must recommend securities or investment strategies that are suitable based on the client’s investment profile, risk tolerance, financial objectives, and circumstances. Supervisors at the firm must ensure that these recommendations are appropriately monitored.
Branch Office Supervision
Firms are responsible for supervising the activities of all branch offices, regardless of geographic location, to ensure compliance with the firm’s policies and regulatory requirements.
If a brokerage firm fails in its duty to supervise its advisors, it can be held liable for customer losses. Penalties may include but not be limited to actual damages, costs and attorney’s fees.
What is a Registered Investment Advisory (RIA) Firm’s Duty to Supervise?
A Registered Investment Advisory (RIA) firm’s duty to supervise refers to its obligation to oversee the conduct and activities of its employees and investment adviser representatives (IARs) to ensure compliance with applicable securities laws, rules, and fiduciary responsibilities. This duty is regulated primarily by the Securities and Exchange Commission (SEC) for federally registered firms and by state regulators for state-registered RIAs. RIAs operate under a fiduciary standard, which requires them to always act in the best interests of their clients.
What are Some of the Elements of a Registered Investment Advisory (RIA) Firm’s Duty to Supervise?
Key aspects of an RIA firm’s duty to supervise include:
- Establishing and Enforcing Written Supervisory Policies
RIA firms must adopt and implement written policies and procedures that are reasonably designed to prevent violations of securities laws. These policies, are often written in the firm’s Compliance Manuals and cover a wide range of supervisory activities, including:
-Trade execution
-Conflicts of interest
-Suitability of investment advice
-Handling client funds and assets
-Record-keeping requirements
-Personal trading by employees
- Supervising Investment Advice and Activities
Brokerage firms must monitor and supervise the investment advice provided by its IARs to ensure that the advice is suitable and in the best interests of the clients. This includes making sure:
-Recommendations align with the client’s financial goals, risk tolerance, and objectives.
-Fees charged to clients are fair, transparent, and fully disclosed.
-Any conflicts of interest (such as compensation arrangements) are disclosed and managed appropriately.
- Monitoring Client Communications and Transactions
Supervisory oversight must extend to reviewing client communications and transactions, ensuring they are accurate and compliant with regulatory standards. This includes:
-Reviewing emails, reports, and other forms of communication to ensure compliance with advertising and client disclosure rules.
-Monitoring trades for inappropriate behavior, such as churning (excessive trading) or unauthorized transactions.
-Ensuring that clients are receiving fair and prompt trade executions.
- Preventing Insider Trading and Market Manipulation
RIA firms are required to have controls in place to prevent insider trading or any form of market manipulation by their employees. This includes monitoring access to sensitive, non-public information and enforcing policies on the use of such information in trades.
- Compliance Training and Education
Firms are responsible for ensuring that their employees, especially IARs, receive ongoing training and education on relevant regulations, fiduciary duties, and compliance practices. Regular training helps employees understand the firm’s supervisory expectations and maintain up-to-date knowledge of regulatory developments.
- Maintaining Proper Records
RIAs are required to maintain accurate and detailed records of their supervisory activities and client interactions. This includes:
-Records of all recommendations and advice given to clients.
-Documentation of all trades, transactions, and account changes.
-Evidence of compliance with supervisory policies and procedures. Failure to maintain adequate records can result in regulatory penalties.
- Supervising Outside Business Activities
Firms have a duty to monitor the outside business activities of its IARs (such as personal securities trading or other employment) to prevent conflicts of interest or any misconduct that could impact clients or the firm.
- Client Complaints
RIA firms must have procedures in place for addressing client complaints in a timely manner. Complaints should be investigated thoroughly, and appropriate corrective actions should be taken if necessary. Documentation of complaint handling is a key aspect of compliance oversight.
- Ensuring Compliance with an Advisor’s Fiduciary Duty
The firm’s supervisory procedures must focus on upholding the fiduciary duty it owes to clients. This means ensuring that:
-Conflicts of interest are avoided or fully disclosed and mitigated.
-Investment advice is always in the client’s best interest.
-Fees and expenses are reasonable and transparent.
- Handling Custody of Client Assets
If an RIA has custody of client assets, it must implement specific controls to protect those assets. This includes conducting annual surprise audits by independent public accountants, notifying clients, and ensuring accurate reporting of the holdings.
Regulatory Consequences of Failure to Supervise
When an RIA firm fails to Supervise its Advisors, it can also be held liable for investment losses. Brokers and advisors should bear the risk of loss–not you. You may be entitled to compensation for your losses.
If you believe that your advisor or financial institution’s failure to supervise its employees has caused you investment losses, it is imperative to contact one of our experienced investment loss attorneys to discuss your rights.
Israels & Neuman PLC is a securities law firm that represents investors in FINRA arbitration proceedings in all 50 states.