If you learn that your broker mishandled your investment, you probably not only feel outraged at the broker’s actions, but you may wonder why the firm the broker works for did not supervise the broker’s activities. It is natural to think that brokerage firms have a handle on their brokers’ behavior. This might not always be the case, however.
When a brokerage firm fails to control the activities of its brokers and a broker commits wrongdoing that causes you financial loss, you may have recourse against the firm. That is because FINRA rules require firms to supervise their registered representatives.
The FINRA rule on supervision
According to FINRA Rule 3110, a firm must have a system in place that keeps watch over its associated individuals through written supervisory procedures. These WSPs must address how a firm supervises its members and how the firm reviews its activities. Examples of firm activities include its investment banking and its securities business as well as the external and internal communications of the firm.
How firms comply with this rule will vary. According to FINRA, a firm should design their supervisory system in a reasonable fashion to achieve compliance with federal law and FINRA rules. WSPs should name the person who will conduct reviews of firm activities, the acts of supervision the person will conduct, how often the reviews will take place, and how to carry out the review documentation.
Additional supervisory rules
It is not enough to have a supervisory system in place. FINRA Rule 3120 requires firms to test their supervisory system and verify that it works. FINRA Rule 3130 also necessitates that firms name one or more people to act a chief compliance officer. It is the job of the CCO and the firm CEO to discuss how the firm has complied with securities laws and FINRA rules. The CEO must also certify on an annual basis that the firm’s processes comply with FINRA supervisory requirements.
These rules can help stop misconduct or incompetent behavior at firms before it causes serious harm. In the event a firm’s broker acted inappropriately, it may indicate that a firm failed to comply with one or more of these supervisory rules.