Supervision in the Securities Industry

By Scott Evans, Spring 2014 Student Intern

gradeOne of the many duties imposed by FINRA upon securities brokerage firms is the duty to supervise their individual brokers.  FINRA expressly mandates that brokerage firms maintain a system of supervision over its employees to ensure compliance with applicable securities laws and regulations.  In order to carry out this duty, firms are required to have a monitoring system in place so that all of their registered representatives are subject to supervision.  For an illustrative, high-profile example of this claim being used against renowned trader, see this article relating to billionaire hedge fund manager Steven A. Cohen.

Investors should care about this rule as it provides a duty upon which brokerage firms must act.  If the firm fails to adequately supervise its employees, the firm may be liable for the investor’s losses.

The Supervisors

superviseBrokers are generally supervised by branch office managers, and it is the branch managers’ responsibility to carry out the firm’s monitoring system and oversee each broker under their control.  Among the ways this supervision occurs is via pre-employment screening, account oversight, and continuous education.  If a supervisor determines that his employee is violating the firm’s policies, he must report that conduct to his bosses.  In an ideal situation, the firm will then discipline the employee so as to deter such conduct in the future.

The System

The type of system each firm puts in place will vary.  In order to meet the firm’s supervisory responsibility, the system must simply be “reasonable” in the eyes of the law.  Typically, these systems will monitor such things as communications with clients, account activities, types of account handled, customer complaints, and more.  Branch managers will look for potential red flags such as high-volume orders, excessive commissions, and placing too much of one stock in a single account.


supervise2If monitoring systems were not required, illegal activity might go unnoticed.  Brokerage firms that fail to use a monitoring system or that use an unreasonable one can be responsible for an investor’s loss.  Investors that feel they might have a failure to supervise claim should consider consulting an attorney as soon as possible because time is of the essence.  The Investor Advocacy Clinic may be able to assist investors who qualify.  Find more information here.