What is Failure to Supervise – FINRA Rule 3110?
FINRA Rule 3110 (Failure to Supervise) requires a firm to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws and regulations and FINRA rules. FINRA Rule 3110 supersedes NASD Rule 3010.
FINRA, the self-regulator that oversees brokers and brokerage firms, requires member firms to establish and maintain a system to supervise the activities of their associated persons, including registered representatives and other employees. FINRA Rule 3110 outlines the responsibilities and obligations of firms in maintaining effective supervisory systems, which are designed to ensure compliance with applicable securities laws, regulations, and FINRA rules.
A failure to supervise occurs when a firm fails to establish and maintain a supervisory system that is reasonably designed to achieve compliance with securities laws, regulations, and FINRA rules, or when the firm fails to enforce its supervisory procedures adequately. Firms are responsible for ensuring that their associated persons comply with applicable securities laws and regulations, as well as FINRA rules, and must take reasonable steps to prevent violations from occurring.
If a firm fails to supervise adequately, it may be subject to disciplinary action by FINRA, including fines, censures, and suspension or revocation of its membership. In addition, the individuals responsible for supervisory failures may also face disciplinary action, including fines, suspensions, and bars from the industry.
Violations of FINRA Rule 3110
Inadequate supervision of registered representatives: If a registered representative engages in unauthorized trading, churning, or other misconduct, and the firm fails to detect or address these violations, the firm may be held responsible for a failure to supervise.
In September 2022, The Securities and Exchange Commission (SEC) reportedly ordered Raymond James & Associates to pay a penalty of $500,000 for allegedly failing to supervise a former registered representative who was sentenced to five years in prison last year for allegedly misappropriating more than $900,000 from two older clients from October 2015 through April 2019.
Frederick M. Stow of Franklin, Tennessee, purportedly stole $901,500 from one of the clients, a World War II Veteran, between October 2015 and April 2019. After that client died at the age of 98, Stow purportedly stole an additional $22,400 from another older client. To learn more, see: Financial Advisor Frederick Stow Reportedly Charged with Defrauding Senior Veteran
Inadequate supervision of branch offices: Rule 3110 also requires firms to supervise their branch offices to ensure compliance with securities laws and regulations. If a firm fails to adequately supervise its branch offices, it may be held responsible for any violations that occur at those locations.
In 2018 FINRA suspended and fined a designated supervisor and branch office manager for failure to supervise cold callers in his branch office that he had hired without following his member firm’s procedures. The findings stated that the branch hired and employed several cold callers, the majority of whom were not registered through the firm. The findings also stated that the manager did not follow the firm’s WSPs regarding hiring practices, including those specific to cold callers.
Inadequate supervision of outside business activities: Registered representatives must provide written notice to their firms before engaging in outside business activities. Rule 3110 requires firms to supervise these activities to ensure compliance with securities laws and regulations. If a firm fails to supervise its registered representatives’ outside business activities, it may be held responsible for any violations that occur.
Last December, FINRA censured and fined LPL Financial $150,000 for allegedly failing to investigate red flags in connection with a representative’s undisclosed business activities.
From September 2018 through August 2019, LPL purportedly failed to reasonably supervise transfers of funds by the Representative’s LPL customers to third parties, including a purported investment advisory firm or “Entity,” after which the customers’ funds were converted by a third party. Consequently, LPL violated FINRA Rules 3110 and 2010.
LPL Financial’s rep allegedly caused five LPL customers to transfer funds from their LPL accounts, or from annuity contracts that the customers held, directly to the Entity or to accounts held at a third-party custodian for which the Entity was the advisor. More than $650,000 in transferred funds were ultimately converted by a third party.
Failure to implement adequate supervisory procedures: Rule 3110 requires firms to establish and maintain written supervisory procedures that are reasonably designed to achieve compliance with securities laws and regulations. If a firm fails to implement adequate supervisory procedures or fails to enforce its procedures effectively, it may be held responsible for a failure to supervise.
In January 2023, FINRA sanctioned Triad Advisors failure to supervise in connection with LJM Preservation & Growth Fund (LJM), an alternative mutual fund.
Triad permitted the sale of LJM on its platform without conducting reasonable due diligence of the company and without a sufficient understanding of its risks and features, including the fact that the fund pursued a risky strategy that relied, in part, on purchasing uncovered options.
FINRA alleged that Triad lacked a reasonable supervisory system to review representatives’ LJM recommendations. Triad representatives sold $2,267,000 in LJM to fifty-eight customers, according to FINRA’s findings. LJM’s value dropped 80% during an extreme volatility event in February 2018 and the fund ultimately liquidated and closed, resulting in hundreds of thousands in losses for Triad’s customers.
From March 27, 2014, to January 1, 2019, Triad also reportedly failed to obtain required account information for customers who purchased the private offerings of LJM Partners, Ltd. and LJM Preservation & Growth Fund LP. Triad purportedly failed to enforce written supervisory procedures to make sure that this information was obtained by the firm, in violation of FINRA Rule 3110.
FINRA Arbitration to recover Investment Losses
If a firm violates FINRA rules and fails to supervise its employees properly, it may face regulatory sanctions and fines from FINRA. If you have suffered investment losses and believe that a broker-dealer or associated person violated securities laws, FINRA rules, or their duty to you, you may be able to recover your losses through FINRA arbitration.
FINRA arbitration is a process in which disputes between investors and broker-dealers or associated persons are resolved by a panel of arbitrators, who are neutral and independent decision-makers. The arbitration process is designed to be faster and less expensive than litigation, and the decision of the arbitrators is final and binding.
Hiring a FINRA Attorney
FINRA arbitration is a process in which an impartial arbitrator or panel of arbitrators is appointed to hear the dispute and render a decision.
The White Law Group helps clients navigate the arbitration process and represent their interests throughout the proceedings. This can include preparing and filing the initial claim, conducting discovery, presenting evidence and arguments at the hearing, and appealing the decision if necessary.
In addition to their knowledge of FINRA rules and procedures, the FINRA attorneys at the White Law Group also have experience in securities law and litigation. They can provide valuable guidance to clients on the strengths and weaknesses of their case, the likelihood of success, and the potential risks and rewards of pursuing arbitration.
If you have an investment related dispute, the securities attorneys at the White Law Group may be able to help you. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to helping investors in claims in all 50 states against their financial professional or brokerage firm. Since the firm launched in 2010, it has handled over 700 FINRA arbitration cases. The firm has offices in Seattle, Washington and Chicago, Illinois and reviews securities cases across the country.
If you or someone you know has been the victim of elder financial fraud, the securities attorneys of The White Law Group may be able to help. To speak with a securities attorney, please call offices at (888)637-5510.
Tags: Financial advisor failure to supervise, FINRA arbitration, finra attorneys, finra rule 3010, FINRA Rule 3110, LJM funds, securities attorneys, securities fraud attorney, supervision, Triad Advisors, what is failure to supervise Last modified: March 29, 2023
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