Failure to Supervise

CourtroomSecurities fraud trial attorneys at Mark Anchor Albert and Associates have been involved at the highest level in securities cases alleging the failure to supervise in both state and federal court, often involving claims totaling billions of dollars.

FINRA Rule 2010 and NASD Rule 3010 require broker/dealers to adequately supervise their stock brokers and other registered representatives. Broker/dealers must not ignore obvious “red flag” warnings that should have resulted in additional supervisory scrutiny. They need to remain mindful of whether individuals responsible for underlying misconduct are attempting to conceal misconduct.

A broker-dealer also has a statutory obligation to supervise its associated persons under 15 U.S.C. § 78o(b) (2001), which provides:

(4) The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding twelve months, or evoke the registration of any broker or dealer if it finds ... that such broker or dealer ... (E) has willfully aided, abetted, counseled, commanded, induced, or procured the violation by any other person or any provision of the Securities Act of 1933, the Investment Advisers Act of 1940 ... this title the rules or regulations under any of such statutes ... or has failed reasonably to supervise, with a view to preventing violations of the provisions of such statutes, rules, and regulations, another person who commits such a violation, if such other person is subject to his supervision.

15 U.S.C. § 78o(b)(6) incorporates 15 U.S.C. § 78o(b)(4)(E) by reference and authorizes the SEC to impose similar sanctions against individuals for failure reasonably to supervise individuals associated with broker-dealers.

However, Congress has not specified the meaning of the phrase “subject to the supervision.” The statutory language by its terms is not limited to supervising an associated person’s activities done on behalf of, or for the benefit of, the broker-dealer. See generally John H. Walsh, “Right the First Time: Regulation, Quality, and Preventive Compliance in the Securities Industry,” 1997 Colum. Bus. L. Rev. 165 (generally discussing the evolution of the duty to supervise).

Registered investment advisers and banks also are subject to various forms of regulatory oversight, including a duty to supervise their employees. See, e.g., Investment Advisers Act of 1940 §§ 203(e)(5) and 204A, and In the Matter of Justin Federman Stone, 41 S.E.C. 717, 721-722 (1963) (adjudicated opinion of the SEC). See generally David B. Fischer, Comment, “Bank Director Liability under FIRREA: A New Defense for Directors and Officers of Insolvent Depository Institutions-or a Tighter Noose?,” 39 UCLA L. Rev. 1703, 1712-1740 (1992); 12 C.F.R. § 12.7(a)(1) (2001).