Under Rule 3120, the Financial Industry Regulatory Authority (FINRA) requires brokerages to prove that they are adequately supervising accounts. Almost 33% of all fines levied by FINRA are against Pennsylvania firms, and others across the country are for not providing adequate supervision. These failure-to-supervise fines fall into three large categories.
Failure to establish adequate written supervisory procedures
Brokerages must submit a written supervisory plan to FINRA before they can begin operation, and they must review the plan at least every year. Definite rules determine what must be in the plan as they are designed to protect the public from common schemes. Plan components include:
- Name and address of the person responsible for the plan
- Brokerage bylaws
- Business continuity plan
- Continuing education requirements
- Margin requirements
- Maintenance of records related to options and mutual funds
- Underwriting obligations and research
Failure to investigate private securities transactions and business activities
FINRA has levied up to $6.5 million in fines against investment firms who have failed to adequately investigate private securities transactions and business activities of their brokers. Brokers must not be involved in finding investors for any activity outside of their job duties. Furthermore, they must never buy or sell interests in any investment outside of their job duties. Finally, brokers must not receive any compensation related to buying or selling investments outside of their responsibilities with the firm.
Failure to adequately supervise branch locations
Under FINRA’s regulations, the parent organization is responsible for supervising branch locations. This oversight is particularly challenging when many brokers operate independent brokerage, but FINRA expects any issues to be resolved.
If you believe that your broker has not lived up to their supervision obligations, you may want to consult a securities lawyer. These lawyers can often investigate and help you file formal complaints with FINRA.