Failure to Supervise
The failure of a brokerage firm to adequately supervise its broker may also result in liability for the brokerage firm itself. Securities laws and FINRA rules require brokerage firms to reasonably supervise their brokers in order to prevent violations of the rules and regulations of the securities industry. Consequently, a brokerage firm must show not only that they had in place supervisory and compliance rules and procedures, but also show they effectively implemented and enforced them so as to diligently supervise the activities of their brokers. Furthermore, a brokerage firm might be held liable for the acts of their agents under the statutory "control person" provisions and the common law doctrine of respondeat superior whereby the employer is held liable for the wrongful acts of the employee acting within the course and scope of their employment. In addition to making certain that the brokers are properly licensed in the state where their clients are located, the firm is responsible for monitoring the trading activity, the type of investments and the asset allocation to assure compliance with the customer's investment objectives and tolerance for risk. Under special circumstances, a brokerage firm may be required to place an individual broker under "heightened supervision."
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