Supervision Attorneys – Bakhtiari & Harrison

What is failure to supervise?

FINRA Rule 3110 requires every FINRA member firm to establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws, regulations, and FINRA rules. This means the firm must create written supervisory procedures (WSPs), designate qualified supervisors responsible for each aspect of the business, implement systems to detect and review suspicious activity, and take prompt corrective action when violations are identified.

When a firm’s supervisory system fails — either because the system was inadequate in design, or because the firm failed to implement and follow its own procedures — and that failure allows a broker’s misconduct to continue and cause investor losses, the firm is independently liable for failure to supervise. This liability is separate from and in addition to the individual broker’s liability for the underlying misconduct.

Why failure to supervise claims matter strategically

Many investors focus their FINRA arbitration claims exclusively on the individual broker who committed the misconduct — but the brokerage firm is frequently the more important defendant for several reasons:

• Financial resources: individual brokers are often judgment-proof. Brokerage firms have deep pockets, errors and omissions insurance, and the resources to satisfy a significant arbitration award.
• Independent liability: the firm’s liability for failure to supervise is independent of the broker’s liability. Even if the broker is no longer registered or cannot be located, the firm remains liable for its own supervisory failures.
• Scope of damages: failure to supervise claims can encompass the full period during which the inadequate supervisory system was in place — often extending the damages period significantly beyond what can be attributed to individual transactions.
• Punitive damages: systemic supervisory failures — where a firm knowingly maintained inadequate oversight to maximize revenue — are strong candidates for punitive damages awards. Bakhtiari & Harrison’s $54.1 million Citigroup award included $17 million in punitive damages arising from supervisory failures.

Elements of a failure to supervise claim

Proving a failure to supervise claim requires establishing:

• A supervisory obligation existed: the firm was responsible for supervising the broker’s activities under FINRA Rule 3110.
• The supervisory system was inadequate: either the firm’s written supervisory procedures did not address the type of misconduct at issue, or the firm failed to implement its own procedures.
• Red flags were present: the inadequate supervisory system failed to detect warning signs that, if investigated, would have revealed the misconduct and allowed the firm to take corrective action.
• The failure caused investor losses: the supervisory failure allowed the misconduct to continue, causing losses that would have been prevented by adequate supervision.

Common supervisory failures in FINRA arbitration

• Failure to review account activity: firms that do not adequately monitor accounts for unusual concentration, excessive trading, or unauthorized transactions fail their most basic supervisory obligation.
• Failure to conduct branch audits: FINRA rules require periodic on-site reviews of branch offices. Firms that do not conduct adequate branch audits miss systematic misconduct that is visible at the branch level.
• Failure to follow up on red flags: when compliance systems identify potential problems — unusual account activity, customer complaints, or discrepancies in account documentation — and the firm fails to investigate, the failure to follow up is itself a supervisory violation.
• Failure to supervise outside business activities: firms that do not adequately monitor their registered representatives’ outside business activities may face liability when those activities harm investors.
• Failure to supervise email and communications: FINRA requires firms to review registered representative communications with customers. Firms that do not implement adequate communication review systems face supervisory liability for misconduct conducted through unsupervised channels.

Bakhtiari & Harrison’s FINRA Rule 3110 expertise

Ryan Bakhtiari served as Chairman of the FINRA National Arbitration and Mediation Committee from 2013 to 2017 — the advisory body that interprets and makes policy recommendations on the rules governing FINRA arbitration proceedings, including the application of FINRA Rule 3110 in arbitration cases. This institutional knowledge gives the firm a direct understanding of how FINRA’s supervisory framework is intended to work and how panels evaluate supervisory failures in contested proceedings.

For claims involving the individual broker’s conduct — including negligence, unsuitability, and unauthorized trading — visit the Stockbroker Negligence and Advisor Misconduct pages.

Frequently asked questions — failure to supervise

Can I sue the brokerage firm even if the individual broker is no longer registered?

Yes. Failure to supervise liability is independent of the individual broker’s liability and registration status. Even if the broker has been barred from the industry, moved to another firm, or cannot be found, the brokerage firm remains independently liable for its own supervisory failures during the period the misconduct occurred.

What evidence is needed to prove failure to supervise?

Key evidence includes: the firm’s written supervisory procedures (WSPs), supervisory review records, compliance department communications, branch audit reports, exception reports generated by the firm’s surveillance systems, and the firm’s response (or failure to respond) to any red flags identified. Bakhtiari & Harrison pursues this evidence through the FINRA arbitration discovery process and works with industry experts to evaluate the adequacy of the firm’s supervisory system.

How does failure to supervise relate to my other claims?

Failure to supervise is typically asserted alongside the underlying misconduct claims — suitability violations, unauthorized trading, churning, or fraud. It is not a standalone claim but a theory of firm liability that runs parallel to the individual broker’s liability. In many FINRA arbitration cases, the firm’s supervisory failure is the most significant claim strategically, because it makes the firm — rather than just the individual broker — fully liable for the investor’s losses.

Does Bakhtiari & Harrison handle failure to supervise claims nationwide?

Yes. Failure to supervise claims are brought against FINRA member firms in FINRA arbitration regardless of where the firm or the investor is located. Bakhtiari & Harrison represents investors in failure to supervise proceedings throughout the United States.

For a full overview of the firm’s investor representation practice, visit the Advisor Misconduct page.

Contact a failure to supervise attorney — free consultation

Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys review every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.

Investor cases are handled on a contingency fee basis — no recovery, no fee.

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