When firms fail to create or enforce their supervisory systems, broker misconduct such as churning, unauthorized trading, or selling away may go on for months without supervisors stepping in. Unaddressed misconduct leads to preventable investor losses and potential liability for the firm.

FINRA Rule 3110 defines brokerage firms’ supervisory obligations, and it is regularly cited in broker fraud claims. Edward Jones broker fraud investigations may find the firm liable for broker misconduct if it failed to meet the requirements of this rule.

Investors who believe supervisory failures contributed to their losses should reach out to Kurta Law for a free consultation and account review.

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What is Failure to Supervise?

Under FINRA Rule 3110, brokerage firms must follow several key supervisory obligations. Firms must:

Establish a system of supervision reasonably designed to detect and prevent misconduct
Enforce this system effectively
Ensure that supervisory personnel are sufficiently trained or experienced
Perform internal reviews of its business at least once per year

Failure to supervise encompasses failure to meet any of these obligations. Supervisory systems seek to protect investors from exploitation, and failures in these systems can lead to substantial financial harm for clients.

An important term in FINRA Rule 3110 is the word reasonable. No supervisory system can prevent all forms of fraud 100% of the time. But if the firm’s supervisory system can be shown to be lacking, or its supervisors negligent, then investors can recover losses resulting from failures to supervise.

How a firm conducts its supervision is described in its Written Supervisory Procedures (WSPs). These instructions tell supervisors how to monitor investors’ accounts, what metrics mean, and how to respond to signs of broker fraud.

Typical supervisory activities for a brokerage firm include:

Reviewing broker-investor communications
Monitoring trading activity
Responding to investor complaints
Conducting compliance reviews
Reviewing outside business activities, also known as OBAs

Evaluating claims of failure to supervise starts with an in-depth case evaluation by an experienced securities fraud attorney.

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Firm Failure to Supervise Liability Under FINRA Rule 3110

In some cases, Edward Jones may be considered liable for misconduct performed by its brokers. Investors do not need to prove that the firm had an intent to cause harm in claims of failure to supervise.

Instead, FINRA arbitrators consider two important questions when determining firm liability:

Did the firm have appropriate policies in place for identifying red flags?
Did firm supervisors adequately respond to signs of fraudulent activity?

A firm may violate FINRA Rule 3110 in the first sense if it has no Written Supervisory Procedures defining how supervisors should identify and address signs of excessive trading in client accounts.

In the second sense, a firm would be in violation of FINRA Rule 3110 if a supervisor recognized signs of churning and gave the broker a warning, but never escalated the issue or performed additional supervision of the account.

Some brokers go out of their way to dodge their firm’s systems of supervision, and the firm may not be considered liable for their actions. This is where an experienced investment fraud attorney can provide insight into whether you have a case for failure to supervise in addition to your misconduct claim.

FINRA Rule 3310 and Anti-Money Laundering Systems

FINRA Rule 3110 has a partner in FINRA Rule 3310, which specifically requires firms to establish anti-money laundering systems.

Under FINRA Rule 3310, firms must:

Monitor transactions
Report suspicious activity
Regularly update client information
Perform independent AML system testing

Money laundering can be used to cover up fraudulent schemes like insider trading, so a robust AML system is a vital part of a firm’s supervisory system.

Red Flags of Failure to Supervise

Edward Jones broker fraud investigations frequently involve the same suspicious activity appearing again and again. Firms’ supervisory systems should ideally be designed to monitor for these common signs of misconduct to catch fraud as soon as possible.

Firms should monitor investors’ accounts for the following red flags:

High turnover rate
Unsuitable portfolio concentration
High commission-to-equity ratio
Suspicious money transfers
Misrepresentations in broker communications

Regular monitoring of account activity should lead to further inquiry when activity is flagged as unusual. If the firm fails to follow up on suspicious activity, it may be in violation of FINRA Rule 3110.

Investment fraud lawyers can identify signs of Edward Jones supervisory failures through a structured account review.

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Proving Failure to Supervise in FINRA Arbitration

Cases of failure to supervise begin with an allegation of broker fraud. In addition to providing evidence of broker misconduct, the investor also needs to demonstrate that the broker was associated with Edward Jones during the relevant period and within the firm’s supervisory jurisdiction.

Establishing this connection between broker and firm is crucial in supporting a claim of failure to supervise.

An investment fraud attorney can use your evidence of regulatory violations and the firm’s policies to argue that the firm failed in its obligation to prevent misconduct, resulting in financial harm.

How a Securities Fraud Attorney Can Help

Brokerage firms typically require investors to seek out FINRA arbitration in lieu of taking claims through civil court. The arbitration process is typically faster than a civil proceeding and results in a legally binding agreement between parties.

Establishing a clear and well-supported narrative that connects your losses to supervisory failures requires knowledge of FINRA Rules and Edward Jones’ system of supervision. An investment fraud attorney can review your account to gather evidence of misconduct and present it to arbitrators in a logical way.

Investors can learn more about the process in How Edward Jones Broker Fraud Arbitration Works. In some cases, firms may take potential liability for supervisory failures into consideration when making settlement offers. An investment fraud lawyer can also evaluate these offers for their adequacy in addressing your losses.

Do You Have an Edward Jones Broker Fraud Claim?

If you believe supervisory failures contributed to your losses, the securities fraud attorneys at Kurta Law can help. We have proven experience in achieving recovery for investors in cases of broker fraud, including cases with supervisory implications.

Request a free case evaluation or contact Kurta Law to discuss your potential Edward Jones broker fraud claim.

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