The Financial Industry Regulatory Authority (FINRA) sanctioned broker Center Street Securities, Inc. (Center Street) concerning allegations that the firm failed to establish, maintain, and enforce adequate supervisory systems and written supervisory procedures to monitor the use of external email accounts to conduct firm-related business by the firm’s registered representatives. The firm was fined $30,000.
Center Street has been a FlNRA member since February 7, 1991 and employs approximately 84 registered persons out of 74 branch offices. Center Street’s principal office is in Nashville, Tennessee. Center Street sells variable life insurance and annuities, mutual funds, private placements, options, corporate equities, debt securities, U.S. government securities and municipal securities.
The duty to supervise is a critical component of the securities regulatory scheme. The duty to supervise is an affirmative responsibility of all brokerage firms. The SEC has found that effective supervision by a broker-dealer must provide effective staffing, efficient resources and a system of follow-up and review to determine that any responsibility to supervise is being diligently exercised. Evidence that there is a variance between the conduct called for by a firm’s procedures and the actions actually undertaken by a firm supports a finding of liability and failure to supervise.
Supervisors have an obligation to respond vigorously to indications of irregularity. A supervisor cannot ignore or disregard red flags and must act decisively to detect and prevent improper activity. Proper supervision allows the firm to monitor a broker’s investment recommendations to clients, selling away activities, and representations to investors in to ensure that a broker’s interaction with clients is appropriate and to prevent wrongful behavior. Failure to implement systems that can gather information or failure to implement those procedures as described in the firm’s supervisory manuals deprives the firm of the ability to monitor conduct a broker’s conduct with customers.
FINRA alleged that from September 2010, through May 2012, Center Street failed to establish, maintain, and enforce adequate supervisory systems and written supervisory procedures to appropriately monitor of external email accounts. Specifically, FINRA found that at least 35 associated persons used external email accounts for business purposes, but that those emails were not captured by Center Street for retention and review.
The securities attorneys at Gana LLP have handled claims concerning the failure of brokerage firms to properly supervise their employees. Our consultations are free of charge and the firm is only compensated if you recover.