FINRA Outlines Compliance Officer Liability for Bad Broker Practices

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered losses from dealing with broker-advisors who have violated their firms’ compliance rules. If they are following the law, broker-advisors have to follow a set of rules to ensure that they are doing right by their clients. In the real world, though, this doesn’t always happen. Sometimes firms don’t supervise what their brokers are selling along with inappropriate investment strategies.

Few investors know that brokerage firms must employ a professional called a “chief compliance officer (CCO).” This person acts as a watchdog to oversee broker activities and police trades so that rules and guidelines set by federal securities regulators such as FINRA and the Securities and Exchange Commission (SEC) are followed to the letter. What if the CCO isn’t doing their job? They can be sued.

FINRA states “that if a CCO has other business responsibilities (such as at firms where the CEO also serves as CCO), the CCO can be held liable for failure to supervise in his or her business line capacity, notwithstanding the CCO title.”

How can investors take legal action against firms and their CCOs? For example, let’s say a broker recommends investments they know that violate a client’s risk tolerance or brokers overtrade to generate excess commissions, known as “churning.” The firms and CCOs can be cited for “failure to supervise” their brokers, among other charges.

FINRA states that CCOs can be held liable under the following “multiple red flags or actual misconduct he or she did not address:”

  • If the CCO failed to establish, maintain, or enforce the firm’s written procedures.
  • If the CCO’s supervisory failure resulted in a violation (FINRA’s example is a CCO tasked for due diligence failing to do so reasonably on a private offering, so that the firm did not have a reasonable basis to recommend the offering).
  • If the violations caused or created a high likelihood of customer harm.

Bottom Line: Brokers must carefully vet all trades and investments with you to ensure that the securities they are selling meet your financial goals and risk tolerance. The must also have your written permission to use “leveraged” investment strategies, which employ greater risk and potential for loss. If you choose to take on more risk, they must explain in clear detail the downside of such an investment.

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!

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