Failure to Supervise

Securities Brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. But for the performance of these duties, most cases of securities fraud may be reasonably prevented. The failure to supervise is a violation of self-regulatory rules. Courts have recognized a cause of action for the negligent failure to supervise, and brokerage firms are liable for the acts of their registered representatives under the common law doctrine of respondeat superior, and as control persons under Section 20(a) of the Exchange Act. The failure to supervise is a form of stockbroker misconduct and is actionable under the federal securities laws.