Compliance costs are a perennial complaint of those in the securities industry, but for some mid-level managers, it’s more than just a headache.
Many branch office managers, bearing the brunt of corporate attempts to become more efficient, are overseeing larger networks of advisors, yet they still remain responsible for compliance lapses and can see their records marred with a “failure to supervise” judgment.
“Failure to supervise is one of the biggest issues for us,” said a 20-year producing branch manager who spoke anonymously. “The risk today is high, while the remuneration is low.”
The risk is high in part because the violation, charged by FINRA or the SEC, lacks real definition. “Unfortunately, ‘failure to supervise’ has become something of a default term which often gets almost automatically tacked on to client-initiated legal complaints,” says Frank J. Amigo, managing director of Raymond James and Associates’ South Florida Complex. “It’s an unfair situation for managers who may have done nothing wrong but get ‘dinged’ just because they are the supervisor.”
“We see an increase in the use of the phrase ‘Failure to Supervise', concurs Matt Lynch, a principal at consulting firm Tiburon Strategic Advisors. “However, I think it’s often just being used generically alongside a more specific claim, such as an advisor not making a suitable recommendation,” he says. “Just because the term appears in more litigation doesn’t mean that more such judgments are actually being won than they were in years past,” he says.
In fact it’s impossible to say how many judgments are being brought against branch office managers because the keeper of the records doesn’t recognize the job category.
According to the Securities Arbitration Commenter’s Database Services, there were less than a dozen client awards issued over the last 10 years where the respondent was identified as a branch manager, but that number is meaningless.
“Nothing requires respondents to be identified as branch managers, if they in fact are,” says SAC Database Manager Harry Jacobowitz. “Therefore, there’s likely an undeterminable number of branch managers named as respondents in customer claims that we cannot account for.”
Few would argue that the branch managers’ job has become increasingly complex due to regulatory issues and the size of their offices. However, says Lynch, “I don't see that as cause for an increase in ‘failure to supervise’ awards.”
Neither does Mauricio Beugelmans, a securities lawyer. “We’ve seen the large and regional firms in particular committing a lot more resources to helping branch managers meet their increased supervisory commitments,” he says. “The branch manager can be an attractive target to client attorneys hoping to gain settlement leverage.” This is similar to the tactic some attorneys used by naming individual advisors in lawsuits in years past, he said. “But, arbitration panels don’t appear to be very receptive to these attempts. They’re very good at just zeroing in on the facts of a case.”
Most brokerages have cost-effective ways to help their branch managers deal with regulatory scrutiny. “Technology is light years ahead of what it was a decade ago,” says Lynch. “Firms now have built-in programs that allow them to track, in nearly real time, what brokers are doing.
“In fact,” he says, “all of this technology is what enables the larger complexes to even exist. That said, the supervisory process has become more time-consuming for branch managers than it once was, as there are so many more types of reviews, accounts and trades to supervise. But there are also other staff members whose job it is to help deal with compliance issues, with some firms deploying more senior compliance professionals at the branch level. FINRA rules continue to evolve and, yes, branch managers need to keep up. But I believe, in most cases, they’re being given the resources they need to do this."
“No firm or system is foolproof,” Amigo says. “As managers, we are still the first line of defense. We need to know our advisors well, be able to spot changes in behavior or events which may cause a potential problem, and have good enough relationship to be able to speak candidly when there might be a potential issue.”
