Hiring and Retention Liability: Claims Against Firms for Problematic Brokers

Hiring and Retention Liability: Claims Against Firms for Problematic Brokers

Brokerage firms have a fundamental obligation to protect investors by implementing rigorous hiring standards and appropriate supervision protocols for brokers with troubling histories. At Patil Law, we specialize in holding firms accountable when they negligently hire or retain problematic brokers who subsequently cause investor harm.

Understanding Hiring and Retention Liability

When brokerage firms cut corners in their hiring processes or fail to properly supervise brokers with red flags in their backgrounds, they create unacceptable risks for investors. These failures can form the basis for powerful claims against the firms when investor losses result.

The Regulatory Framework for Broker Hiring and Retention

Several key regulations establish requirements for brokerage firm hiring and retention practices:

FINRA Rule 3110(e): Investigation of Applicants for Registration

This rule requires member firms to establish written procedures for verifying the accuracy and completeness of information contained in a broker’s Form U4 application. Firms must:

• Conduct a thorough background investigation before registering an individual
• Verify the applicant’s prior employment history for the past five years
• Ensure all disclosed events, including customer complaints, are fully investigated
• Search reasonably available public records for information about the applicant
• Document the steps taken to verify background information

These requirements create a clear standard of care for the hiring process.

FINRA Rule 3070 (now Rule 4530): Reporting Requirements

This rule requires firms to report various events related to their registered representatives, including:

• Customer complaints alleging theft, misappropriation, or sales practice violations
• Internal investigations into potential misconduct
• Disciplinary actions taken against representatives
• Civil litigation or arbitration alleging sales practice violations
• Criminal charges and convictions

These reporting requirements create an industry-wide system for tracking problematic brokers.

FINRA Rule 3170: The Taping Rule

This rule requires heightened supervision, including tape recording of all customer communications, for firms that employ a significant percentage of brokers from disciplinary firms. This creates specific obligations for firms that hire brokers with troubling backgrounds.

Common Hiring and Retention Failures

Through our extensive experience representing investors in FINRA arbitration, we’ve identified several recurring patterns of hiring and retention failures that create liability for brokerage firms:

Inadequate Pre-Employment Screening

Many investor losses could be prevented through proper pre-employment screening. Common failures include:

• Superficial review of Form U4 disclosures
• Failure to contact previous employers beyond basic verification
• Inadequate investigation of disclosure events
• Insufficient review of public records and litigation history
• Failure to verify educational and professional credentials

These screening failures often allow brokers with significant red flags to move from firm to firm despite problematic histories.

Willful Blindness to “Cockroaching” Brokers

The securities industry has long struggled with “cockroaching”—the practice where brokers with disciplinary histories move between firms after misconduct. Firms enable this practice when they:

• Fail to review FINRA BrokerCheck reports thoroughly
• Ignore patterns of customer complaints that did not result in formal discipline
• Accept vague or implausible explanations for previous terminations
• Disregard “unofficial” warnings from industry contacts
• Focus exclusively on a broker’s production numbers rather than compliance history

These practices prioritize short-term revenue over investor protection, creating substantial liability risk.

Inadequate Heightened Supervision Programs

When firms do hire brokers with disciplinary histories, they have an obligation to implement appropriate heightened supervision. Common failures include:

• Supervision plans that exist on paper but aren’t implemented in practice
• Insufficient duration of heightened supervision
• Inadequate supervision intensity given the broker’s history
• Failure to document heightened supervision activities
• Premature termination of heightened supervision despite continuing red flags

These supervision failures often allow problematic behaviors to continue or even escalate, resulting in significant investor losses.

Retention of Repeatedly Problematic Brokers

Perhaps the most egregious failure occurs when firms retain brokers despite mounting evidence of misconduct. This includes:

• Maintaining brokers with multiple similar customer complaints
• Keeping brokers who repeatedly violate firm policies
• Retaining brokers who fail to cooperate with compliance efforts
• Continuing to employ brokers who require constant supervision interventions
• Making economic calculations that weigh a broker’s revenue against potential liability

These retention decisions reflect a conscious choice to risk investor protection for financial gain, creating particularly strong liability claims when losses occur.

Building Cases Based on Hiring and Retention Failures

At Patil Law, we have developed effective strategies for establishing hiring and retention failures as the basis for investor recovery:

1. Comprehensive Discovery

Through FINRA arbitration discovery, we obtain crucial evidence including:

• Pre-employment screening documentation
• Internal communications about hiring decisions
• Heightened supervision plans and implementation records
• Disciplinary files and performance reviews
• Customer complaint history and resolution records

These materials often reveal a pattern of known risks that were ignored or inadequately addressed.

2. BrokerCheck and CRD Analysis

We conduct thorough analysis of the broker’s official regulatory records, focusing on:

• Timing and patterns of customer complaints
• Employment history and terminations
• Undisclosed outside business activities
• Regulatory investigations and findings
• Arbitration awards and settlements

This analysis can establish what the firm knew or should have known about the broker’s background.

3. Expert Testimony on Industry Standards

We work with experienced former regulators and compliance officers who can credibly testify about:

• Industry standards for pre-employment screening
• Appropriate heightened supervision protocols for specific risk factors
• Reasonable retention decisions given a broker’s history
• The firm’s deviation from accepted industry practices
• The causal connection between hiring/retention failures and investor harm

This expert testimony helps arbitrators understand how the firm’s decisions fell below industry standards.

Real-World Impact of Hiring and Retention Failures

In a recent case, our team recovered over $1.5 million for investors by demonstrating that their brokerage firm had hired a broker despite six customer complaints at his previous firm—all involving the same type of misconduct that ultimately harmed our clients.

Through discovery, we obtained emails showing that compliance personnel had recommended against hiring this broker, but management overruled them based solely on his production numbers. We also established that the “heightened supervision” plan created for this broker was never actually implemented, allowing his misconduct to continue unchecked.

How Patil Law Can Help With Your Hiring and Retention Liability Claim

If you’ve suffered investment losses due to broker misconduct, Patil Law’s experienced securities attorneys can help determine whether hiring and retention failures contributed to your situation. We have the expertise to:

• Research your broker’s background and disciplinary history
• Obtain critical hiring and supervision records through FINRA discovery
• Build compelling claims based on established industry standards
• Present complex hiring and retention issues in clear, persuasive terms

Contact Patil Law today for a free consultation.