Chief compliance officers (CCOs) play a critical role in helping broker-dealers avoid regulatory oversights and promote the overall integrity of the market. However, CCOs are obviously not the only parties who could be on the hook for regulatory violations at a brokerage firm. The Financial Industry Regulatory Authority (FINRA) recently issued guidance on CCOs’ potential supervisory liability. The guidance will inform the practices not only of CCOs, but also of other high-level decision makers within brokerage firms.
When might a CCO bear supervisory liability?
FINRA’s recent guidance made it clear that the ultimate responsibility for a broker-dealer’s compliance rests not with the CCO and other compliance personnel, but rather with the firm’s chief executive officer and senior management.
While CCOs do not generally bear responsibility for supervisory decisions, CCOs may take on these responsibilities if designated to do so. What form does such designation take? According to FINRA’s recent guidelines, CCOs may bear supervisory liability when:
- The broker-dealer’s written procedures assign supervisory responsibilities to the CCO.
- A senior manager for the broker-dealer expressly or impliedly assigns the CCO supervisory responsibilities on an ad hoc basis.
- The firm calls upon the CCO to take on supervisory responsibilities under exigent circumstances, such as during an audit or investigation.
A reasonableness standard applies
Even if a CCO is assigned a supervisory role, FINRA has indicated that it will take disciplinary action against the CCO only if that person failed to discharge supervisory responsibilities in a reasonable matter. The judgment of whether actions were reasonable will depend upon a close examination of the facts and circumstances of each individual case, and FINRA will assess whether the CCO’s conduct was aimed at achieving compliance with industry laws and regulations.
The value of clarity
Broker-dealers generally run more smoothly and with fewer regulatory pitfalls when everyone is aware of their responsibilities and the potential liability assigned to their role. If you have questions or concerns about regulatory issues, we encourage you to contact the securities law attorneys at Ford O’Brien Landy LLP. With offices in New York City and Austin, Texas, we advise and represent clients nationwide.
Source: The Wall Street Journal, “Finra Pinpoints Scope of Potential Liability for Compliance Chiefs,” March 17, 2022