FINRA Enforcement Puts Chief Compliance Officers on Notice


On March 17, 2022, FINRA released Regulatory Notice 22-10.

The regulatory guidance discusses the application of FINRA Rule 3110 – Supervision — as it relates to Chief Compliance Officers (“CCOs”).  The notice begins by making it clear that, as a general matter, supervision is the responsibility of the senior business management and compliance personnel serve in an advisory role rather than supervisory.  FINRA notes however, that it will bring enforcement actions against CCOs in circumstances when a firm has expressly or impliedly designated its CCO as having supervisory responsibility.

FINRA explains that a CCO may have supervisory responsibility in a number of ways.  For example, the CCO may have dual roles as both CCO and business management.  The CCO as management would have a responsibility to supervise or delegate such supervision under Rule 3110.  A firm may also designate its CCO as a supervisor as part of its written supervisory procedures.  A firm’s president or CEO could also “expressly or impliedly” designate the CCO as a supervisor over a particular issue on an ad hoc basis or for exigent circumstances.

FINRA is silent on what would constitute a CCO being “impliedly” designated as a supervisor.  This seems to leave CCO’s in a precarious position whereby firm management, who has the primary responsibility to supervise, could sacrifice the CCO to regulators by pointing to an “implied designation” that was not perceived as such by the CCO at the time.

Once designated, a CCO is held to the same standard as any other supervisor and will be subject to regulatory scrutiny if he or she fails to discharge their supervisory responsibilities in a “reasonable manner.”  FINRA provided the following list of factors that weigh in favor or charging or not charging a CCO with a regulatory violation:

Factors that Favor Charging the CCO for Supervisory Lapses

(1) the CCO was aware of multiple red flags or actual misconduct and failed to take steps to address them;

(2) the CCO failed to establish, maintain, or enforce a firm’s written procedures as they related to the firm’s line of business;

(3) the CCO’s supervisory failure resulted in violative conduct (e.g., a CCO who was designated with responsibility for conducting due diligence failed to do so reasonably on a private offering, resulting in the firm lacking a reasonable basis to recommend the offering to its customers); and

(4) whether that violative conduct caused or created a high likelihood of customer harm.

Factors that Weigh Against Charging the CCO for Supervisory Lapses

(1) the CCO was given insufficient support in terms of staffing, budget, training, or otherwise to reasonably fulfill his or her designated supervisory responsibilities;

(2) the CCO was unduly burdened in light of competing functions and responsibilities;

(3) the CCO’s supervisory responsibilities, once designated, were poorly defined, or shared by others in a confusing or overlapping way;

(4) the firm joined with a new company, adopted a new business line, or made new hires, such that it would be appropriate to allow the CCO a reasonable time to update the firm’s systems and procedures;

(5) the CCO attempted in good faith to reasonably discharge his or her designated supervisory responsibilities by, among other things, escalating to firm leadership when any of (1)–(4) were occurring.

The ultimate take away from this notice is that CCOs and compliance personnel do not automatically have any responsibility to supervise under FINRA Rule 3110.  If they are designated as supervisors, however, they have the same responsibilities as any other supervisor under the rule.  As noted above, FINRA’s guidance that a CCO can be implicitly designated as a supervisor should give CCOs some pause.  If there is any doubt or confusion about whether a CCO has been designated as a supervisor by implication, it is certainly wise for the CCO to confirm that designation explicitly and in writing.

Herskovits PLLC has a nationwide practice defending individuals and broker-dealers faced with a FINRA investigation or disciplinary proceeding.  Feel free to contact us for a consultation at (212) 897-5410.

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