FINRA: Supervisory obligations rest with a firm’s business management, not the chief compliance officer

Agency Rule-Making & Guidance FINRA Compliance Supervision

On March 17, FINRA issued Regulatory Notice 22-10 reminding member firms that meeting their supervisory obligations under Rule 3110 “rests with a firm’s business management, not its compliance officials.” According to FINRA, a firm’s chief compliance officer’s (CCO) role generally is advisory and not supervisory, and as such, an action will not be brought against a CCO under Rule 3110 for failure to supervise unless a firm confers to the CCO supervisory responsibilities, and the CCO then fails “to discharge those responsibilities in a reasonable manner.” Specifically, FINRA stated that supervisory liability will not apply to a firm’s CCO unless the CCO is responsible for either establishing, maintaining, and updating the firm’s supervisory procedures, or has been “expressly or impliedly designated” to enforce the firm’s compliance with its supervisory procedures. With respect to determining a CCO’s liability when the CCO is exercising supervisory responsibilities, FINRA added that it would apply a reasonableness standard to a CCO’s actions. A CCO may be more likely to be held liable should it be discovered that (i) the CCO “was aware of multiple red flags or actual misconduct” and then failed to take steps to address the issues; (ii) the CCO “failed to establish, maintain, or enforce a firm’s written procedures”; (iii) “the CCO’s supervisory failure resulted in violative conduct”; or (iv) the “violative conduct caused or created a high likelihood of customer harm.”

FINRA also listed factors that would weigh against charging the CCO, including: (i) the CCO was given insufficient resources to undertake his supervisory responsibilities; (ii) the CCO was overburdened with other responsibilities; (iii) the CCO’s supervisory responsibilities were poorly defined; (iv) the firm changed in such a way such that it would be appropriate to allow the CCO time to update procedures; and (v) the CCO attempted to fulfill his duties, including by escalating concerns to senior leadership. FINRA added that it will also consider whether to take action against a firm or the firm’s president (or another individual with more director supervisory responsibility) rather than the CCO and explained that in some instances a Cautionary Action Letter may be more appropriate than formal disciplinary action.