In Regulatory Notice 22-10, FINRA offers the broker-dealer community guidance on when it will consider charging a Chief Compliance Officer under Rule 3110. Equally as important, FINRA articulates the factors that it may consider when deciding not to level such a charge. The clarity is helpful. And worth any CCO’s careful examination.
FINRA notes that, as stated in Regulatory Notice 99-45, a CCO’s role is advisory, not supervisory.[i] FINRA starts with the presumption that it will not bring an action against a CCO under Rule 3110.[ii] It will set this aside when: (1) a broker-dealer assigns supervisory responsibilities to the CCO; and (2) the CCO does not discharge these responsibilities in a reasonable manner.[iii] To determine if a CCO acted reasonably, FINRA will consider, among other factors:
- If the CCO knew of, but did not address, multiple red flags or instances of actual misconduct;
- If the CCO failed to establish, maintain or enforce written supervisory procedures required for the firm’s business;
- If the CCO’s supervisory failures resulted in conduct that violated the applicable regulatory standards; and
- Whether the CCO’s conduct caused or created a high likelihood of customer harm.[iv]
FINRA will also consider several exculpatory factors that might weigh against charging a CCO under Rule 3110.[v] These include whether the broker-dealer failed to give the CCO sufficient budget, training or other resources to reasonably fulfill – or otherwise poorly defined – the CCO’s duties. If these factors seem familiar, then you likely read the National Society of Compliance Professionals (NSCP)’s Firm and CCO Liability Framework that it released in January. The NSCP observes in the Framework that “[m]any compliance departments continue to be viewed as cost centers, not receiving the proper support, resources, or authority from their firm to appropriately address compliance-related weaknesses.[vi] It also encourages firms to give “clear direction and agreement from firm leadership on their roles and authority to manage compliance programs specifically tailored to their firms and reasonable designed to prevent violations of federal securities laws.”[vii] To that end, the NSCP offers several factors that it believes should mitigate against CCO liability.
From where I sit, FINRA seems to incorporate some of themes found in the Framework into 22-10. This is not a criticism. Rather, this is to FINRA’s credit. If FINRA is going to construct a notice concerning CCO liability, then it makes sense to consider the NSCP’s experiences and perspectives. The NSCP’s constituents have the most at stake here.
I invite you to contact me if have any questions about either document or their application to your business.
Thank you for reading this post. Please know that I wrote it for informational purposes only (some may consider it ADVERTISING MATERIAL) and did not intend for it to be legal advice or to form an attorney-client relationship with you – especially in jurisdictions where I am not licensed to practice law. I encourage you to seek your own counsel to help you with your specific situation. To that end, I invite you to contact me if you would like to discuss my services.
Ryan Smith is a partner of Practus, LLP and based in the Washington, D.C. area. His practice focuses on helping broker-dealers, registered investment advisers and their associates address a wide range of legal and compliance issues.