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FINRA’s recent notice represents a significant move for the authority in clarifying when CCOs will and will not be held liable for supervisory violations in enforcement actions.
Member firms were reminded in Regulatory Notice 22-10 of the scope of FINRA Rule 3110 “as it Pertains to the Potential Liability of Chief Compliance Officers for Failure to Discharge Designated Supervisory Responsibilities”. The notice was issued on March 17th 2022.
CCOs are not, simply by virtue of their role, responsible for the adequacy of the broker-dealer’s policies and procedures under FINRA Rule 3110. However, FINRA clarifies that the responsibility for implementing and maintaining an effective supervisory system is the responsibility of the firm’s senior business executive(s) and whomever the senior business executive delegates supervisory responsibility to. This could include the registered principals responsible for each business line.
FINRA also clarified that if a CCO has other business responsibilities (some firms elect to have their CCO also hold the title of CEO), the CCO can be held liable for failure to supervise in his or her business line capacity, regardless of CCO title. As such, FINRA states that it will follow the designations of supervisory responsibility in a broker-dealer’s written supervisory procedures. If a firm designates the CCO as responsible for a particular area of supervisory procedures, then the CCO becomes the supervisor for those procedures and is thereby responsible for performing those functions on a reasonable basis.
CCOs should consider whether this is appropriate for their firm; FINRA Reg. Notice 22-10 suggests that the best practice approach would be to potentially have a business-side supervisor responsible for carrying out WSPs, with compliance in a second-level defense role of monitoring and testing the business’ performance of its responsibilities.
Lastly, FINRA explains that even when a CCO is acting as a supervisor, the test as to who(m) liability falls with remains whether they have behaved on a reasonable basis under circumstances.
Factors which would weigh in favor of charging a CCO could include:
- If the CCO was aware of multiple red flags or actual misconduct he or she did not address
- The CCO failed to establish, maintain, or enforce the firm’s written procedures
- Whether or not the CCO’s supervisory failure resulted in a violation (for example a CCO tasked for due diligence yet failing to do so reasonably on a private offering)
- If the violations caused or created a high likelihood of customer harm.
Factors which would weigh against charging a CCO could include:
- The CCO was given insufficient support with regard to staffing, budget, training, or otherwise to fulfill the supervisory duties required
- If the CCO was burdened in light of competing functions and duties
- The CCO’s supervisory responsibilities were poorly defined or shared by others in a confusing manner
- The broker-dealer merged with another firm, adopted a new business line, or made new hires. As such it would be appropriate to allow the CCO a reasonable time to update the firm’s systems, policies, and procedures
- If the CCO attempted in good faith to discharge the supervisory responsibilities by escalating potential issues to firm leadership, among other proactive preventative measures.
How Bovill Newgate can help
Bovill Newgate’s team of professionals can help tailor your compliance program to its business and to keep in-line with industry best practices and updates to FINRA’s rules and regulations. Bovill Newgate continuously provides support to FINRA registered broker-dealers by performing independent annual 3110/3120 supervisory controls testing assessments and independent annual AML compliance assessments and reviews as required under FINRA rules and regulations. We also assist firms during their FINRA examination, to best respond and remediate any identified risk.
We host a quarterly AML roundtable for FINRA member broker dealers to share and discuss current challenges. Get in touch if you’re interested in joining our group.
