The Financial Industry Regulatory Authority issued a reminder to member firms last week that focused on the potential liability of their Chief Compliance Officers (CCOs) for failing to fulfill supervisory responsibilities.
FINRA issued Regulatory Notice 22-10, clarifying the circumstances under which CCOs might be subject to personal liability for failure to supervise under Rule 3110. The rule imposes specific supervisory obligations on member firms, with the responsibility for meeting those obligations resting with business management, not compliance officials. FINRA noted that the role of the CCO’s role is advisory, not supervisory.
With that in mind, the authority said that it will look first to a firm’s senior business management and supervisors to determine responsibility for a failure to supervise. According to the regulatory notice, “FINRA will not bring an action against a CCO under Rule 3110 for failure to supervise except when the firm conferred upon the CCO supervisory responsibilities and the CCO then failed to discharge those responsibilities in a reasonable manner.” In those instances, FINRA said it would weigh the aggravating and mitigating factors and then decide whether charging the CCO is the appropriate response to address the violation.
FINRA noted that a small fraction of the enforcement actions it brings each year for supervisory failures involve charges against CCOs.
Under Rule 3110, member firms are required to maintain a system to supervise the activities of each person in order to achieve compliance with applicable securities laws and regulations. Each firm is required to designate individuals to carry out such supervisory responsibilities. Individual supervisors have a duty to investigate “red flags” that could indicate misconduct is occurring at the firm. FINRA said that the ultimate responsibility for compliance with the rule rests with the firm’s president, not its CCO.
Financial professionals who work for broker-dealers, RIAs or other financial services companies operate in a highly regulated industry that is overseen by the SEC, state regulators and other self-regulatory organizations such as FINRA and various exchanges. The attorneys at Lewitas Hyman understand the complexities that come with being the subject of a regulatory inquiry, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact us (888) 655 6002 or through our online contact form for a free consultation.