In what likely came as an enormous relief to Chief Compliance Officers (CCOs) at broker-dealer firms, on March 17, 2022, FINRA issued Regulatory Notice 22-10 clarifying the scope of potential liability for CCOs related to supervision lapses. Specifically, unless a CCO is actually designated, directly or indirectly, with supervisory responsibilities, within the meaning of the relevant rule, supervision failures or deficiencies will not result in a FINRA enforcement action against a CCO.
The Notice offers the important reminder that Rule 3110 imposes supervisory obligations on FINRA member firms, but firm management is responsible for ensuring these obligations are met. The Rule requires that policies and procedures appropriate to the firm and reasonable to achieve compliance with the securities laws, regulations, and FINRA rules, must be implemented and that at least one supervisory principal be designated to supervise each type of broker-dealer activity that the firm conducts, as well as the registered representatives who are engaged in these activities. However, that person need not be and often is not the CCO.
As the Notice acknowledges, the CCO’s role is often not supervisory in nature. The compliance function, which sets out the rules, policies and practices relevant and appropriate to keep the member firm compliant, is more advisory; while the written supervisory procedures (WSPs) more specifically document the processes and supervisory system for a particular business area, within the overall system of compliance controls in place for the firm. See also FINRA Notice to Members 99-45 (distinguishing between compliance and supervision responsibilities).
Finally, FINRA notes that when deciding whether to bring an enforcement action against a CCO, or presumably any principal charged with supervisory responsibilities, it will seek to determine whether that person “reasonably discharged his or her designated supervisory responsibilities.” In so doing, FINRA will evaluate the particular facts and circumstances, including factors such as: whether the WSPs were reasonable given the firm’s business; if red flags were ignored; and whether actual misconduct or violations, or customer harm, resulted. On the other hand, FINRA also will consider whether the CCO has sufficient support from the firm to fulfill designated supervisory obligations; whether those obligations were among competing responsibilities, or were poorly defined, or part of a new business line or acquisition; and whether the CCO acted in good faith. These types of considerations may lead FINRA to decide to charge the firm, or someone else in firm management, or to pursue more informal disciplinary measures.
Overall, we expect that CCOs, and designated supervisory principals, can take comfort from this additional clarity, which has been much needed. Should you have questions, please do not hesitate to contact the author or your Baker McKenzie contact.
