Published on Mar 22nd, 2022 |

Brief Introduction to New FINRA Release

FINRA released a Regulatory Notice on Friday, March 17th, stating that they consider the role of the Chief Compliance Officer (“CCO”) to be an advisory position rather than a supervisory one.

Synopsis of New FINRA Release

Failure to Supervise

FINRA will not prosecute Chief Compliance Officers for failure to supervise unless the CCO has been delegated specific supervisory responsibilities, according to a recently published Regulatory Notice (22-10).

Difference Between Compliance Guidelines and Supervisory Procedures

FINRA noted it is important to realize the distinction between written compliance guidelines and written supervisory procedures.

  • Compliance Guidelines must be adhered to by applicable rules and describe specific practices that are prohibited.
  • Written Supervisory Procedures document the supervisory system to ensure that compliance guidelines are being followed.

Supervisory Deficiencies and CCO Enforcement

FINRA will bring an enforcement action against a CCO for supervisory deficiencies if a firm has expressly or impliedly designated its CCO as having supervisory responsibility

  • If the supervisory responsibilities for the CCO have not been addressed and discharged in a reasonable amount of time, then this will allow FINRA to take action.
  • If the supervisory responsibilities are within reasonable terms of achieving compliance with the federal securities laws, regulations, or FINRA rules, then this could be an exception.

Factors For CCO Supervisor Responsibility Charges

Below are factors from FINRA that go into charging a CCO who has supervisory responsibility under FINRA Rule 3110:

  • CCO was aware of multiple red flags or actual misconduct and failed to take steps to address them.
  • CCO failed to establish, maintain, or enforce a firm’s written procedures
    as they related to the firm’s line of business.
  • CCO’s supervisory failure resulted in violative conduct.
    • If the violative conduct caused or created a high likelihood of
      customer harm.

Factors Against Supervisor Responsibility Charges

Below are factors that may weigh against charging a CCO:

  • CCO was given insufficient support in terms of staffing, budget, training, or otherwise to reasonably fulfill his or her designated supervisory  responsibilities.
  • CCO was unduly burdened in light of competing functions
    and responsibilities.
  • CCO’s supervisory responsibilities, once designated,
    were poorly defined, or shared by others in a confusing or overlapping way.

Implications of New FINRA Rule

CCOs need to make sure compliance policies and procedures are being designed, drafted, reviewed, and advised properly.

The CCO role has always been an important focus for both the SEC and FINRA. Eliminating multi-hatted CCOs and hiring a dedicated CCO focused solely on the CCO side should allow for less risk when relating to potential actions from FINRA and the SEC.

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Updated on 4/1/2022 by Vigilant