More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
The Securities and Exchange Commission’s Division of Trading and Markets just released Q&A guidance on broker-dealer compliance officers’ liability for failure to supervise—stating that whether a compliance officer could be liable depends on whether such person has the “requisite degree of responsibility, ability or authority to affect the conduct” of the employees.
The frequently asked questions guide, which includes eight questions and answers, states that compliance and legal personnel do not become supervisors solely by reason of their position, because they give advice to management, or participate in management committees.
The FAQ states that a compliance or legal staffer has supervisory responsibility if, among other factors, such person (i) has been given responsibility over a business activity; (ii) has been identified as responsible in a firm’s policies and procedures; (iii) has the power to hire, reward or punish; or (iv) could have prevented the violation from occurring.
The FAQ also defines a robust compliance system as a program of monitoring and escalation of noncompliance issues to management, and also recommends that firms clearly distinguish their compliance activities from their business activities.
Cipperman Compliance Services notes that although the area of when a chief compliance officer is liable for failure to supervise remains “somewhat murky,” the FAQ should allow compliance officers to “breathe a bit easier.”
The FAQ “is saying that if a compliance officer sticks to compliance monitoring, reporting and advising and can’t hire, fire, or reward/punish, he/she should avoid supervisory liability. Said another way: Compliance officers don’t do; they review,” Cipperman says.
Q&A No. 4 goes like this:
Q: Can a broker-dealer establish and implement a robust compliance program without its compliance and legal personnel being considered to be supervisors for purposes of the Exchange Act?
Yes. Broker-dealers have a duty to build effective compliance programs that are reasonably designed to ensure compliance with applicable laws and regulations.Among the things that firms should consider including in their programs are robust compliance monitoring systems, processes to escalate identified instances of noncompliance to business line personnel for remediation, and procedures that clearly designate responsibility to business line personnel for supervision of functions and persons.
Broker-dealers should consider clearly defining compliance and advisory duties and distinguishing those duties from business line duties in order for persons who perform only compliance and legal functions to avoid becoming supervisors of business line employees. Management at broker-dealers can greatly benefit from the participation and input of compliance and legal personnel.
Check out CCOs Under Fire: When Enforcers Get Burned by Regulators on ThinkAdvisor.