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.