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FINRA on Supervision: Not a Boss, Not Your Problem (Even If You're a CCO)

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What You Need to Know

  • Under FINRA rules, supervisors can be sanctioned for failure to perform their duties.
  • “The CCO’s role, in and of itself, is advisory, not supervisory,” FINRA states.
  • Supervisory responsibility rests with a firm's management, not its compliance officials, according to FINRA.

The Financial Industry Regulatory Authority on Thursday reminded broker-dealers regarding when a chief compliance officer is deemed a supervisor and subject to an enforcement action for running afoul of FINRA Rule 3110.

Regulatory Notice 22-10 sets out the scope of Supervision Rule 3110, the CCO’s role and how FINRA assesses a CCO’s liability under the rule.

“Chief compliance officers play an important role in facilitating compliance by promoting strong practices that protect investors and market integrity,” said Jessica Hopper, executive vice president, enforcement, in a statement. “That does not automatically make them supervisors, subject to FINRA’s supervisory requirements. This Notice helps to clarify when a CCO is — and is not — subject to potential liability under FINRA’s Supervision rule.”

For instance, FINRA will bring an action against a CCO under Rule 3110 for failure to supervise “only when the firm confers on the CCO supervisory responsibilities and the CCO fails to discharge those responsibilities in a reasonable manner,” the notice states.

“In those instances, FINRA also will consider whether charging the CCO is the appropriate regulatory response to address the violation after weighing aggravating and mitigating factors.”

As the notice states, “a CCO is not subject to liability under Rule 3110 because of the CCO’s title or because the CCO has a compliance function at a member firm. A CCO will be subject to liability under Rule 3110 only when — either through the firm’s written supervisory procedures or otherwise — the firm designates the CCO as having supervisory responsibility.”

Rule 3110 imposes specific supervisory obligations on broker-dealers.

“The responsibility to meet these obligations rests with a firm’s business management, not its compliance officials,” the notice states. “The CCO’s role, in and of itself, is advisory, not supervisory.”

Accordingly, the notice continues, “FINRA will look first to a member firm’s senior business management and supervisors to determine responsibility for a failure to reasonably supervise. 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.”

As a result, charges against CCOs for supervisory failures “represent a small fraction of the enforcement actions involving supervision that FINRA brings each year,” the notice points out.

Of the nearly 440 disciplinary actions involving Rule 3110 violations for supervisory failures between 2018 to 2021, CCOs were charged in 28 instances, the notice states.

“Of those 28, 18 involved a CCO who was also the CEO or president of the firm — a role that confers supervisory responsibilities,” according to FINRA.

For each of the remaining 10, FINRA found that the firm had conferred upon the CCO specific supervisory responsibilities that the CCO failed reasonably to perform.