On March 17, 2022, FINRA released Regulatory Notice 22-10. It dealt with Supervision. I started to see posts, that FINRA had firmly stated that the CCO (Chief Compliance Officer) would not be disciplined for failures to supervise. The release states “The responsibility to meet these obligations (those outlined in Rule 3110) rests with a firm’s business management, not its compliance officials. The CCO’s role, in and of itself, is advisory, not supervisory.” But, there is always a “but”. Further down in the release (and these quotes are only coming from the Summary.) FINRA says [We] 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.”
It is in fact the case that the written supervisory procedures (“WSPs”) of most firms delegate specific duties to particular principles, however, most WSPs make it clear that the oversight of the functions outlined by the WSPs are overseen by the CCO who has a direct report to the CEO. Even FINRA acknowledges in the Release that often the CCO is assigned the supervisory responsibility to make sure that the WSPs are in place and maintained and enforced.
Well, anyone who, like me has been the CCO at a small firm will tell you that it they don’t ensure that the WSPs are in place, maintained and enforced it won’t get done and that is clearly their responsibility. In fact, in the designation chart, it is always designated to the CCO, and I know that at most larger firms this is no different. I believe that FINRA also knows that this is the reality on the ground.
So, is this good news for CCOs? I think not. CCOs are the center at any firm for the oversight (supervision) of compliance. If they do not do their job FINRA will still discipline. If there is any good news it is this: FINRA says in the Release that if it does decide to discipline the CCO it will use the reasonableness standard. So, for example if the CCO hasn’t reviewed the WSPs for years and they are missing major rule changes that clearly would not be reasonable. But one always must be weary of where the reasonableness line is drawn.
What are possible recommendations?
- I suggest that you review the WSPs to determine exactly what responsibilities of a supervisory nature have been assigned to you.
- Since I am sure that the responsibility for the WSPs rest with the CCO you should make sure that you review them regularly.
- Have resources available that help you keep up with rule and regulatory changes.
- Schedule periodic meetings with senior management to discuss compliance issues.
- Document discussions with management concerning compliance issues.
- Make sure that you have not been delegated responsibility for reviewing trades or emails. (I know this is difficult.)
- Report red flags to senior management immediately, even if you are handling the issue or conducting an internal review. Make sure they know about it once you discover it.
- Share the Release with senior management.
Being a CCO is never an easy job. I done it and perhaps that is why I am now back in private practice.
© Law Office of Sharon M. Davison 2022. Use with attribution.
This is not legal advice and has not created an attorney/client relationship