FINRA Reminds CCOs About Potential Supervisory Liability

FINRA recently published Regulatory Notice 22-10 reminding firms of the scope of Rule 3110 (Supervision) and the potential liability of Chief Compliance Officers for failure to reasonably discharge supervisory responsibilities delegated to them.

FINRA recognizes that compliance and supervision are distinct roles that carry different obligations.  FINRA has said that the supervisory obligations in Rule 3110 “rest with the firm and its president (or equivalent officer or individual, e.g., CEO) and flow down by delegation to the firm’s designated supervisors.”  Often, however, the same personnel straddle both compliance and supervisory roles.  This is especially true at smaller firms at which resource constraints might exist.

When compliance personnel are also tapped to serve in a supervisory function, Rule 3110 applies to that element of their role and, with that, comes the risk of individual liability for failure to satisfy one’s supervisory responsibilities.  Importantly, individual liability under Rule 3110 is based on a “firm’s express or implied designation of supervisory personnel and the delegation of supervisory responsibility to the designated individuals.” FINRA has said that “[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.”  Supervisory responsibilities may be designated to a CCO in writing (e.g., in written procedures) or expressly or impliedly by a firm’s president or senior business management.  A CCO may be assigned supervisory responsibilities on a regular or ad hoc basis or as exigencies demand.  CCOs may also be responsible for establishing, maintaining, and updating WSPs, enforcing the firm’s WSPs, or other specific oversight duties generally reserved for supervisors.

It is encouraging (but not surprising) to see FINRA acknowledge the differences between compliance and supervision.  Nevertheless, the notice serves as a strong reminder that compliance personnel are not immune to the risk of personal liability for supervisory failures if designated with these responsibilities.  CCOs and individuals responsible for designing a firm’s supervisory structure should review their compliance and supervisory designations in light of this reminder to ensure that delineation of responsibilities is appropriately calibrated for the firm and, importantly, that specific personnel are aware of the responsibility to which they are subject.  For smaller firms, in particular, having a clear understanding of the demarcation (or lack thereof) between supervision and compliance is a critical consideration.