FINRA Refrains from Charging Chief Compliance Officers with Failure to Supervise

 

FINRA will not prosecute Chief Compliance Officers for failure to supervise, unless the CCO has been delegated specific supervisory responsibilities, according to a recently published Regulatory Notice (22-10).

Calling the CCO’s role advisory, and not supervisory, FINRA puts supervisory responsibilities on the firm and its chief executives, flowing down to delegated officers.  FINRA stresses the distinction between compliance and supervision: “Compliance guidelines generally set forth the applicable rules and policies that must be adhered to and describe specific practices that are prohibited. By contrast, written supervisory procedures document the supervisory system to ensure that compliance guidelines are being followed.”  FINRA will treat CCOs as supervisors if they have been delegated supervisory responsibilities or take them on.  Such activities would include oversight of associated persons and reviews of trading activity.  FINRA will judge CCOs who take on supervisory functions similarly to other supervisors by assessing their awareness of red flags, their diligence, and the resulting harm.  FINRA notes that most failure to supervise cases against CCOs involved dual-hatted C-suite executives that had both supervisory and compliance roles.

 

 

Chief Compliance Officers should make clear (in writing!) that their mission and function is to design, draft, advise, and review compliance policies and procedures and that management has responsibility for making sure the associated persons follow them.  More specifically, CCOs should not supervise employees and should not be involved with pay or position determinations.  This Notice should also persuade all firms to dispense with the dual-hat CCO model and hire a fully dedicated Chief Compliance Officer either by hiring a full-time person or engaging a third-party firm to provide the service. 

 Read Regulatory Notice here.