FINRA Issues Regulatory Notice on Failure to Supervise Liability for Chief Compliance Officers – Sidley Austin LLP

Mar 24, 2022

On March 17, 2022, FINRA issued Regulatory Notice 22-10 on the liability of chief compliance officers (CCOs) at broker-dealers. The notice represents a significant step for FINRA in clarifying to its membership when CCOs will and will not be held liable for supervisory violations in enforcement actions.

FINRA first acknowledges an important point: CCOs are not, simply by virtue of their positions, supervisors responsible for the adequacy of the firm’s policies and procedures under FINRA Rule 3110. Rather, the responsibility for implementing and maintaining an effective supervisory system is the responsibility of the firm’s senior business executive (whether titled president, CEO, or something else) and whomever the senior business executive delegates supervisory responsibility, including the registered principals responsible for each business line. But FINRA states that if a CCO has other business responsibilities (such as at firms where the CEO also serves as CCO), the CCO can be held liable for failure to supervise in his or her business line capacity, notwithstanding the CCO title.

More significantly, FINRA states that it will follow a firm’s designations of supervisory responsibility in its written supervisory procedures. Thus, if a firm designates the CCO as responsible for a particular set of supervisory procedures, then the CCO becomes the supervisor for those procedures and is responsible for performing those functions reasonably.

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FINRA News and Information compiled by Costello Law Group. See source for full story.