Compliance Officers, Supervisory Duties and Enforcement Actions: FINRA Explains

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.