Finra Pinpoints Scope of Potential Liability for Compliance Chiefs
Finra’s notice comes amid growing concerns about individual liability among compliance professionals
The Financial Industry Regulatory Authority said it would only take action against chief compliance officers when they fail to carry out specific supervisory responsibilities designated by the firm, and not in matters where they play an advisory role.
Finra, Wall Street’s self-regulatory arm, in a regulatory note Thursday said that it generally considers the role of compliance chief an advisory position rather than a supervisory one. The responsibility for supervision under Finra rule 3110, which lays out obligations for member firms and requires each to designate individual supervisors for responsibilities, lies with a company’s senior business management and not its compliance officers.
It added that in cases in which it takes disciplinary action, it will look first to a firm’s senior business management team and supervisors to determine the responsibility for a failure to supervise.
Chief compliance officers were charged in 28 cases out of about 440 Finra disciplinary actions between 2018 and 2021 that involved supervisory failures under rule 3110, Finra said. In 18 of the 28 cases, the compliance chief also was the chief executive officer or president of the firm, a role that held supervisory responsibilities, and in the remaining 10 cases, the compliance chiefs held specific supervisory responsibilities given by the firm that they failed to perform, Finra said.
“Chief compliance officers play an important role in facilitating compliance by promoting strong practices that protect investors and market integrity,” said Jessica Hopper, head of enforcement at Finra. “That does not automatically make them supervisors, subject to Finra’s supervisory requirements.”
Finra’s notice comes after the New York City Bar Association and the National Society of Compliance Professionals each proposed their own frameworks to better define the individual liability for compliance chiefs. Their proposed frameworks aim to address growing concerns among compliance professionals about the extent of individual liability for compliance officers and to guide regulators as they look to clarify the chief compliance officer role when determining potential compliance failures.
“It’s leading to a good direction for firms and CCOs, but I think there is still more work to be done and more thinking to be done with these issues,” said Brian Rubin, a member of the board for the National Society of Compliance Professionals and of the committee that wrote the group’s framework, which was shared with Finra. Mr. Rubin, a partner at law firm Eversheds Sutherland (US) LLP in Washington, said the notice addresses some of the concerns of compliance chiefs holding supervisory positions, but the industry has other concerns, such as when CCOs are charged even if they acted in good faith or made a mistake.
Adam Felsenthal, who leads the initiative at the New York City Bar Association, said the association’s committee is pleased to see the Finra guidance took into consideration a few factors suggested by its proposal, including situations in which the compliance chief ignored multiple red flags and when the CCO doesn’t have proper support in terms of staffing and resources.
“The framework really helps to comfort the compliance community that regulators are not going to target them indiscriminately,” said Mr. Felsenthal, who is general counsel and deputy chief compliance officer at healthcare investment firm Great Point Partners LLC. “This checks off one of the concerns and now they can go back to their main job and dig in deep and solve compliance issues.”
He added that a positive next step would be for the U.S. Securities and Exchange Commission, which oversees Finra, to release a framework on this issue as well.