FINRA Provides Guidance on CCO Liability under FINRA Supervision Rule

FINRA reminded members that a firm's responsibility to meet its supervisory obligations "rests with a firm’s business management, not its compliance officials." FINRA highlighted the factors it considers before imposing supervisory liability on a firm's Chief Compliance Officer ("CCO") pursuant to FINRA Rule 3110 ("Supervision").

Rule 3110 and the Role of a CCO

In the Notice, FINRA explained that Rule 3110 imposes specific supervisory obligations on member firms and that the CCO’s role generally is advisory and not supervisory. FINRA stated it will not bring an action against a CCO under Rule 3110 for failure to supervise unless a firm delegates to the CCO supervisory responsibilities, and the CCO then fails to execute those responsibilities in a "reasonable" manner.

FINRA clarified that supervisory liability will not apply to a firm's CCO unless the CCO is responsible for either (i) creating and improving the firm's supervisory procedures, or (ii) enforcing the firm's compliance with its supervisory procedures.

CCO Liability Determination

In determining whether to bring an action against a CCO, FINRA said it would (i) assess a CCO's actions, or lack thereof, under a reasonableness standard, and (ii) weigh the CCO's conduct against a set of factors applicable to those who have supervisory responsibilities.

FINRA clarified that liability is more likely to be found if the CCO:

1. was aware of multiple red flags or actual misconduct and then failed to take steps to address them;
2. failed to establish, maintain, or enforce a firm’s written procedures;
3. the CCO’s supervisory failure resulted in violative conduct; and
4. the violative conduct "caused or created a high likelihood of customer harm."

FINRA said that liability is less likely to be found if:

1. the CCO was given insufficient support in terms of staffing, budget, training;
2. the CCO was unduly burdened in light of competing functions and responsibilities;
3. the CCO’s supervisory responsibilities, once designated, were poorly defined, or shared by others in a confusing or overlapping way;
4. the firm joined with a new company, adopted a new business line, or made new hires, such that it would be appropriate to allow the CCO a reasonable amount of time to update the firm’s systems and procedures; and
5. the CCO attempted in good faith to reasonably discharge his or her designated supervisory responsibilities by escalating to firm leadership when any of (1)–(4) were occurring.

FINRA also stated that it would consider whether a more appropriate member of the firm should be charged with the Rule 3110 violation, such as one that had a "more direct responsibility for the supervisory task at issue." FINRA emphasized that liability will be assessed on a case-by-case basis, and that in some instances a Cautionary Action Letter will be more appropriate than formal disciplinary action.