FINRA Reminder of Liability for Failing to Discharge Rule 3110

Publish Date

Type

Compliance Alert

Topics

  • Compliance

The Financial Regulatory Authority (FINRA) recently issued Regulatory Notice 22-10 (the Notice) to remind member firms that their Chief Compliance Officers (CCOs) are generally not subject to liability for failure to supervise under FINRA Rule 3110 (Supervision) unless they are specifically acting in a supervisory role. The Notice highlights the supervisory responsibilities of the president of the broker-dealer and the business managers, and notes that, generally, a CCO’s role is primarily an advisory one.

A CCO can be designated as having supervisory responsibility in the following ways:

  • The firm’s written procedures assign the CCO the responsibility to establish, maintain, and update written supervisory procedures, both generally and in specific areas.
  • The written procedures assign the CCO responsibility for enforcing the firm’s written supervisory procedures or other specific oversight duties usually reserved for line supervisors.
  • The firm, through its president or some other senior business manager, expressly or by implication designates the CCO as having specific supervisory responsibilities on an ad hoc basis or asks the CCO to take on specific supervisory responsibilities if needed.

Rule 3110 imposes specific supervisory obligations on firms. The responsibility to meet these obligations generally rests with a firm’s business management, not its CCO and compliance team. FINRA will look first to a firm’s president and senior business management to determine responsibility for a failure to supervise reasonably. Again, FINRA will not bring failure-to-supervise actions against CCOs unless their firms had given them supervisory responsibilities and they subsequently failed to discharge those responsibilities as prescribed. FINRA predicates individual liability under Rule 3110 upon the firm’s express or implied designation of supervisory personnel and the delegation of supervisory responsibility to the designated individuals.

A firm’s supervisory obligations under Rule 3110 rest with the firm and its president and flow down by delegation to the firm’s designated supervisors. The firm’s president, not its CCO, takes ultimate responsibility for compliance with all applicable requirements unless and until particular functions are delegated to another person in the firm.

As stated in FINRA Rule 3130’s Supplementary Material, “A CCO is a primary advisor to the firm on its overall compliance scheme and the particularized rules, policies and procedures that the firm adopts.”

Neither Rule 3110 nor Rule 3130 attach specific supervisory responsibilities to a CCO.

Our guidance

FINRA’s publication of this Regulatory Notice is timely as it follows the recent publication by the National Society of Compliance Officers (NSCP) of the NSCP Firm and CCO Liability Framework, which provides specific guidance and criteria for evaluating firm and CCO liability. It also follows the recent publication by the New York City Bar Association Framework on CCO Liability. Firms should confirm they have these critical elements in place and that management is engaging in discussions about the framework to ensure they have implemented and maintain the best protections against liability.

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For more information

For more information on the Rule 3110 failure-to-supervise liability of firms and their CCOs, or to find out how we can help your firm comply with FINRA regulations, please contact your ACA consultant or contact us here.