RIA Compliance Blog
Earlier this month the National Society of Compliance Professionals, a nonprofit membership organization that supports compliance personnel and programs in the financial services industry, published a report entitled “Firm and CCO Liability Framework.” The report is designed as an aid to compliance professionals and as a proposal to regulators, including the Securities and Exchange Commission, to determine situations in which liability of Chief Compliance Officers should be mitigated.
The SEC has provided its own guidance regarding when CCOs may be held liable, some of which we have highlighted in a previous post. Additionally, the New York City Bar Association’s Compliance Committee released a comprehensive report last year that contains a description of the history of regulatory comments and guidance provided on the issue of CCO liability and proposes its own framework of liability.
The NSCP report was motivated in part by a widespread belief among compliance professionals that financial services regulators have expanded the situations in which CCOs will face liability for firm compliance failures. According to a survey contained in the report, 72% of compliance professionals share that belief. Additional survey results contained in the report include: that 35% of compliance professionals claim to have insufficient resources to adequately carry out the obligation to provide firm training on compliance issues; that 20% claim to have insufficient authority either to enforce or to develop compliance policies and procedures; and that 25% claim to be unable to meaningfully raise compliance concerns to the firm’s senior management.
The report drew upon prior regulatory guidance establishing that firms should empower CCOs with authority and responsibility to develop compliance polices and procedures. This includes a responsibility by firm leadership to assess the needs of the compliance program and to allocate an appropriate level of resources to ensure that the CCO can conduct and maintain a robust program. Firm leadership should also establish clear direction to CCOs regarding their authority to manage the compliance programs and to oversee firm compliance.
The report presented nine questions that regulators should ask in determining whether compliance officers should be personally liable for firm violations. The report urged that if any of the nine questions are answered “yes,” that weighs against a finding of liability by the CCO or other compliance professional.
The questions included: (1) whether the CCO sought and obtained advice of legal counsel and adhered to the advice received; (2) whether the CCO or other compliance professional had only theoretical or nominal responsibility or authority, as opposed to actual or meaningful authority; (3) whether firm senior management provided sufficient support and resources to allow the CCO to achieve firm compliance; (4) whether the CCO has identified and escalated a particular compliance issue; and (5) whether the CCO took action to either prevent or lessen the impact of a compliance violation.
Other questions were (6) whether firm management responded appropriately when it became aware of a particular compliance issue; and (7) whether firm management had the opportunity to review and accept adequate policies designed to prevent the issue.
The NSCP survey also showed that 63% of compliance professionals feared liability for relying on information provided to them by other individuals within the firm. To address that concern, the report urged regulators to consider (8) whether it was reasonable for the professional to rely upon the information proved and (9) whether, in the case of misrepresentations or misstatements made by others at the firm, the compliance professional had the actual ability to verify the representations or statements.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.