Where were chief compliance officers (CCOs) most likely to lose their moral compass and get nabbed by regulators in the past year?
According to lead attorneys in Eversheds Sutherland’s securities enforcement practice, who performed a year-end analysis to find the most frequent and remarkable cases Finra and the Securities and Exchange Commission brought against CCOs in 2018, failing to adopt adequate supervision led the regulatory pitfalls that tripped up compliance officers and their staffs.
When there is a breakdown in supervision at firms that allows business practices or investor protections to go awry, CCOs become the prime target for regulators, the law firm said.
And being on the wrong side of regulators’ charges can carry serious consequences, as these CCOs found in 2018. Early in the year, Finra sanctioned and barred a CCO for two years for failing to update written procedures to ensure a registered rep who Finra had placed on restriction for sales infractions was being adequately supervised. The CCO was held responsible because he was the only person at the firm who could revise such written supervisory procedures, Finra found.
Finra suspended another B-D compliance officer for two years and ordered him to pay $50,000 because he failed to establish and maintain a supervisory system over the firm’s microcap liquidation sales business. The CCO appealed the finding in July 2018, arguing that the decision did not reflect the firm’s practices, but lost and failed to reduce his bar or penalty.
In fact, the National Adjudicatory Council (NAC) arbitrators found on appeal that the CCO’s violations were egregious and “demonstrated failure to appreciate the extent and seriousness of the responsibilities he took on,” which warranted the significant sanctions which went beyond arbitration guideline ranges.
“You don’t need an infinity stone to know that regulators may impose sanctions on CCOs who fail to follow, develop and update their firm’s procedures,” said Brian Rubin, the Washington office leader for Eversheds Sutherland’s securities enforcement group.
“This is especially important where the regulator has imposed restrictions on the firm, or where the firm employs individuals who are subject to plans of heightened supervision that compliance officers must draft,” Rubin said.
According to Eversheds Sutherland, five other areas tripped up CCOs in 2018:
- Insufficient disclosures;
- Policies and procedures related to performance;
- Anti-money laundering;
- Failure to follow written supervisory procedures;
- Custody rules.
CCOs are on the line for such infractions because they have the responsibility to control firms’ policies, procedures and overall compliance structures, which at B-Ds must be “reasonably designed to achieve compliance” and must be “tailored to the member’s business,” Finra regulation states. RIAs, too, must designate an individual who is responsible for administering those policies the firm has adopted and must implement to protect investors and business operations.