In an effort to better understand compliance officer liability, Two Roads Software sat down with a compliance officer with 20+ years experience currently working as the Chief Compliance Officer at a boutique securities firm supervising about forty registered reps.
A compliance officer at a prominent New York based broker-dealer was recently fined $25,000 and suspended for one month due to his involvement in his firms compliance failures. A compliance officer was recently fined $10,000 and suspended for four months after failing to implement a plan of heightened supervision on a troublesome broker. Another compliance officer will serve a six-month suspension after it was shown the firm, through the compliance officer, failed to establish and implement an adequate supervisory system for the review and retention of electronic communications relating to the firm’s business.
Examples like these occur every month where compliance officers are stamped by regulators for “failure to supervise.” Compliance officers are beginning to ask “Is this fair?” After all, compliance officers sit in a position that is usually understaffed and overworked, and with the risk that they will be held liable for the actions of others whom they have little control.
A question that’s being asked more and more these days is: how liable are compliance officers for the actions of those they supervise? Are they liable by virtue of their position alone, or are they judged by their actions (or lack thereof) in the case?
The SEC is clear to establish that to be found at fault, a compliance officer must possess “the requisite degree of responsibility, ability or authority to affect the conduct of the employee whose behavior is at issue.” That seems simple enough, but what does it really mean? According to SEC documentation the compliance officer must have possessed the power to prevent the violation and also must have known that they had the power take effective action. The regulators make the call if a compliance officer should have known, and therefore liable to be sanctioned.
Compliance officers are overseeing more people, and as a result 53% of compliance officers now feel that their personal liability has increased since they entered the field. In response, compliance officers are asking for more compensation, citing workload, liability, and the value of their expertise. And what’s more, 85% of financial executives feel stressed about regulatory change, the majority of which falls on compliance officers.
“Failure to supervise” has become a charge tacked on to many client complaints. So this begs the question, how can compliance officers protect themselves?
How can compliance officers protect themselves?
A compliance officer with over 20 years of experience notes that “
There must be effective monitoring controls in the brokerage firm so that the compliance personnel can keep a finger on the pulse of what is happening. Catching a problem early and nipping it in the bud is the key to avoiding further damages. So far in the financial space we have seen that trade reporting and surveillance has the capability to recognize and help compliance staff thwart manipulative trading practices. It is now time to have a similar product that can monitor firms’ internal and external communications so that compliance officers can perform their duties more effectively and avoid further liability. A recent failure by a New Jersey broker dealer to review emails highlights the liability a compliance officer can face if not careful.[pullquote align=”right”]The best way to protect yourself is to raise awareness of the rules before they are violated.[/pullquote]
It should be mentioned that reps often simply don’t know they are breaking any rules, and therefore basic education can prevent future issues.
“Most reps who violate a rule do so because they are unaware of the rule to begin with,” one compliance officer notes, “The development of a good training plan is invaluable because the best way to protect yourself is to raise awareness of the rules before they are violated.”
The only way to reduce your liability completely is to “vote with your feet” when faced with a situation that violates securities law. But compliance officers must be proactive in establishing written procedures, educating reps, using accurate monitoring software, and archiving communication regularly. They must also arm personnel by implementing modern methods, technology, and training tools to protect themselves and the interest of the firm in regards to FINRA and SEC rules. Without these measures, the compliance officer may become collateral damage from regulatory scrutiny.