Guidance (and a touch of solace) for compliance and legal personnel on potential supervisory liability
On 30 September, the staff of the Securities and Exchange Commission’s (SEC’s) Division of Trading and Markets addressed an issue of great interest to the compliance and legal community concerning the circumstances under which the compliance and legal staffs of broker-dealers may be viewed as ‘supervisors’ and thus face liability under the securities laws for failing to supervise firm employees.
The guidance, which appears in the form of responses to frequently asked questions (FAQs), seems to confirm the industry’s long-held view that supervisory liability does not attach unless a compliance or legal employee truly functions in a supervisory capacity. However, given that any such determination turns on all of the facts and circumstances, the FAQs underscore that senior management of broker-dealers would do well to engage in an assessment of the roles and responsibilities of their compliance and legal teams.
In order for compliance and legal staff of a broker-dealer to avoid potential supervisory liability, their roles should be limited to serving as advisers to, and a resource for, the chief executive officer and other senior management who, the FAQs confirm, bear ultimate supervisory responsibility. While the FAQs focus on broker-dealers, they are also relevant to assessing the potential supervisory liability of compliance and legal personnel of registered investment advisers…
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