SEC issues guidance on supervisory liability of broker-dealer compliance and legal personnel

A difficult question continually faced by broker-dealer compliance and legal personnel is whether their roles and duties can lead to them being considered supervisors of business personnel, and thereby subject them to liability for ‘failure to supervise’ if those business personnel engage in activities that violate applicable laws, rules and regulations.  

The Securities and Exchange Commission (SEC) Division of Trading and Markets recently issued a set of frequently asked questions (FAQs) concerning the supervisory liability of broker-dealer compliance and legal personnel. The division staff issued, and may periodically update, the FAQs to provide guidance relating to liability that may arise from the role and duties of a broker-dealer’s chief compliance officer (CCO) and other compliance and legal personnel.

Acknowledging the critical role that compliance and legal personnel play in a broker-dealer’s efforts to comply with legal and regulatory requirements, the FAQs are intended to provide assistance in evaluating the facts and circumstances under which compliance and legal personnel face potential supervisory liability. According to the staff, the Exchange Act does not presume that compliance or legal personnel are supervisors; instead, the issue centres on whether such personnel have supervisory authority over business units or personnel outside of their departments (for example, a chief executive officer acting as CCO). Supervisory authority also can be implicitly delegated to or assumed by compliance or legal personnel, resulting in supervisory liability…

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