FINRA’s Reg BI CCO Enforcement Action: A Canary in a Coal Mine?

In a recent enforcement case, the Financial Industry Regulatory Authority (FINRA) sent shockwaves through the financial world by bringing charges against a Chief Compliance Officer (CCO) and the CCO’s firm. The case revolves around allegations of violations of Regulation Best Interest (Reg BI) due to inadequate procedures regarding excessive trading. While the CCO wasn't charged for supervisory failures or intentional misconduct, the enforcement action has left the industry wondering about the potential implications for CCOs in the future.

This case might be seen as a warning for other compliance officers. The question looming over the industry is whether this enforcement action is an isolated incident or if it signifies a broader trend of increased scrutiny and sanctions against CCOs for their firms' compliance failures.

On August 31, 2023, FINRA and the CCO entered a Letter of Acceptance, Waiver, and Consent (AWC), settling the charges. The AWC outlined that the firm had inadequate procedures related to excessive trading, violating both FINRA's supervisory rule and Reg BI's Compliance Obligation. Surprisingly, the AWC did not provide a clear rationale for charging the CCO, leaving many unanswered questions.

In response to the regulatory ambiguity surrounding CCO liability, the National Society of Compliance Professionals (NSCP) introduced its Framework in February 2023. The Framework aims to provide clarity and align with statements from regulatory bodies, outlining questions to be considered by regulators when evaluating potential CCO liability. Unfortunately, there is no indication that FINRA applied this framework to the recent AWC. Going forward, it is crucial for regulatory bodies to communicate their expectations clearly, and the application of frameworks like NSCP's can provide transparency and guidance for all stakeholders.

This information comes from Brian Rubin, partner at Eversheds Sutherland, and Greg Amoroso, senior compliance consultant and founder of Amoroso Compliance Consulting, LLC., whose article FINRA’s Reg BI CCO Enforcement Action: A Canary in a Coal Mine? appeared in the October 2023 edition of NSCP Currents. To receive important information such as this and to review the risks and the associated compliance and supervision suggestions, join NSCP today to receive NSCP Currents and stay up to date on issues that matter most for the financial services industry. Members can access the full article here. 

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