The SEC staff recently issued guidance with respect to when compliance and legal personnel at broker-dealers may face supervisory liability under the Securities Exchange Act of 1934 (the “Exchange Act”) in the form of “Frequently Asked Questions.” Very generally, under Sections 15(b)(4) and 15(b)(6) of the Exchange Act, chief compliance officers and other legal and compliance personnel at broker-dealers may be subject to liability for failure to supervise and ensure compliance with certain legal and regulatory requirements.
In the Frequently Asked Questions, the SEC stated that as an initial matter, a broker-dealer’s compliance and legal personnel (including the chief compliance officer) were not presumed to be “supervisors” solely resulting from their status as a member of the legal or compliance team. Instead, the SEC clarified that whether compliance or legal personnel are “supervisors” is a facts and circumstances determination that considers whether such personnel have supervisory authority over business units or employees outside of the compliance and legal departments. The SEC also set forth factors and criteria to assist broker-dealers in determining whether compliance or legal personnel may be deemed to have supervisory authority.
The SEC also emphasized in several responses that compliance and legal personnel may be involved in the implementation of a compliance program, monitoring systems and other programs to identify instances of noncompliance, and may participate in the management of the firm without being considered supervisors, so long as such person’s duties and responsibilities are clearly defined and the facts and circumstances are such that such person does not have the requisite degree of responsibility, ability or authority to affect the conduct of business units or employees. In the event a person is considered a “supervisor,” he or she must reasonably supervise compliance and regulatory programs with the intent of preventing violations of federal securities laws and other related rules and regulations.
Based on the SEC guidance, broker-dealers should consider reviewing the duties and responsibilities of compliance and legal personnel to determine whether they would be considered “supervisors” under the Exchange Act and clarify such persons’ roles within the firm to ensure only those appropriate persons are deemed to be “supervisors.”