In light of the supervisory standards applicable to compliance officers and in-house attorneys with broker-dealer and investment management firms, these individuals and firms need to appreciate and manage the risks of supervisory liability being applied to them due to the violative conduct of business personnel. In an article titled “Compliance and Legal Officer Guidelines To Prevent Non-Line Supervisory Liability” my colleague Carrie DeLange and I analyzed the “Gutfreund Standard” and the SEC’s more recent guidance from a Division of Trading and Markets “FAQ,” and other statutes and rules, and provide guidance for compliance officers and in-house attorneys with broker-dealer and investment management firms to best manage these situations.
The article provides these recommendations and takeaways:
- Firms need to continue to be vigilant regarding their supervisory systems.
- Firms need to foster a strong compliance culture that encourages appropriate collaboration between management and compliance and legal personnel which allows for issues to be addressed as early as possible in the escalation process.
- Firms should clearly delineate supervisory responsibility for business functions to business line management and the supervisory responsibilities of compliance and legal should be limited to the employees in those departments.
- Firms should have written firm-wide escalation policies and procedures on a department-by-department basis across the firm, including the compliance and legal departments. These escalation policies should address when escalation will be triggered and provide the steps to be followed, including when to escalate issues to senior management.
- Lastly – if the circumstances arise that a compliance or legal officer is delegated or assumes supervisory responsibility and therefore ends up with “the requisite degree of responsibility, ability or authority to affect the conduct of the employee whose behavior is at issue” – the compliance or legal officer needs to reasonably respond and appropriately document his or her efforts and coordinate with inside or outside counsel to preserve privilege as necessary.
Each year the National Society of Compliance Professionals (NSCP) publishes its “Best of NSCP Currents” edition. This year, the NSCP selected “Compliance and Legal Officer Guidelines To Prevent Non-Line Supervisory Liability” for inclusion in its “Best of” issue. Thank you to the NSCP for the honor of being selected for this year’s edition.
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