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Securities Compliance Sentinel Analysis of cutting-edge securities industry issues

A Secret Concern With Small Firm Supervision And Compliance

Posted in Broker-Dealer Regulation, Compliance and Supervision, FINRA Enforcement, SEC Compliance, SEC Enforcement

A recently released compliance testing survey of the Investment Adviser Association and ACA Compliance showed that 90% of all firms claimed to have a full-time person designated to the compliance function, but nearly two thirds of all chief compliance officers have multiple roles within the firm.  Unless I missed that day of new math, these statistics mean that compliance personnel are not solely devoted to that function, especially at small firms. 

Your initial reaction may be, “so what”.  After all, at many small advisor firms and broker-dealers you have to wear multiple hats because of limited resources.  Although that may be true, there is significant risk to those in a compliance position who also take on supervisory duties. 

Just look at any SEC or FINRA enforcement cases and it will become clear that both are focused on nailing anyone in a supervisory role.  If you are the CCO on top of being a supervisor, you can expect even more attention in an enforcement proceeding.

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Although economics may dictate wearing more than one hat, a compliance officer should never wear the supervisory hat.  There needs to be a clear line between the two roles for not only liability reasons, but also to be certain that the firm has more than one voice when it comes to compliance versus personnel issues.

One place to start is with the WSPs; they should clearly define the roles and functions of compliance and supervision.  Once you have clearly defined written procedures, make sure they are followed.  Only then can small firm compliance officers have a fighting chance if confronted with the claim that they are, in reality, supervisors.