Wearing the Bull's-eye: The Compliance Officer as Line Supervisor
It is axiomatic that smaller firms do not have available the cadres of specialized compliance personnel that larger firms do. Out of necessity, senior compliance staff at smaller firms may be called upon to handle a multitude of home office functions in addition to compliance, and to serve in multiple capacities. Unfortunately, cost efficiency, not necessarily expertise is the driver of these decisions. This burden may fall especially hard on compliance personnel since they are viewed as being Renaissance-like in their intimate understanding of all things brokerage and/or financial. Unfortunately, that perception may be more perceived than real.
This model is especially common at smaller firms, and senior compliance personnel are called upon often to act in dual capacities: compliance overseer, and, frequently, as the person designated to approve the opening of new accounts and to grant approval with respect to the sales of certain products, such as variable annuities. While we may all appreciate the expediency and necessity of the need to wear multiple hats in a smaller shop, these latter functions may be interpreted by FINRA as line supervisory duties, and cause the compliance officer to be viewed as a business supervisor for regulatory purposes.
In a pure and ideal world, Compliance is not a line-function, compliance officers are objective and impartial in their assessments and recommendations, and their evaluations are not tied innately to revenue considerations. While the failure to factor in the impact of compliance decisions on the fate and fortunes of the company is a luxury most compliance officers (and their firms) can ill-afford, traditionally, compliance has been used as a tool to identify problems or issues which must be remedied by the business unit responsible for the revenue activity. In that model, compliance is called upon later to examine and report on the performance of these managers.
However, when the compliance officer is cast in the role of both cop and “perpetrator,” the oversight chain loses its tensility. In essence, who is left to oversee the function when the compliance officer is carrying out dual roles: compliance officer and supervisor? The end repercussion is that the compliance officer creates potential failure to supervise liability for him/her self, and may be called to task by a regulator or arbitration panel for failing to perform either of his/her assigned duties to industry standards. The logical and ultimate repercussion may be a charge of a failure to supervise or similar dereliction of duty allegation.
So, how does the compliance officer/supervisor build firewalls under these circumstances? In the first instance, the head of the particular business unit with the greatest stake in the transaction at issue should not be isolated from the decision making process . Rather, exceptions to firm policy may be forwarded to him/her for resolution, although if this person is consistently faulty or lax in granting approvals, this may ultimately not help the compliance officer avoid sanction for failed supervisory effort.
Perhaps a better alternative is to establish a Compliance Committee consisting of compliance and senior business unit personnel to address “exceptions” and sensitive intra-firm compliance issues. Under this scenario, the Committee would meet at least monthly, but more frequently if necessary. To be effective, clearly defined standards must be established by the firm with regard to the appropriateness of certain activity. For instance, with regard to sales of variable annuities, no sales would be permitted to retirement accounts or to customers over a designated age or in amounts that would appear excessive based on the customers identified financial circumstances. Exceptions may not be unilaterally granted by the compliance officer who is asked to review and approve an annuity application. Rather, the request for an exception would be submitted to the Compliance Committee for review, consideration, and approval. Thus, the business unit leaders with, in theory, the highest level of expertise would sit in judgment of the request for an exception, and it becomes a group rather than individual decision of either the compliance officer or the one business person who stands to gain the most from the transaction if it is permitted to go forward regardless of its merits. Once established, the Compliance Committee may provide a number of additional valuable benefits to the company, enabling senior management to both learn of and address myriad problems at an early stage, and to take as necessary pro-active steps to interdict the problem before it spins out of control.
The benefit to the compliance officer who is wearing multiple hats is obvious: he or she potentially limits personal regulatory exposure. But the firm benefits too, and if its actions are later cited as inadequate, the group decision making concept, unless the Committee is simply a rubber stamp, allows for the argument that business judgment, not disinterest or disregard of the rules, dictated the decision. Firms are still permitted, in the exercise of their business judgment, to make mistakes or reach different decisions than a regulator who judges the events after the fact. If the Committee decisions are well vetted and reasonable under the circumstances, significant defenses may be available to address later second-guessing by a regulator or an aggrieved investor.
Jonathan M. Harris
Lindquist & Vennum P.L.L.P.
Minneapolis, Minn.
(612) 371-2492
jharris@lindquist.com
