FINRA Reminds Firms About CCO Supervisory Liability

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REGULATORY DEVELOPMENTS

FINRA ISSUES REMINDER REGARDING CCO SUPERVISORY LIABILITY UNDER FINRA RULE 3110

On March 17, FINRA issued a regulatory notice to remind member firms about the scope of CCO liability under Rule 3110, which imposes supervisory obligations on member firms and only applies to CCOs if member firms designate supervisory responsibilities to the CCO. In the normal course, CCOs serve an important advisory role for member firms and do not fall under the purview of Rule 3110 without an explicit designation of specific supervisory responsibilities. If a member firm has given the CCO such supervisory responsibilities, FINRA may bring an action against the CCO under Rule 3110 if the CCO has “failed to discharge” such responsibilities in a “reasonable manner.” If FINRA finds that the CCO has failed such imperative, FINRA will then weigh certain factors to decide if formal disciplinary action against the CCO is an appropriate response to address the violation. Factors that weigh toward disciplinary action against the CCO include if the CCO was aware of multiple red flags or actual misconduct and failed to address them, or if the violative conduct resulted in customer harm. Factors that weigh against disciplinary action include if the CCO’s supervisory responsibilities were poorly defined or if the CCO attempted in good faith to reasonably discharge his/her supervisory responsibilities.

“Chief compliance officers play an important role in facilitating compliance by promoting strong practices that protect investors and market integrity. That does not automatically make them supervisors, subject to FINRA’s supervisory requirements.”
-Jessica Hopper, FINRA Executive Vice President, Enforcement

CFPB ISSUES POLICY ON UDAAP ACTIVITY RELATING TO CONSUMER REVIEWS

On March 22, the CFPB issued policy guidance for banks, financial companies and their service providers that restrictions on consumer reviews that are unenforceable under the Consumer Review Fairness Act (CRFA) may still be unfair, deceptive or abusive acts or practices in violation of the Consumer Financial Protection Act. Citing examples from Federal Trade Commission (FTC) matters, such acts or practices include using terms in contracts that are unenforceable under the CRFA to silence consumers from posting a review, posting fake reviews, disliking or refusing to publish unfavorable reviews, removing or pressuring consumers to remove a review, or any other act or practice that would unfairly deprive consumers of information posted in reviews or deceive consumers about the nature of reviews. The CFPB’s policy guidance follows on the FTC’s efforts to deter fake reviews, misleading endorsements and related fraud across the digital economy.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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