Chief Compliance Officer Discipline Remains on FINRA’s Radar

The Financial Industry Regulatory Authority (FINRA) recently settled two enforcement actions against chief compliance officers (CCOs). These actions focus on perennial challenges where dually hatted CCOs perform both compliance and supervisory roles at the broker-dealer. Although the underlying conduct in the two matters differed — FINRA’s message remains consistent with its published guidance on when it may take disciplinary action against CCOs¹ — FINRA’s guidance makes clear that only in circumstances when a firm has expressly or impliedly designated its CCO as having supervisory responsibility will FINRA bring an enforcement action against a CCO for supervisory deficiencies. Both enforcement actions against the CCOs fall within prior FINRA guidance.

Key Takeaways

With these disciplinary actions, FINRA reminds CCOs that they can be subject to liability when the firm designates the CCO as having supervisory responsibility through the broker-dealer’s written supervisory procedures or otherwise. CCOs should take steps to mitigate their potential exposure to disciplinary action by reviewing how their firm has positioned their responsibilities. CCOs with what FINRA has deemed supervisory responsibilities face potential exposure. These two enforcement actions align with prior FINRA guidance finding that a CCO will be disciplined for having supervisory responsibility through the firm’s written supervisory procedures or otherwise in the following ways:

• CCOs are assigned the responsibility to establish, maintain, and update written supervisory procedures generally and specific areas (in one case here, electronic communications).
• The firm’s written procedures assign to the CCO responsibility for enforcing the broker-dealer’s written supervisory procedures or other specific oversight duties usually reserved for line supervisors (in one case here approving suitability as principal).
• Apart from the written procedures, the broker-dealer, through its president or some other senior business manager, might also expressly or impliedly designate the CCO as having specific supervisory responsibilities on an ad hoc basis.
• Taken together, these two enforcement actions suggest that FINRA remains prepared to pursue individual CCO accountability where the CCO has acted in a supervisory role. Considering this posture, CCOs and broker-dealers should assess whether their supervisory, recordkeeping, and compliance frameworks are not only well documented but also reasonably designed.

FINRA Enforcement Actions

Independence Capital Co. and Dennis Twarogowski

According to FINRA’s settled order, from August 2020 through February 2021, Independence, an Ohio-based introducing broker-dealer, and its CCO failed to establish and implement a reasonable supervisory system and written supervisory procedures designed to ensure compliance with Regulation Best Interest (Reg BI) in connection with representatives’ recommendations of L Bonds to retail customers. The broker-dealer was charged with willfully violating Reg BI.

FINRA alleged that the L Bonds were risky and illiquid securities, were not rated by a nationally recognized statistical rating organization, and were suitable only for investors with substantial financial resources and no need for liquidity. Despite these risks, FINRA found that five Independence representatives recommended L Bonds to nine retail customers, including senior investors, resulting in customer concentrations ranging from approximately 11% to 50% of liquid net worth. FINRA further alleged that Independence lacked a reasonable process to assess whether representatives exercised reasonable diligence, care, and skill in understanding the risks, rewards, and costs of the L Bonds or in determining whether the recommendations were in the best interest of the customers, as required by Reg BI.

FINRA also found that the firm’s CCO, who also acted in a supervisory capacity, approved each of the transactions despite information indicating that the investments were inconsistent with the customers’ risk tolerances and liquidity needs. As a result, FINRA charged Independence and the CCO with failing to reasonably supervise representatives and failing to establish and enforce written policies and procedures reasonably designed to comply with Reg BI. The CCO was suspended for three months, was fined $5,000, and agreed to an undertaking requiring that the CCO complete 20 hours of continuing education concerning Reg BI.

Mark Praverman

Praverman was registered with many firms at once as a CCO or principal over the years and was both a general securities principal and CCO for Synapse Brokerage, a broker-dealer whose sole line of business was operating an internal cash management and sweep program in connection with its parent’s fintech affiliated technology platform. FINRA alleged that in connection with that program, Praverman as CCO failed to preserve required books and records in violation of Section 17(a) of the Securities Exchange Act of 1934 and related FINRA rules.

Specifically, FINRA found that the broker-dealer failed to retain required business-related electronic communications, including emails and instant messages, relating to the firm’s brokerage activities. FINRA further alleged that the CCO caused these violations by failing to establish and enforce a system reasonably designed to ensure that required records were preserved. FINRA also alleged that the COO provided inaccurate information to FINRA regarding the firm’s access to its books and records, including representations that the firm had independent access to records maintained by a third-party vendor when it did not.

The CCO was suspended for 12 months in all principal capacities, fined $20,000, and required to requalify as a General Securities Principal before again acting in that capacity.