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Compliance Role, CCO Liability in Spotlight

Growing regulations and digital transformation are among the challenges facing the financial services industry and by extension chief compliance officers, according to a report from consultancy Russell Reynolds. The firm evaluated the compliance function in the banking, insurance and asset management industry and identified key trends.  Russell Reynolds cited a study which found that 89 percent of respondents in banking, insurance and asset management planned to increase spending on compliance in 2019. The report also reviewed important hiring trends in compliance for asset managers, noting for example that 39 percent of asset managers have replaced their chief compliance officer since the start of 2017.  Meanwhile, a report from the New York City Bar in conjunction with several industry groups looks at CCO liability, observing that  because of their role, compliance officers are “inherently at risk of becoming subject to regulatory investigations and personal liability” and these investigations and liability risks can discourage appropriate activity by CCOs, isolate them from other business processes, or, at the extreme, lead individuals to leave CCO roles for fear of bearing liability for the misconduct of others. The paper explores the regulatory risks and pressures CCOs face from banking regulators as well as the SEC and Finra then discusses how the compliance community and regulators can better achieve their shared goals. The paper presents a number of recommendations, including:

  1. Formal guidance from financial regulators outlining the principles that will be used to determine whether to pursue regulatory action, individually or personally, against compliance officers in order to further regulatory goals and grant compliance officers greater certainty that good faith conduct will not likely lead to personal liability. 
  2. Existing regulatory communications—such as risk alerts, enforcement actions and settlements, and reports of examination activities—can be developed to provide more detailed and specific guidance to compliance officers.
  3. Creating advisory groups of key representatives from federal regulatory and enforcement agencies, compliance officers for financial institutions, and compliance professional associations to promote a more effective partnership between the compliance industry and their regulators.
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