Chapter 1 - The Role of Compliance.pdf

SECTION 1 THE ROLE OF COMPLIANCE AND XXX FORMAL COMPLIANCE STRUCTURE 1 The Role of Compliance 2 Formal Compliance Structure © CANADIAN SECURITIES INSTITUTE  The Role of Compliance...

SECTION 1 THE ROLE OF COMPLIANCE AND XXX FORMAL COMPLIANCE STRUCTURE 1 The Role of Compliance 2 Formal Compliance Structure © CANADIAN SECURITIES INSTITUTE  The Role of Compliance 1 CONTENT AREAS Compliance Overview Creating a Culture of Compliance Roles of Key Internal Players Compliance Department Organization Balancing Revenue Interests with Compliance Risks LEARNING OBJECTIVES 1 | Describe the role of compliance in the securities industry. 2 | Explain what is meant by a culture of compliance. 3 | Identify the roles of the key internal players in a culture of compliance. 4 | Identify the organizational structure of a typical compliance department. 5 | Discuss the risks of noncompliance. © CANADIAN SECURITIES INSTITUTE  CHAPTER 1      THE ROLE OF COMPLIANCE 1 3 INTRODUCTION The securities industry in Canada and globally is characterized by increased regulation and an ever-growing need for high compliance standards. Securities regulators require that investment dealers maintain a permanent and effective compliance function. The objectives of this function are to provide supervision, prevent misconduct, and promote ethical standards. Fulfillment of these objectives is essential to create fair and orderly markets and, ultimately, to foster investor confidence. The term compliance function refers to the staff members who carry out compliance responsibilities; it does not describe a prescribed organizational structure. The regulatory requirements for a compliance structure are flexible, given that each investment dealer is unique, and that business models and products offered vary from one dealer to the next. However, all investment dealers are alike in that compliance should be viewed as an integral part of general business activities, rather than as an isolated activity of the compliance department. Everyone at the investment dealer, including the board of directors (or equivalent), employees, and agents, should therefore understand the standards of conduct that apply to their role, regardless of whether they are registered with or approved by the securities regulators. In this chapter, we discuss the concept of compliance, with particular focus on the need for a culture of compliance within an investment dealer that is a member of the Canadian Investment Regulatory Organization (CIRO). We also examine how the nature of compliance and the roles of key internal players at a dealer member have evolved to meet the current requirements of regulators in the securities industry. The goal of these requirements is to reduce the risk of financial loss, regulatory or civil sanctions, and reputational harm to the firm and the industry. COMPLIANCE OVERVIEW 1 | Describe the role of compliance in the securities industry. The compliance function has evolved over time as business philosophies and the expectations of regulators and customers have changed. Historically, compliance was a reactive process. Its role was to monitor for violations of rules, regulations, and internal policies. Its purpose was to identify potential issues at an early stage, including patterns of improper behaviour or activities, material or systemic weaknesses, and product-specific problems. Once identified, the compliance department would report issues to management, along with their recommendations. Management, in turn, was responsible for resolving problems quickly. Today, compliance is a proactive function with a broadened role. Surveillance is now accompanied by an equally important advisory function, along with day-to-day risk management. Rather than review past transactions to identify violations, as in the past, the emphasis is on developing and implementing a continual culture of compliance. This responsibility includes forecasting trends and creating supervisory platforms based on those forecasts. The expanded responsibilities of the role place increased demands not only on compliance personnel but on every employee of a dealer member. To have an effective compliance department, an investment dealer member of CIRO must have an infrastructure based on dynamic policies and procedures and robust training initiatives, monitoring systems, and advice channels. The firm must also appoint a chief compliance officer (CCO) to oversee the department and manage compliance issues within the firm. The CCO cannot create a compliance culture single-handedly; however, the person in that role must be able to build the framework and provide the leadership required to make it work. The day-to-day work of compliance is generally a function of staff members who continually monitor and assess the firm for compliance with regulatory requirements. They report and advise internally on any concerns, including whether there are appropriate policies and procedures in place to address possible compliance issues. Compliance staff is also responsible for identifying and preventing violations of regulatory requirements by all employees and clients. The dealer member’s compliance function has a significant impact on its culture and ethics. It manages the risk of legal or regulatory sanctions, financial loss, and damage to the firm’s reputation that can result from violations. © CANADIAN SECURITIES INSTITUTE 1 4 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 1 INTERNAL RESPONSIBILITIES The compliance function performs the following internal activities: Advising day-to-day on rules and regulations Establishing and updating compliance policies and procedures on a regular schedule and when the need arises Monitoring and interpreting regulatory developments Providing mandated training and education Liaising with regulators Promoting and delivering a compliance culture within the firm Taking preventive measures to ensure that employees comply with rules and regulations Enforcing the dealer member’s policy manual and applicable industry rules, and imposing discipline Reviewing business opportunities from a compliance perspective, including new products and markets EXTERNAL STAKEHOLDERS Today’s compliance function must monitor the needs of investors, customers, regulators, auditors, and the public. To a lesser extent, compliance staff must consider the expectations of analysts, rating agencies, partners, peers, and the media. In response to these external stakeholders’ needs, and also as a way to maintain a fair and equitable marketplace, regulators have substantially increased their demands on market participants. Monitoring of external stakeholders’ needs by the compliance function might include any of the following activities, depending on the stakeholder: Maintaining ongoing dialogue with regulator partners such as CIRO, the provincial securities administrators, and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) Monitoring industry-specific press coverage, particularly as it relates to other market participants’ regulatory breaches Tracking civil litigation and consumer concerns Monitoring industry-wide developments by participating in continuing education forums Remaining current with regulatory notices, including those issued from other non‑industry-specific bodies (such as the Canadian Radio-television and Telecommunications Commission regarding anti-spam initiatives) Sitting on industry committees Monitoring shareholder expectations through ongoing dialogue and feedback from the board of directors Monitoring consumer expectations by regularly reviewing customer surveys and complaints Maintaining regular, frequent, and sometimes daily contact with senior and line management COMPLIANCE AS A CORPORATE GOVERNANCE ISSUE Risk to reputation is currently one of the largest risks facing financial organizations. For that reason, the focus on more stringent standards of governance remains strong, especially in light of recent financial crises. Heightened standards imposed by regulators on dealer members emphasize transparency, heightened disclosure to clients, accountability, ethical behaviour, enhanced governance, and stronger risk management and compliance capabilities. However, it is evident that mere compliance with laws and regulations is inadequate to protect against this risk; it must be accompanied by compliance with internal governance, ethics, and risk policies. Dealer members should integrate their governance, risk management, and compliance activities to protect themselves from reputational damage. Furthermore, they recommend that these activities be linked to © CANADIAN SECURITIES INSTITUTE  CHAPTER 1      THE ROLE OF COMPLIANCE 1 5 organizational performance measures. And, finally, to achieve success, the focus must shift to integrity and compliance as an organizational goal, and not merely a function of the law. Dealer members must establish a culture of compliance by promoting and rewarding compliant behaviour and penalizing behaviour that violates the compliance principles of the organization and the industry. Part of this initiative involves establishing a culture where compliant behaviour is seen as something that is willingly done, rather than something that must be done. EXAMPLE With the recent severe market volatility resulting from the global COVID-19 pandemic, we have seen unprecedented impacts on both client account balances and dealer operations. In these situations, the compliance function of dealer members has been tested by both volatility and clients’ fear for their financial well- being. Mere compliance with industry rules, expectations, and guidance is not enough to protect registrants in such circumstances; individual registrants must also understand why the rules are in place. The mischief they are designed to prevent can sometimes only become apparent in the face of a crisis such as COVID-19. Put another way, dealer members must comply not only with the letter of industry rules, but also with the principles behind them. For example, a dealer member that fails to implement CIRO’s guidance relating to cybersecurity will quickly have realized during the global pandemic that their entire operations were susceptible to heightened attacks that take advantage of systems weakened by a crisis. During the pandemic, problems might arise from poorly thought-out work-from-home arrangements or the use of personal devices on unsecured networks. Dealer members that fail to value the true importance of compliance or to communicate to staff why it is important will suffer during these types of events, and, by extension, so will their clients. CREATING A CULTURE OF COMPLIANCE 2 | Explain what is meant by a culture of compliance. A culture of compliance is difficult to describe precisely. It is generally a culture where everyone acts as they should, but it does not necessarily grow out of rules, policies, and procedures. The culture of an organization is defined by the behaviours it accepts and rewards. CIRO measures the extent to which its dealer members foster a culture of compliance through a process of observation, audits, and reviews. Regulators observe the firms’ activities and evaluate their responses to an enquiry, which includes the following types of questions: How frequently do clients complain of improper business dealings? How many unresolved client complaints exist? How quickly and thoroughly does the firm respond to client complaints? How reliable are reports that complaints have been resolved? Does the firm have a reputation for failing to resolve client or regulatory complaints quickly? Is a firm’s relationship with the regulator consultative or reactive regarding compliance issues? Is compliance a primary concern for the firm, or an afterthought in response to an enquiry? Is compliance a part of the firm’s ongoing training? Are all employees trained in compliance, or only particular employees? How does the firm deal with employees who violate rules and regulations? Are employees who have committed comparable violations treated equally? © CANADIAN SECURITIES INSTITUTE 1 6 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 1 In an organization with a culture of compliance, employees obey the spirit of the law, not merely the letter of the law. In ambiguous situations, they can be relied on to make ethical and compliant decisions. A dealer member’s success depends on its ability to ingrain a culture of integrity and ethical values. In an organization without such a well-developed culture of compliance, ethical dilemmas are allowed to go unresolved or are resolved in a noncompliant way. Ultimately, the goal of a culture of compliance is to be able to rely on all employees to act in a compliant manner in all situations. When in doubt, employees in a compliant culture understand that escalation to senior management is an appropriate measure. In addition, in the current principles-based approach to regulation, the regulators allow flexibility in the implementation of a compliance system in recognition that the business model of one dealer member is very different than that of another. However, this flexibility can create uncertainty in dealer members where a culture of compliance does not exist. In assessing what is acceptable, employees are more inclined to respond to the behaviour of their firm’s leaders than they are to a code of ethics or set of rules. If a senior manager or director acts unethically, their employees are also likely to act unethically. Conversely, when the firm’s leaders act ethically, reward ethical behaviour, and penalize unethical behaviour, they foster a culture where employees can be relied on to act compliantly. Such a culture is known as “tone at the top.” ROLES OF KEY INTERNAL PLAYERS 3 | Identify the roles of the key internal players in a culture of compliance. Many groups and individuals with distinct interests are involved in the compliance function and in developing the compliance culture of a dealer member. At a minimum, they include the board of directors, senior management, the compliance department, and the line managers and supervisors. The compliance role of each of these groups is described in detail below. BOARD OF DIRECTORS Directors are elected by the shareholders of a firm and are accountable to them for achieving corporate objectives. The board of directors also represents the corporation and establishes the environment in which management and staff undertake corporate objectives. The board is also obligated to act in the best interests of the corporation. Directors are generally not active in the day-to-day operations of a dealer member. Instead, they are responsible for developing strategies to carry the business into the future while managing associated business risks. One of their main objectives is to set strategic goals and identify issues that must be addressed to achieve those goals. Two substantial business risks they must consider are compliance risk and regulatory risk. However, it is not their role to verify that the firm and its staff are in compliance with the relevant requirements. Another of the board’s responsibilities is to establish the firm’s ethical code. No single model of ethics can be prescribed because such codes must address the firm’s particular business. Nevertheless, the conduct of the directors in their activities, both in and outside the firm, becomes part of the firm’s compliance culture and sets an example for employees. A dealer member’s board of directors must act on reports received from the CCO. The board must also establish the firm’s corporate governance structure and integrate it with the risk management and compliance functions. When integration is successful, the firm and its representatives are more likely to comply with rules and regulations than a firm where governance and compliance are at odds. © CANADIAN SECURITIES INSTITUTE  CHAPTER 1      THE ROLE OF COMPLIANCE 1 7 SENIOR MANAGEMENT The primary responsibility for developing a firm’s culture of compliance falls on senior management. The CCO is an integral member of this group but without the ongoing support of senior management, it is virtually impossible to establish such a culture within a firm. Under CIRO’s Investment Dealer and Partially Consolidated (IDPC) rules, a member of the firm’s executive management must be appointed as Ultimate Designated Person (UDP). In almost all circumstances, the person designated is the president or chief executive officer of the dealer member. DID YOU KNOW? In 2023, the CSA approved the merger of IIROC and the MFDA into a single self-regulatory organization (SRO) known as CIRO. The new SRO has assumed the regulatory responsibilities of the MFDA and IIROC and will operate under an interim set of rules until a new rule book is developed. The IDPC rules govern investment dealers and dually registered dealers. Mutual fund dealers are governed under the Mutual Fund Dealer rules. In this textbook, we focus on the IDPC rules, which we refer to interchangeably as “CIRO rules.” IIROC guidance remains in effect and will be updated to reflect the new rules. The UDP must oversee the development and implementation of adequate written policies and procedures. Upon their establishment, senior management must make sure that all employees understand their responsibilities. Changes to written policies and procedures should be communicated to staff through compliance memos or regular meetings and supplemented with continuing education programs. It is senior management’s responsibility to communicate such information, but they often delegate the task to the compliance department. Directors and senior management must also establish an ethical climate by showing strong support for the firm’s compliance function, prioritizing compliance goals, and demonstrating compliant behaviour. Only in an environment that promotes such a tone at the top can line managers and employees view the compliance function as a key institutional process. This outlook enables them to work cooperatively to achieve business objectives despite the many challenges posed by the regulatory framework. CIRO rules also require that the firm’s CCO report to the board of directors at least annually on the status of compliance. These requirements help to ensure that the senior management team members accept a critical role in establishing a culture of compliance and that they understand their accountability. Finally, senior management must allocate adequate resources to the compliance department and grant the necessary authority to supervisory personnel so that they can implement and enforce the firm’s policies and procedures. COMPLIANCE DEPARTMENT The role of the compliance department has become increasingly important in recent years. This department plays a central part in implementing and monitoring many regulatory initiatives. Such initiatives include new processes regarding anti-money laundering, client identification, corporate governance, and privacy. Compliance departments also help senior and line managers promote a culture of compliance within firms and oversee staff training on compliance issues. The CCO, as the title suggests, is the head of the compliance department. He or she monitors activities at the firm to ensure that staff members adhere to policies and procedures, that the compliance function is managed effectively, and that regulatory standards are met. The CCO must establish and maintain policies and procedures for assessing compliance by the dealer member, and it must report the results of this assessment to the board of directors at least annually. The CCO must also report all material incidents of noncompliance to the UDP. The CCO’s role can be fulfilled only with the ongoing support of senior management and the board of directors. © CANADIAN SECURITIES INSTITUTE 1 8 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 1 Under normal circumstances, the compliance department does not have direct authority over line staff, such as sales or trading employees. This limited authority restricts the department’s ability to act when violations are brought to the attention of line managers. However, the role of the compliance department is evolving. At most firms, the compliance department has the power to reverse or restrict transactions that it deems to be in violation of regulatory requirements or that could be perceived as unethical. By assuming responsibility for business decisions in such cases, however, the compliance department may also be assuming regulatory responsibility for its action or inaction. We discuss the organizational structure of a typical compliance department later in this chapter. LINE MANAGERS AND SUPERVISORS The primary objective of line managers and supervisors at a dealer member is to meet specific production goals established by their superiors. Therefore, their focus is often on revenue. However, new regulations highlight the added importance of the compliance culture and function within the firm. Some high-profile compliance failures have shown that violations can be incalculably costly to the violating firm. As a result, line managers and supervisors today are much more likely than in the past to view the compliance department as a valuable resource and a partner to the business. It is critical that line managers and supervisors understand that, although their objectives for revenue are paramount, this revenue cannot be earned or achieved without the compliance department. In the past, compliance has typically been viewed skeptically as anti-business; however, it has always been the case that the opposite is true. Compliance should be viewed as a partner with business because the business would not exist without it. Line managers and supervisors are also increasingly held accountable not only for the revenue-generating activities of their staff, but also for their regulatory lapses. In effect, this accountability is the foundation of a culture of compliance within a dealer member. To reduce the possibility of regulatory action, litigation, and reputational harm, managers and supervisors now stress to their staff the importance of being compliant while continuing to meet revenue objectives. Employees typically look to management for guidance regarding their organization’s culture, and they respond accordingly. In a compliance-focused culture, managers encourage employees to ask compliance-related questions about their firm’s products, services, and business activities. Because not all compliance issues have easy answers, management should provide a forum for their resolution, along with education and training. EXAMPLE A dealer member’s new proprietary investment product has the potential to generate significant revenue. Because it has several underlying and embedded complexities, the firm realizes that, purely from a risk perspective, the product might not be suitable for all clients; many clients may simply have an inappropriate risk tolerance. In addition to the issue of suitability, the proprietary nature of the product is also a concern. Because there are many similar products in the marketplace for clients to choose from, the dealer member must consider compensation conflicts in recommending the product to clients. The good news is that the firm’s product has tangible differences that clearly set it apart from those of industry competitors. A recommendation to purchase it can therefore easily be justified to the client (for reasons other than the fact that the competitor’s product pays lower fees to both the firm and the advisor recommending it). Because of these nuances, management decides to provide employees with opportunities to analyze all risks in an appropriate setting, where they are comfortable addressing them. The firm also ensures that its employees feel no hesitation about approaching the compliance department with any questions. This dialogue will take place during the creation of the product, most likely in front of the dealer member’s product review committee. It is standard practice for these types of concerns to be reviewed and analyzed in advance of a product being made available. © CANADIAN SECURITIES INSTITUTE  CHAPTER 1      THE ROLE OF COMPLIANCE 1 9 COMPLIANCE DEPARTMENT ORGANIZATION 4 | Identify the organizational structure of a typical compliance department. No single organizational structure fits all compliance departments, because firms vary in their management structure, business lines, and strategies. Factors such as available technology and staff experience play an important role in determining departmental organizations at each dealer member. Supervisory regulations and best risk management practices for particular lines of business also help in determining departmental structures. EXAMPLE A firm that deals with commodity futures and options requires dedicated resources for the supervision and risk management of its business. Other rules, such as those regarding registrations and anti-money laundering, apply equally to all firms and require similar supervisory resources. Some functions may overlap with other departments and can appropriately be housed in one of those departments. Registrations, for example, could logically be a part of the human resources department, rather than the compliance department. Similarly, technology resources might be a part of the information technology department and still be dedicated to supporting the compliance function. FUNCTIONAL ORGANIZATION OF A COMPLIANCE DEPARTMENT Figure 1.1 shows the organizational chart of a typical compliance department at a full-service investment firm. This chart is a simplified version of what an actual structure would look like; few firms would fit precisely into such a simple structure. The organizational charts that follow illustrate some of the functions that would generally fall under each of the second-level headings in the simplified chart. Figure 1.1 | Compliance Department Chief Compliance Officer Investment Retail Institutional Management Registrations and Funds © CANADIAN SECURITIES INSTITUTE 1 10 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 1 RETAIL COMPLIANCE Figure 1.2 shows some basic functions of the retail compliance department. Figure 1.2 | Retail Compliance Retail (Advice and No-Advice Channels) Account opening (with specific expertise for different account types) Surveillance Complaint handling and investigations (including regulatory reporting) Anti-money laundering and terrorist financing Retail compliance might include the following additional functions: Developing policies and procedures Providing interpretive advice Providing pre-approval for transactions that require it Approving marketing and surveillance initiatives Overseeing training Reviewing outside activities The number of compliance staff required to fulfill the department’s responsibilities depends on the following factors, among others: An upward or downward shift in business growth may increase or reduce the need for compliance staff. Improvements to information systems can improve efficiency and reduce the need for staff. If the firm operates in multi-jurisdiction locations or in different languages, additional or specialized staff may be required. An alternative method of organizing retail compliance is geographically, with parallel teams responsible for the functional divisions. This structure is depicted in Figure 1.3. © CANADIAN SECURITIES INSTITUTE  CHAPTER 1      THE ROLE OF COMPLIANCE 1 11 Figure 1.3 | Retail Compliance Department Organized Geographically Retail (Advice and No-Advice Channels) Western Ontario Québec Atlantic INSTITUTIONAL COMPLIANCE Figure 1.4 shows the functional organization of the compliance department for institutional sales and trading and investment banking. Figure 1.4 | Institutional Compliance Institutional (Sales & Trading and Investment Banking) Account approvals and trade surveillance Research reviews and approvals Firewalls and gatekeeper requirements The institutional sales and trading department and the investment banking department generally have a smaller compliance staff than that required to supervise a full-service advice channel retail business. The reason is that the risk of multiple compliance problems at the institutional level is smaller. However, the potential loss that can result from noncompliance in an institutional business is still significant. Consequently, the level of skill and experience of institutional compliance staff should be high. Some firms, particularly those that trade derivatives and other complex instruments, have dedicated legal staff that works closely with institutional compliance staff. The number of staff required is determined by factors similar to the retail division: volume, nature, and complexity of the business; sophistication of available technology; and the experience and qualifications of existing staff. © CANADIAN SECURITIES INSTITUTE 1 12 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 1 INVESTMENT MANAGEMENT The organizational chart of the compliance department of an investment firm is illustrated in Figure 1.5. Figure 1.5 | Investment Management Compliance Investment Management and Funds Legal support Trading surveillance Many investment firms have investment management and investment fund subsidiaries, which also require specific expertise. Typically, the staff required to support this type of business is associated with the firm’s legal department, rather than compliance. An organizational chart specific to the registrations unit is not shown, mainly because the number of staff required for this unit depends on the volume and complexity of the business conducted by the firm. BALANCING REVENUE INTERESTS WITH COMPLIANCE RISKS 5 | Discuss the risks of noncompliance. Finding an appropriate balance between revenue generation and compliance risk is a significant challenge for any dealer member. To address it successfully, senior management must consider the types and extent of risk that the firm is prepared to assume in attempting to increase revenues. Most importantly, deciding whether the business wishes to take on additional risk should be done with advice from the compliance department. By communicating a consistent message to all departments regarding such risks, senior management helps to create a successful relationship between compliance and the rest of the firm. With the help of legal advisors, consultation with regulators, and advance rulings, it is easier to minimize compliance risk than other types of risk such as credit or reputational risk. As the compliance department and the business units become familiar with each other’s perspective, their differences are minimized, and the benefits of cooperation are realized. DID YOU KNOW? The compliance department can often identify potential compliance issues at an early stage of product development and suggest solutions to compliance problems. This partnership approach to business development is a hallmark of firms with a strong culture of compliance. Generally, the compliance department aims to minimize risk, whereas the business units aim to generate maximum revenue. However, a dealer member with a strong compliance culture benefits from both objectives, which are never completely at odds with each other. All employees share the common objective of a profitable and compliant business. If a firm finds that revenue cannot be generated without significant risk, the firm should seriously consider whether that revenue stream should be pursued. © CANADIAN SECURITIES INSTITUTE  CHAPTER 1      THE ROLE OF COMPLIANCE 1 13 EXAMPLE Leverage strategies and products that are designed to enhance leverage, such as leveraged exchange-traded funds, can be very effective in certain situations. However, because such strategies and products can increase risk, their use must be supported by facts, for both the clients and the dealer member. RISKS OF NONCOMPLIANCE In the highly competitive securities industry, and especially in tough market conditions, dealer members can be tempted to cut costs by reducing non-revenue-generating compliance staff. However, most firms are aware that the risks related to noncompliance are too great to take this hazardous approach to meeting performance goals. DID YOU KNOW? During the market downturn in 2009, IIROC (now CIRO) cautioned its dealer members of their need to maintain an effective supervision and risk management program, despite the need to reduce expenses. They specifically noted that firms should carefully consider the potentially negative impact of reducing the number of employees in compliance and other control function areas. The three general types of violations are categorized by the laws, rules, or policies that they violate: Criminal violations Civil violations Regulatory violations Penalties for noncompliance vary significantly, depending on the type of violation and the costs of correcting the violation’s effects. The consequences of any type of violation can include disciplinary measures (e.g., fines, suspensions, and in some instances, termination), legal expenses, penalties, and the cost of staff response time. Unlike penalties, legal and staff costs must be paid regardless of the outcome of an investigation. A criminal violation can also result in a prison sentence. Considering the direct costs of noncompliance, and the added intangible costs of lost business, adverse media attention, and loss of reputation, the benefits of a culture of compliance are clear. ENFORCEMENT ACTION CIRO may initiate enforcement action against any member of a dealer member’s staff who violates securities laws or the firm’s requirements or who fails to meet their supervisory obligations. Individuals subject to action may include directors, executives, supervisors, the UDP, the CCO, the chief financial officer, and any other Approved Person. In each case, the person’s conduct will be judged against the standard of a reasonably proficient and diligent person holding the same responsibilities. EXAMPLE Compliance officers could face disciplinary action in either of the following cases: When they fail to identify rule violations consistent with the standard of a reasonably proficient and diligent compliance officer When, after identifying a violation, they fail to escalate it in accordance with the firm’s established escalation procedures © CANADIAN SECURITIES INSTITUTE 1 14 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 1 SUMMARY In this chapter, we discussed the evolving role of compliance at a dealer member in today’s regulatory environment. We focused on the firm-wide mandate of the compliance function and the specific responsibilities of the CCO and other compliance department staff. We discussed that the compliance function encompasses surveillance, advice, reporting, and other risk management activities that are necessary to keep a dealer member compliant with current regulations. You should also know the role of the compliance function in maintaining a fair and equitable marketplace. This role involves monitoring the concerns of external stakeholders and keeping up to date with changes in the industry. We also looked at the various roles of the key internal players at a dealer member and explained how they work together to create a culture of compliance that starts at the top and filters down through the entire organization. A key point to remember is the need to create an appropriate balance between managing compliance risk and generating revenue for the firm. Finally, we briefly discussed the risks of noncompliance – a topic we explore in greater detail in Section 5, Regulatory Investigations and Reporting. In the next chapter, we focus on a formal compliance structure and explain what such a structure looks like at a dealer member. © CANADIAN SECURITIES INSTITUTE