Licensing of Compliance Officers

Before the SFO was finalized 7 years ago, I heard there had been a debate about whether requiring compliance officers to be licensed by SFC, i.e. creating a new regulated activity (RA10?) for them. The final conclusion was NO. Subsequently another query is whether SFC would licence compliance officers if they apply for them.

SFC has just released a new FAQ to address this enquiry, where SFC's answers are:

• Normally, SFC will not license back office staff, including compliance officers and in-house legal counsel.
• If a person who is employed by a licensed corporation in such a role does not perform functions that directly relate to the conduct of the regulated activity for which the corporation is licensed, SFC will neither license him as a representative nor approve him as a responsible officer.
• SFC takes the view that competent compliance officers or in-house legal counsel do not necessarily possess the qualifications and experience necessary to be approved as responsible officers. Frequently, they do not possess such qualifications and experience.
• SFC also considers that the functions of compliance officers and in-house legal counsel are inherently different from those of epresentatives who are licensed to carry on regulated activities for the licensed corporation to which they are accredited.
• One of the primary functions of a licensed corporation's compliance officer or in-house legal counsel is to ensure regulatory compliance both on the part of the licensed corporation and also on the part of the licensed representatives accredited to it. As a matter of general principle, SFC considers it necessary for there to be segregation between the performance of this function and the performance of the activities that constitute the carrying on of regulated activities. Without such segregation, there would be inherent conflict arising out of a compliance officer or in-house legal counsel carrying on the regulated activities for which the corporation employing him is licensed and, at the same time, being responsible for supervising such activities for the purposes of regulatory compliance.
• This is underscored in SFC's Management, Supervision and Internal Control Guidelines, which states, "Management establishes and maintains an appropriate and effective compliance function within the firm which, subject to constraint of size, is independent of all operational and business functions, and which reports directly to the Management".
• As a matter of general principle, compliance officers and in-house counsel who are employed by a licensed corporation should refrain from carrying on the regulated activities for which the corporation is licensed.

Interestingly, for smaller firms who can't afford a full-time compliance officer, usually a responsible officer is also taking up the compliance role. Such conflict of interest is unavoidable.