SEC’s Treatment of Compliance Officers Comes Under Fire

July 1st, 2015

In June, two Securities and Exchange Commission’s (SEC) Commissioners weighed in on the agency’s treatment of chief compliance officers in enforcement actions.  Following two recent cases that held compliance officers liable for company misconduct, the SEC’s rules and expectations for such employees have come under closer examination. In response, Commissioner Daniel Gallagher released a statement on June 18, 2015.  Gallagher voted against the SEC’s recent enforcement actions.  In his statement, he said, “I have long called on the Commission to tread carefully when bringing enforcement actions against compliance personnel. These recent actions fly in the face of my admonition,” he added, “Both settlements illustrate a Commission trend toward strict liability for CCOs under Rule 206(4)-7. Actions like these are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that, under Rule 206(4)-7, is the responsibility of the adviser itself. Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties and responsibilities to avoid liability when the government plays Monday morning quarterback.”

After Gallagher released his statement, more media coverage and industry chatter ensued, prompting Commissioner Luis Aguilar to issue a follow up statement on June 29, 2015.  Aguilar’s statement took an arguably less sympathetic tone towards compliance officers, while still attempting to quell concerns that the SEC was taking “too harsh of an enforcement stance.”  Aguilar said, “The Commission needs capable and honest CCOs to help protect investors and the integrity of the capital markets. Recently, a fellow Commissioner issued a public dissent in two recent enforcement actions against CCOs of investment advisers. While I respect the views of my fellow Commissioners, based on what I’m hearing from the CCO community, the dissent, and the resulting publicity, has left the impression that the SEC is taking too harsh of an enforcement stance against CCOs, and that CCOs are needlessly under siege from the SEC.” He added, “The Commission does not bring enforcement actions against CCOs who take their jobs seriously and do their jobs competently, diligently, and in good faith to protect investors.”  Given this very public exchange, expect any future SEC actions against compliance officers to receive more attention.

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