The Chief Compliance Officer should be a model for employee conduct. I don’t thing there is any better way to lead and educate than to set an example.
Not all Chief Compliance Officers succeed in this role and some get subject to discipline. Here are some ways to get in trouble.
Participation in Wrongful Conduct
David A. Zwick, chief executive officer and chief compliance officer of Suncoast Capital Group, Ltd. was held liable for participating in a scheme with a salesperson he supervised to provide kickbacks to a bond trader. In exchange for the kickbacks, Suncoast received securities transactions at prices favoring Suncoast and provided signification compensation to Zwick. He was found to have knowingly or recklessly approved fraudulent prices on Suncoast trades.
Failure to Supervise
In its release for Rule 206(4)-7 SEC Release No. IA-2204 the SEC stated:
Having the title of chief compliance officer does not, in and of itself, carry supervisory responsibilities. Thus, a chief compliance officer … would not necessarily be subject to a sanction by us for failure to supervise other advisory personnel. … Section 203(e)(6) provides that a person shall not be deemed to have failed to reasonably supervise another person if: (i) the adviser had adopted procedures reasonably designed to prevent and detect violations of the federal securities laws; (ii) the adviser had a system in place for applying the procedures; and (iii) the supervising person had reasonably discharged his supervisory responsibilities in accordance with the procedures and had no reason to believe the supervised person was not complying with the procedures.
Clearly a CCO has a role in addressing serious misconduct by employees. For an investment adviser, the CCO could be a supervisor and the failure to adequately supervise could subject the CCO to discipline for failure to supervise.
Pre-packaged policies and procedures manual
Consulting Services Group did that and failed to meet the SEC’s standards. Unfortunately for them, the pre-packaged manual did not match up to its business. They provide consulting services to mostly institutional clients. It helps them search for and select money managers, allocate assets, review performance, and design investment policies. The pre-packaged policies and procedures manual “failed to address adequately the conflicts of interest unique to CSG’s operations as a pension consultant, and many of the sections within these generic forms were completely inapplicable and irrelevant to CSG’s provision of investment advisory services to clients.” I would guess they manual they bought was designed for a retail investment adviser.
Email server
Among the things Richard Campanella was disciplined
for was the failure to stop the use of non-company email. He received several emails from an employee and told him to stop using the outside email address. Even after three warnings, he field to discipline the employee. Apparently, the employee used the email extensively for business purposes. The end result was record-keeping failure.
Background checks
Westpark Capital’s Chief Compliance Officer was William Morgan. “Among other things, Morgan was responsible for maintaining and updating the Firm’s written supervisory procedures, supervising the branch office managers, performing background investigations and participating in hiring decisions, and determining whether representatives required heightened supervision and the parameters of that heightened scrutiny.” Unfortunately, the company hired some representatives who engaged in churning and made unauthorized and unsuitable trades in customer accounts.
Reporting
Tim Poulus, the Chief Compliance Officer for Olympia Asset Management, failed to report customer complaints to FINRA. (FINRA Case #2008011806301) That statistical and summary information required by NASD Rule 3070(c). The violation lead to a $10,000 fine.
Sources:
- While You Were Complying: SEC and FINRA Disciplinary Actions Taken Against Chief Compliance Officers by Brian Rubin and Katherine Kelly of Sutherland Asbill & Brennan LLP
- Chief Compliance Officer Liability: Setting the Record Straight by Theodore J. Sawicki and Kerry K. Vatzakas
- You know you’ve failed as a CCO when you get barred by FINRA prior post on Compliance Building
- FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders from FINRA
- SEC’s Disciplinary Action Against An Investment Advisory Firm and Its CCO Underscores The Need To Comply With Rules and Regulations By James Eccleston in Financial Counsel.com
- October 2010 Disciplinary and Other FINRA Actions
- SEC Release Nos. IA-2204; IC-26299 -Compliance Programs of Investment Companies and Investment Advisers
- SEC v. Zwick Complaint
Fail is by Amboo who?
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