I was at the IA Watch conference titled “Coping with Regulatory Change” and several presenters from the Securities and Exchange Commission in different panels took a fair amount of time saying that the SEC is not targeting CCOs for enforcement actions. This was in light of several SEC actions against compliance officers in the last few years.
The SEC party line is that it will defer to the good-faith determinations of the CCOs. Of course, CCOs are not granted immunity from enforcement actions. The SEC has put for the three categories for when CCOs are subject to actions by the SEC.
1. Participating in the wrongdoing
The first area of liability is when the compliance officer is participating in the wrongdoing. This is an obvious area of liability. Compliance title is not an absolute shield.
There was the Yue Han case in last few weeks where a compliance associate at Goldman Sachs was accused of trading on inside information on pending deals. He found the inside information while conducting email surveillance in his compliance role.
2. Hindering the SEC examination or investigation
The second area is not doing the bad acts, but effectively helping to cover them up.Lying to the SEC or submitting knowingly false documents is known area liability.
The example is the Wells Fargo case. Judy Wolf was a compliance professional at the firm. When an SEC investigation in insider trading came to light, Ms. Wolf went back and altered the documents around her own review of the particular trades.
Even though this was an enforcement action, the SEC administrative law judge dismissed the action this last August.
3. Wholesale failure
The third are of liability is when there is a “wholesale failure” by the compliance officer. This level of failure seems to be a high standard, but the recent SEC actions makes me wonder how high that standard is. It doesn’t seem to be as such a high bar as you might think.
Shortly after the conference a new action was released that included separate charges against the CCO. The Sands Brothers case involved repeated violations of the custody rule. After SEC deficiency letters and a prior enforcement action, the firm continued to fail to deliver audited financial statements as required by the custody rule. Surely a failure.
“Wholesale failure”? Sure. I would not want to defend the CCO by saying it was not a wholesale failure. Sadly, the order did not use this term.
The SEC has been inconsistent with its interpretation of the “wholesale failure” of the CCO. In the BlackRock case, the CCO was blamed for inadequate policies and procedures.
The SEC’s order found that BlackRock and its then-chief compliance officer Bartholomew A. Battista caused the funds’ failure to report a “material compliance matter”. Rice failed to report violations of BlackRock’s private investment policy to the boards of directors. BlackRock additionally failed to adopt and implement policies and procedures for outside activities of employees, and Battista caused this failure. Battista agreed to pay a $60,000 penalty to settle the charges against him.
In SFX, the SEC charged the CCO for failed to supervise the president of the firm who stole $670,000, for violation of the custody rule, and for making a false statement in a Form ADV filing. The CCO negligently failed to conduct reviews of cash flows in client accounts, which was required by the firm’s compliance policies, and did not perform an annual compliance review. Mason also was responsible for a misstatement in SFX’s Form ADV that client accounts were reviewed several times each week.
Another was a technical interpretation case. In the Delaney case, the CCO was charged because the firm was failing to meet the requirements of 204T related to stock loans and execution of close-outs. The charges were for failing to give proper guidance on the rule, implementation of technology to comply with the Rule. The SEC position was that Delaney was that he knew the firm was violating the rule and did not take steps to stop it.
The SEC has said that CCOs are not targets. However, actions speak louder than words.
