IA Watch produced an informative webinar on CCO Liability. These are my notes.
- Carl Ayers (Moderator) Publisher, Regulatory Compliance Watch
- Brian Moran, Executive director and CCO Sterling Capital Management
- Joseph McGill, J.D., Chief Compliance Officer Lord, Abbett & Co.
- Kelley Howes, Counsel Morrison Foerster
- Heidi Vonderheide of Ulmer & Berne LLP
First up was Heidi. Her firm is working on two CCO liability cases: the Robare case and the Blue Ocean Case with Jim Winkelmann.
These cases are on hold waiting for the Supreme Court to rule on the constitutionality of ALJ system.
The Robare discuss is a disclosure case. There was no evidence that there was any harm to customers.
Will the new leadership of the SEC change the CCO liability equation? It’s probably unlikely. Any case we see has likely been in the works for awhile. So any trend will take a while to show itself.
Kelley tackled what the SEC expects of CCOs. The number one item is to focus on the fiduciary duty of an investment adviser. A CCO should show a clear understanding of the firm’s business and associated risks. The CCO needs to now the regulations and how it integrates into the firm’s operations and disclosures.
The CCO should be in a position to be effective by having some independence and respect in the organization.
The SEC recognizes that the CCO role is hard and only wants to go after CCOs involved in wrongdoing or are asleep at the switch.
That being said, some of the SEC’s CCO cases don’t seem to follow the statements of the SEC.
Joseph emphasized the need for a conflicts matrix that gets reflected in the polices and procedures. The number one thing to focus on is not fixing a deficiency noted in a prior exam.
Brian highlighted the issues that arise when the CCO has other responsibilities. (A jack of all trades; a master of none.) He pointed out that many of the CCO case involved CCOs who wore more than one hat. Most of the cases involved compliance personnel who affirmatively participated in the misconduct, misled regulators or failed to carry their responsibilities.
What about D&O insurance? It would be usual for a CCO to not be covered. A CCO is an officer of the firm. There is likely a fraud exclusion. There may be a question of whether it covers all of the enforcement and litigation costs.