The New York City Bar is looking out for compliance officers. It published a comprehensive report on liability for financial firm compliance officers and ways the regulators can do a better job relating to compliance officers.
“Financial firm compliance officers serve as essential gatekeepers to prevent, detect, and remediate violations of laws, regulations, and internal policies and rules. Because of their role, compliance officers are inherently at risk of becoming subject to regulatory investigations and personal liability. While the intent of such investigations and liability risks may be to strengthen the “gatekeeper” function, they can also discourage appropriate activity by compliance officers, isolate compliance officers from other business processes, or, at the extreme, lead individuals to leave compliance roles for fear of bearing liability for the misconduct of others. “
The Report makes four proposals for regulators to consider:
- Release formal guidance articulating specific factors guiding discretion on charging decisions against chief compliance officers.
- Communicate greater detail on the conducting of inspections and investigations of chief compliance officers in existing methods of informal guidance, through providing greater detail in enforcement action releases, or in other public communication methods.
- Create an ex ante method of communication between compliance officers and regulatory staff.
- Create an ongoing advisory group between regulators and the compliance community to discuss areas of mutual concern.
I’ve complained about item 1 several times. On one hand, regulators state the factors that would put a CCO in danger of liability. Then on the other hand, the enforcement actions completely ignore those factors or come up with new ones. Those two hands are writing different stories.
The SEC Commissioners and senior OCIE staff have usually stated three circumstances that lead to CCO liability:
- when the CCO is affirmatively involved in misconduct;
- when the CCO engages in efforts to obstruct or mislead the Commission; or
- when the CCO exhibits “a wholesale failure to carry out his or her responsibilities
But then you get enforcement actions like the one against Thaddeus North which upheld liability of a CCO because he “failed to make reasonable efforts to fulfill the responsibilities of his position.” That’s not one of those three.
The Report starts off with the proposition that increased CCO liability and uncertainty about the scope of liability may deter people from taking compliance positions. See, e.g., Court E. Golumbic, “The Big Chill”: Personal Liability and the Targeting of Financial Sector Compliance Officers, ; Emily Glazer, The Most Thankless Job on Wall Street Gets a New Worry, WALL ST. J. (Feb. 11, 2016); Dawn Causey, Who Should Have Personal Liability for Compliance Failures?, A.B.A. BANKING J. (Aug. 17, 2015).
The middle of the Report is a collection of enforcement actions against compliance officers in the financial sector. I’m going to go back through that collection. I didn’t see any mention of actions against compliance officers outside the financial sector. But come to think of it, I’m not sure I can recall any actions against compliance officers outside the financial sector that didn’t have the compliance officer involved in the wrongdoing.
I already mentioned the four recommendations from Part III of the Report. That regulators can fix this by getting enforcement to stick to the delineated reasons in the charges and orders against compliance officers who have gone astray.
The Report was prepared by the NYC Bar, and in partnership with the Association for Corporate Growth, American Investment Council and SIFMA.
Sources:
- Report on Chief Compliance Officer Liability in the Financial Sector
- New York City Bar Association Releases Report on Compliance Officer Liability; Makes Four Recommendations to Regulators
- Chief Compliance Officer Liability in the Financial Sector
- Report Urges Action on CCO Liability by Matt Kelly in Radical Compliance
- Thaddeus North and CCO Liability
