Author: Doug Cornelius

You can find out more about Doug on the About Doug page

Foreign Ownership of Real Estate Under New CFIUS Regulations

In September 2019, the U.S. Department of the Treasury issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Part of those proposed real estate transactions passing ownership to a foreign person near critical locations. The final regulations came out and are largely unchanged.

The regulations extend CFIUS jurisdiction to cover the purchase or lease by, or a concession to, a foreign person of real estate in and/or around specific airports, maritime ports and military installations. The restricted areas depending on the type of critical real estate.

The specific restricted areas are:

  1. Within one mile of any of the 100 identified military installations
  2. Within 99 miles of any of 32 identified military installations
  3. Any county or other geographic area identified in connection with certain Air Force bases located in Colorado, Montana, Nebraska, North Dakota, and Wyoming;
  4. Any part of 23 identified military installations and located within 12 nautical miles of the U.S. coast
  5. Located within or will function as part of an airport or maritime port

Arnold & Porter put together this map of its applicability:

That’s a lot of real estate covered by this rule assuming its accurate. The rule talks about the creation of tool to make this more certain.

One of the exceptions is urbanized areas. Unless the real estate is in “close proximity” of an identified military installation or is part of a covered port, the rule provide an exception for transactions that involve real estate located within an “urbanized area” or “urban cluster.” Those two terms: “urbanized area” or “urban cluster” are defined by the Census Bureau based on population density. Hopefully, most major cities inside all of those problematic areas in the map will fall under this exception. The question will be how far does the urbanized area extend outside the CBD.

Another exception is if your foreign investor is from Australia, Canada or the United Kingdom. Apparently, the Trump administration likes these countries and investors from those three get a pass from CFIUS on real estate transaction. The rules do allow for other countries to be added to the list.

Leases are also excluded from CFIUS as long as the lease is for less than 10% of the building and there are at least 9 other tenants.

Real estate transactions are not subject to mandatory CFIUS filings. Of course you risk having the transaction fall apart if CFIUS comes in later to undo the transaction.

The new rules give you the option of filing a short-form “declaration” rather than the longer, traditional form of “notice.”  That also means a shorter 30-day review period.

Sources:

Compliance Bricks and Mortar for March 6

These are some of the compliance related stories that caught my attention.

SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19)

Securities and Exchange Commission announced that it is providing conditional regulatory relief for certain publicly traded company filing obligations under the federal securities laws. The impacts of the coronavirus may present challenges for certain companies that are required to provide information to trading markets, shareholders, and the SEC. These companies may include U.S. companies located in the affected areas, as well as companies with operations in those regions.

To address potential compliance issues, the Commission has issued an order that, subject to certain conditions, provides publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. Among other conditions, companies must convey through a current report a summary of why the relief is needed in their particular circumstances. The Commission may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Companies and their representatives are encouraged to contact SEC staff with questions or matters of particular concern.

https://www.sec.gov/news/press-release/2020-53

How’s Your Business Continuity Plan?
Bruce MaCEwen
Adam Smith, Esq.

Doing all you can to support the professionals and staff who work for you, to provide ongoing reassurance to clients, and to be, to the best of your ability, a genuinely helpful and calming resource to those who might be hit more severely, is your professional and ethical duty.

https://adamsmithesq.com/2020/03/hows-your-business-continuity-plan/

Emergency Preparedness Plan
Joshua M Brown
The Reformed Broker

There’s a regulation in place for investment advisory firms like ours that an emergency preparedness plan must be in place in the event that employees are unable to reach their primary place of business. When regulators come in to a registered investment advisor’s office, they will usually request a copy and check to see if the firm’s plans are up to date and appropriate. It’s part of their normal course of protecting the public.

https://thereformedbroker.com/2020/03/05/emergency-preparedness-plan/

Mapping the Landscape of Comments to the SEC’s New Proxy Rules
Jens Frankenreiter
The CLS Blue Sky Blog

A couple of interesting features of this graphical representation stick out immediately. First, comments by institutional authors (which mostly appear in the upper half of the graph) seem to be qualitatively different from comments by private senders (which mostly appear in the lower half). Second, there are several tight clusters of documents, indicating nearly identical letters. In fact, a simple plagiarism tool indicates that 67 documents (roughly 13 percent) share 50 percent or more of their text with at least one other document. Most of these documents can be found in clusters 6, 7, and 8. On the other hand, 384 documents (around 73 percent) contain language deemed to be at least 90 percent unique, suggesting that a majority of authors produced highly bespoke opinions (rather than relying on a copy-and-paste template).

https://clsbluesky.law.columbia.edu/2020/03/04/mapping-the-landscape-of-comments-to-the-secs-new-proxy-rules/

Russia updates crypto regulations after string of scandals
Selva Ozelli
The FCPA Blog

With plans to launch its own cryptocurrency later this year, Russia has updated its anti-bribery and AML laws to aid its burgeoning digital economy while dealing with corruption risks associated with the new technology amid reports the Federal Security Service (FSB) allegedly tried to extract a bribe worth $1 million in bitcoin from a media mogul last year.

https://fcpablog.com/2020/03/04/russia-updates-crypto-regulations-after-string-of-scandals/

In A Setback For The DOJ, Judge Grants Hoskin’s Motion For Acquittal Of All FCPA Charges
FCPA Professor

[I]n a setback for the Department of Justice and its FCPA theory of prosecution, Judge Janet Bond Arterton (D. Conn) granted Hoskin’s motion for acquittal on the seven FCPA charges he was convicted of by the jury (See here for the decision. The judge denied Hoskin’s motion for acquittal on the five money laundering charges he was convicted of by the jury).

http://fcpaprofessor.com/setback-doj-judge-grants-hoskins-motion-acquittal-fcpa-charges/

Prosecutors urge the judge to deny early prison release for Bernie Madoff
CNBC

Over 500 victims had written to a Manhattan federal court judge to oppose early release for the 81-year-old Madoff from a 150-year sentence imposed in 2009, while only 20, or 4% of letter writers, supported it, prosecutors said.

https://www.cnbc.com/2020/03/05/prosecutors-urge-the-judge-to-deny-early-prison-release-for-bernie-madoff.html

Compliance Patterns in Raked Leaves
Tom Fox
FCPA Compliance & Ethics

Patrick Taylor has said that AI allows the compliance practitioner to understand the “subtle clues in that pattern of activity that will clue me in to take a different look.” He likened it to seeing “patterns in raked leaves” which allows you to then step in and take a deeper and broader look at an issue, either through an audit or investigation. This is where compliance practitioner can step back and literally keep an eye on the big picture and longer term as opposed to just the immediate numbers and information in front of them. It may also be the best hope for finding that kind of systemic fraudulent behavior.

http://fcpacompliancereport.com/2020/03/compliance-patterns-raked-leaves/

Proposed Harmonization of Exempt Securities Offerings

In what proposes to be a big change in private placements, the Securities and Exchange Commission issued a set of proposed amendments that “provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections.”

Offering and Investment Limits. The Commission proposed revisions to the current offering and investment limits for certain exemptions.

For Regulation A:
– raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
– raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.

For Regulation Crowdfunding:
– raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
– amend the investment limits for investors in Regulation Crowdfunding offerings by: not applying any investment limits to accredited investors; and revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest.

For Rule 504 of Regulation D:
– raise the maximum offering amount from $5 million to $10 million.

Integration:

The current Securities Act integration framework for determining whether multiple securities transactions should be considered part of the same offering is proposed to be revised with four new safe harbor. This would be particularly useful in private fund offerings. One is strict 30-day separation between the offerings.

General Solicitation:

Demo days and similar events would be exempt from “general solicitation” restrictions.

Accredited investor verification:

The amendments would change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings.

There would be new items to the non-exclusive list of verification methods in Rule 506(c) public-private placements.

It’s just a proposed rule. You have two months to review and provide comments.

Sources:

The One That “May” Pay Commissions

EquiAlt is in the business of snapping up distressed properties in Florida. That takes capital and it raised it through a series of funds through debt offerings. That seems like mismatched cash flow to me. You have to make interest payments on investments in real estate that are not generating cash flow. The SEC took an even more skeptical view and accused the firm of being a Ponzi Scheme and defrauding investors.

“The SEC’s filings present an inaccurate picture of Mr. Rybicki’s business dealings,” Washington D.C. attorney Stephen L. Cohen said in an email to the Tampa Bay Times. “We look forward to addressing these matters with the court.”

Since it was a real estate company it caught my attention, a found a few items that were worth exploring.

As with most alleged frauds, the SEC lists a bunch of luxury items by the alleged fraudsters. The EquiAlt’s principals apparently bought Ferraris, Porsches and a Rolls Royce. Plus expensive watches and private jet charters.

Lesson: Just assume that if the SEC shows up at your office and sees a Rolls Royce or a Ferrari out front, the SEC is going to be immediately suspicious.

The SEC got hung up on the use of “may” is the private placement documents. EquiAlt was is accused of using in-house employees and unlicensed external sales agents to to raise investor money. According to the SEC, they were ALWAYS paid commissions. The SEC is taking the position that the fundraising documents should not have said that the funds MAY pay commissions.

I hate that the SEC raises this issue. But it does.

Lesson: If you always pay some kind of fee, especially to an affiliate, make sure you use a more forceful term than “may.” Or I suppose you could find a time to forego the payment so that “may” is more accurate.

The last thing that caught my attention was a claim that the fund raising documents falsely stated that a certain individual was EquiAlt’s Chief Financial Officer when that person did not do so.

Lesson: Always make sure you get your firm’s personnel right in the fund-raising documents.

Sources:

The One Who Thought He Was Above the Law

The headlines for a case against Steven Seagal just write themselves. We was charged by the SEC for violating the anti-touting provisions of the securities laws for putting his celebrity girth behind Bitcoiin2Gen, in an initial coin offering.

The coin launched at about $0.60 in February 2019 and is not just about worthless. As near as I can tell, the selling point of this coin to BitCoin is that it has an extra “i.”

I have some sympathy for Mr. Seagal. He may have thought he was merely hawking some scam coin and not realized he was touting a security. Of course that’s the big problem with coin offerings. Promoters claim they are not securities, but the SEC thinks they are.

The SEC points out that the Bitcoiin offering was was well after the SEC’s DAO report that warned companies about the intersection of ICOs and securities laws. Just because you say it’s not a security over and over again, it does not make it true.

Mr. Seagal was to be paid $250,000 in cash and $750,000 in the Bitcoiins. Although, according to the SEC order, he only ended up with $157,000 in his pocket. That must be a nice supplement to his unpaid position as a special Russian representative to promote humanitarian ties between Russia and the United States.

As a Buddhist, Zen teacher, and healer, Steven lives by the principles that the development of the physical self is essential to protect the spiritual man. He believes that what he does in his life is about leading people into contemplation to wake them up and enlighten them in some manner. These are precisely the objectives of the Bitcoiin2Gen to empower the community by providing a decentralized P2P payment system with its own wallet, mining ecosystem and robust blockchain platform without the need of any third party.

https://bitcoiin2gen.pr.co/163919-zen-master-steven-seagal-has-become-the-brand-ambassador-of-bitcoiin2gen?reheat_cache=1

Mr. Seagal was not the first celebrity to get tagged by the SEC for promoting coin offerings. Professional boxer Floyd Mayweather Jr. and music producer DJ Khaled disgorged their promoter fees and paid penalties in November 2018.

Mr. Seagal accepted the order without admitting or denying the charges. That give the SEC the right to play the Nico Toscani quote: “You guys think you’re above the law. Well, you ain’t above mine.”

Sources:

Compliance Bricks and Mortar for February 28

We get a bonus day this year with the once-every-four year appearance of February 29 tomorrow. That means an extra day to catch up on some compliance reading.

Exam Recap: What’s hot during OCIE Exams
by Carl Ayers
Private Funds CFO

Don’t expect the SEC to admit to conducting new sweep exams but sources are telling sister publication RCW that OCIE’s looking at compliance with the liquidity risk management rule and how advisor’s handle sweep accounts.

https://www.privatefundscfo.com/exam-recap-whats-hot-during-ocie-exams (subscription required)

The Supreme Court Takes on SEC Disgorgement
by Daniel Walfish
NYU Law’s Compliance & Enforcement

One of the Securities and Exchange Commission’s core enforcement powers may soon be overhauled or even scrapped entirely. For fifty years the SEC has sought “disgorgement” of the proceeds of unlawful activity as one of its main remedies in federal court, even though there is no explicit statutory authority for doing so. On March 3, 2020, the Supreme Court will hear oral argument in Charles C. Liu and Xin Wang v. SEC, No. 18-1501, in which the Justices have agreed to consider whether courts can order disgorgement as an “equitable remedy” for a violation of the securities laws. This post discusses the case’s legal backdrop, some of the ways the Court could decide it, and some of its potential consequences.

https://wp.nyu.edu/compliance_enforcement/2020/02/22/the-supreme-court-takes-on-sec-disgorgement/

10 TYPES OF PROHIBITED REVENUE SHARING
Cipperman Compliance Services

Although, in theory, sufficient disclosure should allow advisers to receive revenue sharing, in practice, the SEC attacks revenue sharing in all its forms regardless of the extent of the disclosure.  Our conclusion is that the SEC has effectively banned revenue sharing.  As support for our position, below are ten types of revenue sharing outlawed by the SEC (cases hyperlinked).

https://cipperman.com/2020/02/21/the-friday-list-10-types-of-prohibited-revenue-sharing/

Ethisphere Announces the 2020 World’s Most Ethical Companies

Ethisphere’s research supports the conclusion that ethics and financial performance go hand-in-hand. Our annual practice of tracking how the stock prices of publicly traded honorees compare to the Large Cap Index found that listed 2020 World’s Most Ethical Companies outperformed the large cap sector over five years by 13.5 percent. This “Ethics Premium” forms the basis upon which companies can correlate responsible behavior with shareholder value.

https://ethisphere.com/ethisphere-announces-the-2020-worlds-most-ethical-companies/

Why Financial Regulation Keeps Falling Short
By Dan Awrey and Kathryn Judge
The CLS Blue Sky Blog

Modern finance is fast moving, extremely complex, and contributes to pervasive unknowns. Yet the processes governing how finance is regulated are typically slow, highly deliberative, and often reflect deeply ingrained and incredibly optimistic assumptions about our ability to understand the financial system and the potential impact of regulatory intervention. In our new paper, “Why Financial Regulation Keeps Falling Short,” we identify the key drivers of this fundamental mismatch between finance and financial regulation, demonstrate how this mismatch contributes to undesirable policy outcomes, and lay the conceptual foundations for understanding how the processes governing the creation of financial regulations can be improved to help close this gap.

https://clsbluesky.law.columbia.edu/2020/02/25/why-financial-regulation-keeps-falling-short/

A Closer Look at Warren Buffett’s Annual Letter to Berkshire Shareholders
by Kevin M. LaCroix 
The D&O Diary

Like many others, I look forward to Warren Buffett’s annual letter to Berkshire Hathaway shareholders, and like many others, I read his annual letter closely, looking for any investment insights I can glean as well for Buffett’s now-famous homespun brand of wisdom and humor. Although Buffett latest letter to Berkshire shareholders – which was published Saturday morning – does offer readers a little under each of these headings, I think many reading Buffet’s latest letter might have come away a little disappointed, as I discuss further below. 

https://www.dandodiary.com/2020/02/articles/warren-buffett/a-closer-look-at-warren-buffetts-annual-letter-to-berkshire-shareholders/

Ponzi Schemes Surge In 2019 – Coincidence Or Cause For Concern?
PonziTracker

According to Ponzitracker’s research, 60 Ponzi schemes were allegedly uncovered in 2019 that involved a collective $3.245 billion in investor funds. The statistics mark an abrupt reversal to a multi-year downward trend that in 2018 saw the lowest number of alleged Ponzi scheme discoveries in ten years. In addition, the surge in alleged schemes – the largest percentage increase since 2009 – also comes on the heels of a blockbuster year for financial markets in 2019. While it remains to be seen whether the reversal is an anomaly or cause for concern, all of the data points suggest that 2019 was a banner year for Ponzi scheme discoveries and enforcement.

https://www.ponzitracker.com/home/ponzi-schemes-surge-in-2019-anomaly-or-cause-for-alarm

Massachusetts Fiduciary Standard

Massachusetts is showing no patience for the Regulation BI and is imposing its own fiduciary standard on investment advice in the Bay State. The standard goes into effect when published on March 6, with enforcement coming into play on September 1.

The standard in 950 CMR 12.207 will apply to any broker-dealer or agent in Massachusetts. The original proposal included investment advisers and investment adviser representatives. But according to the Adopting Release, the final regulation excluded them because they are already subject to a fiduciary standard.

For broker-dealers, the fiduciary standard extends past the recommendation requirement standard if the broker-dealer has discretionary authority over the account, has an agreement to monitor the account or receives ongoing compensation.

Sources:

The One With the Undisclosed Private Fund Fee Scrape

Every compliance officers knows that undisclosed revenue sources at the expense of advisory clients is going to get their firm in trouble. (That’s probably not true. But If you’re a regular reader of Compliance Building, you know that it leads to trouble.) The latest charge comes against Criterion Wealth Management.

The SEC’s complaint alleges that from 2014 to 2017 the defendants recommended that their advisory clients invest more than $16 million in four private real estate investment funds without disclosing that the fund managers had paid them more than $1 million, which was on top of the fees that defendants were already charging their clients directly.

This just a charge by the SEC and Criterion has not had a chance to defend itself. I’m just writing about this case to expose what can get you in trouble with the SEC as a warning of what not to do.

Criterion arranged for investments with two different real estate private fund managers. In some investments, Criterion would get a large portion of the performance promote. In others, Criterion was paid a trailing fee based on it’s clients’ investment in the funds.

The first arrangement results in depressed returns to the clients and created more income for Criterion. The second arrangement created an incentive for Criterion to recommend their clients stay invested in the funds.

Both of those arrangements would be perfectly fine if properly disclosed by Criterion to its clients. Criterion did have a disclosure in its Form ADV.

“Associated persons of [Criterion] are registered securities representatives and investment adviser representatives of [BrokerDealer,] a registered broker-dealer … In these capacities associated persons may recommend securities, insurance, advisory, or other products or services, and receive compensation if products are purchased through [Broker-Dealer.] Thus, a conflict of interest exists between the interests of the associated persons and those of the advisory clients.”

The SEC thought that disclosure was inadequate. It also cited a statement in Item 14 of Form ADV (referrals) that Criterion did not accept compensation from non-clients in connection with its services.

The SEC noted this problem in an exam and issued a deficiency letter.

This is the second lesson from the case. Fix the problems in the deficiency to make the SEC examiners happy. Or else the lawyers get involved.

In response to the deficiency letter, Criterion sent a letter to its clients that the compensation arrangement had created potential conflicts of interest that were not fully disclosed. The SEC wanted more in the letter. The SEC wanted Criterion to state that it had steered its clients to less-favorable classes in the funds because of the compensation arrangement and that this resulted -and continued to result- in lower returns to Criterion’s clients than other fund investors.

I’m sure there was a lot more back and forth about this than is contained in the complaint. But take the lesson.

With the lawyers involved, they found more problems at Criterion. The firm failed to conduct annual reviews for many years and hadn’t updated its compliance manual in eight years. The SEC also claims that when Criterion used a compliance consultant the firm failed to disclose the compensation arrangement to the consultant.

The complaint also claims that Criterion’s two principals had scienter and should be held personally responsible for the alleged misdeeds. One of the principals also had the title of Chief Compliance Officer, so this case also involves CCO liability. I think this clearly puts in the prong 1 category of being involved in the wrongdoing.

Sources:

CCO Liability and Failing Qualifications

Cases imposing liability against compliance offices catch my attention. An Illinois court just imposed a fine on the former chief compliance officer of The Nutmeg Group, a registered investment adviser and fund manager. David Goulding had previously agreed to be barred from association with any investment adviser.

David Goulding must have thought things would go differently when his father promoted him at his financial advisory firm from a part-time administrative capacity to the full-time role as the chief compliance officer. The Nutmeg Group had $32 million in assets under management. Mr. Goulding was going to make money…

It’s not clear whether he knew that his father had been convicted of conspiracy to defraud the United States, mail fraud, and illegal transportation of currency in connection with a tax evasion and money laundering scheme that lead to him serving six months in prison and suspension from the practice of law for four years.

As you might expect, things were bad at Nutmeg. Nutmeg did not have complete records of investments, lacked books and records required by law, and had no internal controls to prevent violation of the Investment Advisers Act. Fund assets were commingled with firm assets. Of course, this lead to improper valuations and inaccurate reporting to investors. Assets were improperly transferred.

As the new CCO, Mr. Goulding could fix this?… No.

The following are Mr. Goulding’s failing qualifications:

  • No training, experience, or knowledge of the securities industry
  • Never worked for a broker/dealer, investment company, or investment fund
  • No experience communicating with investors
  • No experience performing or assisting in the valuation of an investment fund
  • No experience with the compliance responsibilities of an investment adviser
  • Education consists of an undergraduate degree in philosophy with a minor in political science.
  • Worked as a personal trainer and in marketing for a health club and Border Books prior to joining the firm.

The court thought “[t]o be blunt, the evidence suggests David literally had no idea what he was doing or what he was getting himself into when he decided to go work for Nutmeg.” (p.16 of Memorandum Opinion and Order)

In the process of some attempt to fix things, he helped perpetuate the wrongdoing at Nutmeg. He sent misleading statements to investors that served to further Nutmeg’s improper activities.

Just his luck after becoming CCO, the firm was subject to examination three months later. That exam quickly uncovered the serious problems at Nutmeg.

Mr. Goulding’s defense was that he did not receive financial benefit from the fraud. That benefit went to his father who agreed to disgorge his profits, plus pay a penalty. David ended up disgorging half his salary as CCO.

Under the SEC’s three prong approach, Mr. Goulding hit the first prong by participating in the fraud. You could argue that he may not even have fully understood what he was doing was wrong. The court found that Mr. Goulding had aided and abetted Nutmeg’s primary violations of the Investment Advisers Act. (p.16 of Memorandum Opinion and Order)

Was this a matter of bad timing? If Mr. Goulding had more time as CCO could he have fixed the problem? Did his father put someone unqualified in the position to help with the fraud? My guess: yes, no, yes.

Sources:

NYC Bar Publishes Recommendations on CCO Liability

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:

  1. Release formal guidance articulating specific factors guiding discretion on charging decisions against chief compliance officers.
  2. 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.
  3. Create an ex ante method of communication between compliance officers and regulatory staff.
  4. 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:

  1. when the CCO is affirmatively involved in misconduct;
  2. when the CCO engages in efforts to obstruct or mislead the Commission; or
  3. 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: