SEC Enforcement Actions Against Corporate Officers – Targeting or Responsible Monitoring?

In SEC Chairwoman Mary Jo White’s opening statement to about 1,000 broker-dealer compliance officials at the Annual Broker-Dealer Compliance Outreach Program, she was clearly dismissing a growing sense that compliance professionals are being singled out by the SEC enforcement program, “To be clear, it is not our intention to use our enforcement program to target compliance professionals” she said, adding “We have tremendous respect for the work that you do. You have a tough job in a complex industry where the stakes are extremely high.” White also drew on the close similarities between the SEC and compliance officials, “Like you, much of our work at the Commission centers on protecting investors. We want to support you in your efforts and work together as a team.”

White’s statement came shortly after a public difference of opinion between commissioners Daniel Gallagher and Luis Aguilar. Gallagher, who issued dissents in the SEC’s cases against BlackRock Advisors in April and SFX Financial Advisory Investment Management in June, argued that the SEC rules governing compliance officials issued in 2003 are vague and leave too much uncertainty “as to the distinction between the role of CCOs and management in carrying out the compliance function.” In addition to the ambiguity in the rules, the only rule interpretations which have been provided by the SEC have come in the form of enforcement actions which Gallagher wrote “are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that is the responsibility of the adviser itself.” Gallagher suggested that the SEC consider either amending the rules or providing commission-level guidance which would help clarify what is expected of compliance officers in their roles.

Aguilar has challenged Gallagher’s statements with hard numbers as to the SEC’s past enforcement actions against CCOs over the past 6 years. Since 2009 there have been fewer than 20 such actions a year, with the exception of 2013, when 27 cases were brought against CCOs. In addition, Aguilar pointed out that in most instances where the SEC did bring an action against a CCO, that CCO generally had additional corporate responsibilities as an owner, CEO, CFO, general counsel or other high-ranking corporate official. Out of all the actions brought by the SEC since the compliance official rules were enacted only eight have been against a corporate executive whose sole title was CCO (two of the those eight cases were the subjects of Gallagher’s dissents). Aguilar is of the opinion that based on these numbers, “honest and diligent chief compliance officers have nothing to fear from the agency.”

Aguilar and Gallagher are slated to leave their positions on the commission in 2015 and 2016, respectively. However, it is unlikely this debate will end in the near future. White’s comments reflect her belief that while the SEC will continue to provide risk alerts and OCIE priorities annually to help firms identify vulnerabilities and help strengthen their compliance programs, it will still bring enforcement actions when compliance officers cross the threshold from making good faith business decisions to engaging in significant misconduct.

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