SEC Judge Rules on the Extent of Liability for Compliance Officers

On August 5th, 2015 in a decision that has implications for registered investment advisers and broker-dealers, SEC judge Cameron Elliot ruled on an enforcement action regarding the extent of liability for Compliance Officers in In the Matter of Judy K. Wolf, available here. Sanctions were not imposed against Ms. Wolf due to the violation being “decisively outweighed by the remaining public interest factors: egregiousness, degree of harm, and deterrence.” However, it was found that Wolf purposefully lied about her records violation.

In In the Matter of Judy K. Wolf, Judge Elliot stated he believed the further sanction against Wolf would be pursuit of “the low-hanging fruit” that is compliance officers.

On October 15, 2014, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Wolf, as Parker MacIntyre noted at the time. Wolf altered documents in an SEC investigation of insider trading to make it appear that she had performed a more thorough investigation than she had for Wells Fargo. The initial action was filed by the SEC against the tippee in this case, then against Wells Fargo and Ms. Wolf. She was accused of altering documents used during a Commission investigation, and lying about it in a hearing, thereby violating Section 17(a) of the Securities Exchange Act of 1940.

Wolf had begun a review on a set of trades in Burger King securities made by a registered representative of Wells Fargo Advisors. This was done prior to an announcement that a private equity firm, 3G Capital, was to acquire Burger King and take it private. The findings within Wolf’s compliance review log confirmed the Wells Fargo registered representative bought Burger King securities ten days prior to the announcement, but her inquiry failed to make any additional inquiries into the trades, and Wolf closed the review with no findings. She later altered them retroactively and back-dated the alterations. During the investigation the question of law was whether Ms. Wolf, “knew or recklessly disregarded the risk that an altered log [containing information she had NOT originally included in the investigatory log for Wells Fargo] was not the original 2010 log.

Ms. Wolf was later terminated by Wells Fargo, and only after she was terminated by Wells Fargo did she admit to altering her investigation log. It was made clear by the judge that while Ms. Wolf committed records violations and later lied about it in an SEC hearing on the matter, her actions were greatly outweighed by deterrence factors.

Wells Fargo admitted to violations of Exchange Act Section 17(a). She did not implicate anyone above her at Wells Fargo for her course of action though others likely knew of Ms. Wolf’s conduct. The decision points out that she was really a low-level employee, and that sanctions against her would fail to deter the behaviors sanctioned, because others in the industry would see her as “one bad apple.” The decision points out that “Wells Fargo clearly had much deeper and more systematic problems than one bad apple…any sanction here will not only fail to have the desired deterrent effect, but may actually be counterproductive.” The violation was found to “lack egregiousness,” meaning there was no proven harm to investors in the marketplace and so no sanction or any type of remedy was in order. Judge Elliot went so far as to say that there was a real risk of excessive sanctions against compliance personnel which could discourage competent individuals from entering the field of compliance for fear of the risk.

At the Commission hearings, Wolf presented testimonial evidence that she had inability to pay were she sanctioned. Wolf’s former husband is on disability, and since discharged she has been unable to secure employment. She attested she is unable to pay her attorney and that her son is assisting her financially. She is 62 years of age and is likely retired from the industry for good. She testified that a fine over $100 would be a burden, that anything over $500 would render her incapable of assisting her ex-husband. Additionally, several assets of which she is listed co-owner are actually his.

Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.