The Securities and Exchange Commission (SEC) is taking an increased interest in examining chief compliance officers (CCO) to determine whether enforcement action should be taken against them. At the Investment Adviser Association’s annual compliance conference, CCOs were given a number of stern warnings. Director of the SEC’s Division of Investment Management Robert Plaze spoke about changes and improvements being made by the SEC. He warned CCOs that a newly created Asset Management Unit, which is part of the Division of Enforcement, “is dedicated to suing you.” He also claimed that the new unit will be staffed with people who understand the asset management business. It will also collaborate with both the Investment Management Division and the agency’s Office of Compliance Inspections and Examinations. Mr. Plaze stated that the unit will make the SEC’s oversight of registered investment advisers more efficient, allowing it to be able to perform more effective examinations. These warnings should concern CCOs who have taken a supervisory role within their firm.
The SEC has the authority to impose sanctions on people who are associated with a broker-dealer or an investment adviser if those people have reasonably failed to supervise. Both broker-dealers and investment advisers employ legal and compliance personnel to provide advice to them and their firms regarding the application of laws and regulations. One major issue that arises is whether the CCO is considered a supervisor within the firm. If so, the CCO could be subject to sanctions by the SEC for failure to supervise.
In the keynote address at the Investment Adviser Association’s conference, Commissioner Daniel Gallagher addressed the dilemma of whether employees of a firm are considered to have taken a supervisory position. He discussed a recent case, Gutfreund, which broadened the definition of a supervisor to include in-house general counsel. Gallagher stated that the apparent holding of the case said “once a person becomes involved in formulating management’s response to a problem, he or she is obligated to take affirmative steps to ensure that appropriate action is taken.” If a person becomes involved in responding to management problems, he/she may be deemed to be in a supervisory role. As a result of this case, compliance personnel also may be subject to liability for violations of the law if they are deemed supervisors. This creates a conflict for CCOs. They can either choose to become more involved in the firm and risk being sued, or they can minimize their responsibilities to ensure they are not subject to liability, which may result in termination for not contributing enough. This area is problematic for investment adviser firms because the SEC has not drawn an actual line to show when a CCO or in-house counsel are considered to be in a supervisory position.
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 the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.