Outgoing SEC Commissioner Daniel M. Gallagher explained his dissenting votes in two SEC enforcement actions against Chief Compliance Officers. Mr. Gallagher explained that in both instances, the Commission’s order states that the CCO was responsible for the implementation of the firms’ policies and procedures. This, he says, illustrates a Commission trend toward strict liability for CCOs under Rule 206(4)-7.
Mr. Gallagher discussed the consequences of the SEC’s policies, including:
- Actions like these 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, under Rule 206(4)-7, is the responsibility of the adviser itself. Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties and responsibilities to avoid liability when the government plays Monday morning quarterback.
- The Commission needs to be especially cognizant of the messages it sends to the compliance community, and in particular to CCOs of investment advisers. To put it bluntly, for the vast majority of advisers, CCOs are all we have. They are not only the first line of defense, they are the only line of defense.