One chief compliance officer was required to take training in connection with an enforcement action before the Securities and Exchange Commission, while in a separate, unrelated action, another compliance officer was let off with no sanction despite being found to have altered a document submitted to the SEC and subsequently being less than candid regarding her actions.
F. Robert Falkenberg
In the first case, involving Parallax Investments, LLC, an SEC-registered investment adviser, the SEC found that, from at least January 2009 through November 2o11, contrary to applicable rules, the firm engaged in at least 2,000 securities transactions with advisory clients on a principal basis through an affiliated broker-dealer without prior written disclosure or obtaining consent from such clients. The SEC also found that Parallax, contrary to rules, failed to provide pooled investment vehicle investors with audited financial statements on a timely basis; failed to adopt, implement and annually review written policies and procedures reasonably designed to prevent violations of applicable law; and failed to establish, maintain and enforce a written code of ethics.
For these offenses, Parallax and John Bott II, the firm’s owner and manager were jointly ordered to reimburse certain advisory clients an aggregate amount of US $450,000 and to implement certain undertakings.
In addition, F. Robert Falkenberg, the firm’s CCO, was held to have aided and abetted each of the firm’s violations, except those related to Parallax’s principal trading. Among other evidence of Mr. Falkenberg’s wrongful conduct, the SEC found that he backdated evidence of an alleged review of the firm’s compliance policies and procedures for 2010 that he, in fact, prepared untimely, only after requested to provide evidence of such review by SEC staff in connection with a routine examination of Parallax in 2011.
As a penalty, Mr. Falkenberg was ordered to take 30 hours of relevant compliance training. He was subject to no other penalty. Mr. Falkenberg worked for the Financial Industry Regulatory Authority prior to serving as CCO of Parallax.
Separately, Judy Wolf was a compliance consultant to Wells Fargo Advisors LLC and in 2010 reviewed the trading of Waldyr Da Silva Prado Neto, a registered salesperson for the firm. The SEC later sued Mr. Prado for insider trading.
In December 2012, Ms. Wolf altered a document she previously prepared evidencing her review of Mr. Prado’s trading. She changed the document, in anticipation of an SEC inquiry, to make it appear her review was more thorough; failed to disclose this alteration when the document was produced to the SEC; and later, initially denied making the alteration when asked by SEC staff. The SEC filed charges against Ms. Wolf, claiming that she aided and abetted Wells Fargo’s violation of securities laws, namely the firm’s failure to produce accurate records to an SEC representative, and the firm’s production of altered records. (Click here for details regarding the SEC’s charges in the article “Investment Advisor Compliance Officer Charged by SEC for Altering Document Related to Insider Trading Probe” in the October 19, 2014 edition of Bridging the Week.)
The ALJ hearing this matter concluded that the SEC’s Division of Enforcement “satisfied its burden of showing that Wolf acted with scienter and rendered substantial assistance in the commission of [Wells Fargo’s] primary violation.” However, the ALJ refused to impose sanctions on Ms. Wolf, claiming that “[t]here is real risk that excessive focus on violations by compliance personnel will discourage competent persons from going into compliance, and thereby undermine the purpose of compliance programs in general.”
In determining to assess no sanctions against Ms. Wolf, the ALJ cited a warning recently made by departing SEC Commission Daniel Gallagher that “we should strive to avoid the perverse incentives that will naturally flow from targeting compliance personnel who are willing to run into the fires that so often occur at regulated entities.” (Click here for additional information on Commissioner Gallagher’s views on CCOs in the article “Investment Adviser Chief Compliance Officer Blamed in SEC Lawsuit for President’s Theft of Client Funds; SEC Commissioner Criticizes Enforcement Actions Against CCOs Generally” in the June 21, 2015 edition of Bridging the Week.)
My View: It almost borders on insulting to suggest that “competent persons” would refrain from becoming compliance personnel because a compliance officer might be penalized for amending a previously written compliance report after the initiation of a review by the Securities and Exchange Commission, and then being less than forthcoming about the changes. That being said, compliance personnel should not be penalized for borderline interpretations that impose obligations on them that seem not to exist in the plain language of a relevant law or rule – as happened a few weeks ago when the SEC fined the chief compliance officer of SFX Financial Advisory Management Enterprises because the firm’s compliance policies allegedly were not “reasonably designed …to prevent the misappropriation of client funds” after the firm’s former president stole customer money. (Click here for more details regarding the SFX matter in the article, “Investment Adviser Chief Compliance Officer Blamed in SEC Lawsuit for President’s Theft of Client Funds; SEC Commissioner Criticizes Enforcement Actions Against CCOs Generally” in the June 21, 2015 edition of Bridging the Week.)