In remarks before the 2015 National Society of Compliance Professionals, National Conference, Andrew Ceresney, Director, SEC Division of Enforcement, outlined the type of criteria used to charge Chief Compliance Officers with securities law violations.  According to Mr. Ceresney, CCOs are charged in the following types of cases:

  • cases against CCOs who are affirmatively involved in misconduct that is unrelated to their compliance function;
  • cases against CCOs who engage in efforts to obstruct or mislead the Commission staff; and
  • cases against CCOs where the CCO has exhibited a wholesale failure to carry out his or her responsibilities.

Mr. Ceresney stated the SEC has brought over 8,000 enforcement cases in the last 12 years.  During this 12-year period, the Commission has only brought five enforcement actions against individuals with CCO-only titles affiliated with investment advisers that involved charges under Rule 206(4)-7 and other compliance-related violations, where there wasn’t otherwise efforts to obstruct or mislead Commission staff.

Attempting to demonstrate that CCO’s are only charged for compliance failures in egregious circumstances, Mr. Ceresney discussed the Black Rock case.  He noted that Blackrock, one of the largest money management firms in the world, did not have any written policies and procedures regarding the outside business activities of its employees, even though the BlackRock CCO knew of and approved numerous outside activities engaged in by BlackRock employees. BlackRock’s CCO also was involved in extended discussions about a significant outside family business of a senior portfolio manager that posed a conflict with the investments his funds held. Despite these red flags, the CCO failed to develop and implement written policies and procedures to assess and monitor the outside activities of BlackRock employees and to disclose related conflicts of interest to the BlackRock funds’ boards and to advisory clients.

Mr. Ceresney stated it is important to recognize that the SEC did not charge the CCO with failing to disclose the conflict of the senior portfolio manager to the fund boards; the SEC only charged the firm with that conduct. Rather, the SEC charged the CCO with a wholesale compliance failure — causing BlackRock’s failure to adopt written policies regarding outside business activities such as those engaged in by the senior portfolio manager. The absence of an outside business policy, in the face of red flags, was a clear compliance failure given the CCO’s awareness of, and focus on, the issue, according to Mr. Ceresney.