Andrew J. Donohue, chief of staff of the Securities and Exchange Commission, claimed that, despite a number of recent enforcement actions naming chief compliance officers, the SEC “is not targeting – and has not targeted – compliance personnel.” He made this statement in a speech before the National Regulatory Services’ 30th Annual Fall Investment Adviser and Broker-Dealer Compliance Conference held last week in San Diego. Mr. Donohue acknowledged three recent SEC enforcement actions involving CCOs of investment advisers have caused “a lot discussion whether the Commission was targeting CCOs.” (Click here, here and here to access SEC orders against CCOs of BlackRock Advisors, Parallax Investments and SFX Financial Advisory Management Enterprises.) However, he claimed SEC enforcement staff will only “typically” recommend enforcement actions against CCOs “when they have (1) affirmatively participated in the misconduct; (2) helped mislead regulators; or (3) had clear responsibility to implement compliance programs and policies and wholly failed to carry out that responsibility.” As a result, he concluded, “I believe that CCOs should feel empowered to diligently carry out their responsibilities without fear of personal liability.” In his capacity as chief of staff, Mr. Donohue serves as senior adviser to SEC Chair Mary Jo White.
My View: Mr. Donohue’s suggestion that CCOs may only be liable for failure to implement relevant compliance programs and policies appears contrary to the plain language of the applicable SEC rule at least so far as such actions are aimed at CCOs of investment advisers. This rule says it is the responsibility of IAs themselves to adopt and implement relevant policies and procedures to avoid violations of law, not CCOs (SEC Rule 275.206(4)-7; click here to access). As pointed out in the separate statement of former SEC Commissioner Daniel Gallagher to the settlement order of Eugene Mason, the CCO of SFX Financial Advisory Management Enterprises, SEC enforcement actions imposing such an obligation on CCOs send “a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, less they be held accountable for conduct that … is the responsibility of the adviser itself. Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties to avoid liability when the government plays Monday morning quarterback.” (Click here for further background and commentary on the SEC enforcement action involving SFX 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.) To give CCOs more comfort, the SEC should at least agree not to stretch the reach of its own rules to impose obligations on CCOs that are contrary to the rules' plain language.