Andrew Ceresney, Director of the Division of Enforcement of the Securities and Exchange Commission, said in a speech last week before a group of compliance professionals that concern over recent SEC enforcement cases against chief compliance officers of investment advisers is misplaced. He claimed that the actions “punish misconduct that falls outside the bounds of the work that nearly all of you do on a daily basis; do not involve the exercise of good faith judgments; and are consistent with the partnership we have developed to foster compliance with the laws.” According to Mr. Ceresney, the SEC has traditionally brought only three types of cases against CCOs: (1) where CCOs are affirmatively involved in misconduct unrelated to their compliance function; (2) where CCOs obstruct or mislead Commission staff; and (3) “where the CCO has exhibited a wholesale failure to carry out his or her responsibilities.” He acknowledged that it was this latter category of cases that has recently engendered criticisms—including from former commissioner Daniel Gallagher and current commissioner Luis Aguilar—in connection with actions against CCOs of certain investment advisers. However, he insisted that these types of cases were far and few between (i.e., only five enforcement actions against individuals with the title of CCO only in the past 12 years) and were justified by egregious facts. Mr. Ceresney’s speech was delivered before the 2015 National Society of Compliance Professionals, National Conference. Separately last week, the SEC brought and settled an enforcement action against Fenway Partners, LLC and three of its senior officers, including the co-chief financial officer and CCO. It charged the respondents with failure to disclose conflicts of interest to a fund client and investors regarding transactions involving payments of more than US $20 million to an affiliated company for consulting services, and to one current and a number of former employees for services they rendered while still employed at Fenway Partners. The respondents agreed to pay in excess of US $10 million in aggregate to resolve this matter. This amount will be used to reimburse harmed investors.
My View: Mr. Ceresney’s comments on potential CCO liability, as well as the comments of Andrew Donohue, chief of staff of the Securities and Exchange Commission, a few week’s ago, are valiant efforts to at least define the very few types of fact patterns that may prompt an SEC enforcement action against a CCO. However, SEC officials must make clear that, at a minimum, the agency will not proceed against CCOs for violations of rules that do not apply to them when the language of the rule is, at best, unclear, and, more objectively, seemingly not applicable at all. Under the relevant provision of the rule under which a number of CCOs recently have been charged, it is the responsibility of an investment adviser to “adopt and implement” written policies and procedures reasonably designed to prevent law and rule violations and to review such policies and procedures at least annually for effectiveness. It is the legal requirement of CCOs solely to administer such policies and procedures. (Click here to access the relevant SEC rule—SEC Rule 275.206(4)-7). As pointed out in the separate statement of former SEC Commissioner Daniel Gallagher to the recent settlement order of Eugene Mason, the CCO of SFX Financial Advisory Management Enterprises, SEC enforcement actions imposing obligations on CCOs not explicitly required by a rule send “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 … 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.”