During a public statement on June 18, 2015, SEC Commissioner, Daniel M. Gallagher expressed doubt about whether the SEC’s recent enforcement actions against chief compliance officers (CCOs) of registered investment advisers was sending the appropriate message to the investment advisers and their compliance personnel.
Commissioner Gallagher cited two recent SEC enforcement actions (which he voted against) in which the CCO was charged with causing the RIA to violate Rule 206(4)-7 under the Investment Advisers Act of 1940. The Rule requires registered investment advisers to adopt and maintain written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules. In one of the two enforcement matters, the CCO was charged with causing a violation of the Rule due to the CCO’s alleged failure to ensure that the RIA had reasonable policies and procedures in place to monitor the outside business activities of the RIA’s employees, and that appropriate disclosure was made regarding conflicts of interests to the RIA’s clients. In the second matter, the CCO was similarly charged in connection with the failure to discover the long-term theft of client assets by the RIA’s president. The charges cited by the staff are based, in large part, that the CCO is responsible for the implementation of the RIA’s written policies and procedures in order to comply with the Rule.
According to Commissioner Gallagher, the Rule does not make it clear as to whether it is the responsibility of the CCO, the RIA’s management, or both to implement and maintain the written policies and procedures reasonably designed to prevent violations. However, the enforcement actions cited by Commissioner Gallagher appears to indicate that the SEC believes that the CCO is the primary, if not the sole person, responsible for compliance with the Rule.
Commissioner Gallagher argues that the SEC’s position is counterproductive as the CCO is the “first line of defense” and may be the “only line of defense” in prevention of violations. Accordingly, it may be necessary to cut CCOs some slack in determining compliance responsibility under the Rule.
Finally, Commissioner Gallagher cites the need for the SEC to take a hard look at the Rule to determine if there needs to be amendments or at least some industry guidance as to the roles and responsibilities of both management and CCOs with respect to maintaining compliance with the Rule.