In her opening remarks last week at the National Compliance Outreach Program for Broker-Dealers held by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, SEC Chairperson Mary Jo White noted that the work of compliance professionals “is critically important to investors and the integrity of the markets.” Although she noted that the SEC’s enforcement program seeks to emphasize the “importance of a strong compliance program… it is not our intention to use our enforcement program to target compliance professionals.” However, she claimed that the SEC “of course [must] take enforcement action against compliance professionals if we see significant misconduct or failures by them.” She claimed that the SEC does not bring cases against compliance officers based on “second-guessing compliance officers’ good faith judgments, but rather when their actions or inactions cross a clear line that deserve sanction.”

My View: Just a few weeks ago, the Securities and Exchange Commission brought an enforcement action against Eugene Mason, the chief compliance officer of SFX Financial Management Enterprises, after the firm’s former president, Brian Ourand, was discovered allegedly to have stolen client funds from 2006 to 2011. The SEC acknowledged that Mr. Mason discovered Mr. Ourand’s activities as a result of a client complaint and, in response, SFX and Mr. Mason investigated Mr. Ourand’s conduct, SFX fired Mr. Ourand and SFX reported Mr. Ourand’s theft to criminal authorities. Notwithstanding, the SEC brought suit against Mr. Mason claiming that he was responsible for the implementation of SFX’s policies and procedures that “were not reasonably designed, and were not effectively implemented, to prevent the misappropriation of client funds.” This type of enforcement activity appears to involve precisely the type of second-guessing of CCOs that SEC Chairperson Mary Jo White says the SEC should not be engaging in. Indeed, this Monday-morning quarterbacking appears particularly egregious in this instance where the relevant rule appears, on its face, to impose the burden to draft satisfactory policies in the first place on the firm, not the CCO – as pointed out by SEC commissioner David Gallagher in a separate written statement. Unless the evidence and relevant rule(s) clearly points to the liability of a CCO, regulatory agencies should refrain from prosecuting such persons unless they wish to discourage qualified persons from taking such positions in the first place. (Click here for more details regarding the SEC’s enforcement action against SFX and Mr. Mason 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.)