SEC Commissioner Daniel Gallagher, in a speech on June 25, 2015, said that a perceived trend by the SEC toward “strict liability” for chief compliance officers (CCOs) is “sending a troubling message.”
The statement explains his vote against bringing two enforcement actions against CCOs. In one case, the SEC charged a CCO with violating Rule 206(4)-7, popularly known as the adviser compliance rule, in connection with an alleged failure to ensure that the adviser’s compliance program was sufficient to assess and monitor outside activities of employees. In the second case, the SEC found that a CCO failed to implement compliance policies and procedures that, if carried out appropriately, would have detected an alleged multi-year theft of client assets by the adviser’s president.
This trend toward strict liability, Commissioner Gallaher argued, could encourage CCOs to distance themselves from their firm’s compliance policies and procedures, lest they be held accountable for the adviser’s conduct. Moreover, this trend could incentivize CCOs to favor less comprehensive policies and procedures that require less monitoring in an effort to avoid potential liability when the SEC “plays Monday morning quarterback.”
Part of the problem, the Commissioner said, is that the compliance rule itself is not a model of clarity and “offers no guidance as to the distinction between the role of CCOs and management in carrying out the compliance function.” He said that the SEC should not resolve this uncertainty through enforcement actions.
While acknowledging that CCOs should be held accountable for violations of the federal securities laws, he said that the SEC should strive to avoid “perverse incentives” that will flow from targeting CCOs who are “willing to run into the fires that so often occur at regulated entities.” The SEC, he said, should consider whether to amend Rule 206(4)-7 or provide guidance to clarify the roles and responsibilities of CCOs so that CCOs are not held accountable for the misconduct of others.
In a speech on June 29, 2015, Commissioner Luis Agular said that Commissioner Gallagher’s statement has left the impression that the SEC is too harsh with CCOs, and that CCOs are “needlessly under siege” from the SEC.” This dialog, he said, “is unhelpful sends the wrong message, and can discourage honest and competent CCOs from doing their work.” The cases that the SEC has brought against CCOs, he said, do not “signify the beginning of nefarious trend” to targeting CCOs, but rather involve “egregious misconduct” of CCOs.
Both Commissioners found some common ground: they agree that CCOs play a vital role in protecting investors.