In a recent decision, Cameron Elliott, Administrative Law Judge for the Securities Exchange Commission (“SEC”), weighed in on the ongoing debate regarding securities enforcement against compliance personnel, with a decision dismissing the SEC’s case against a Wells Fargo’s employee.
Earlier this spring, the SEC charged the chief compliance officers (“CCO”) of Blackrock Advisors and SFX Financial Advisory Management Enterprises for allegedly failing to properly implement compliance procedures at their respective firms. The rule alleged to have been breach was Rule 206(4)-7 of the Investment Advisers Act, which requires advisers to “[a]dopt and implement written policies and procedures reasonably designed to prevent violation[s]”
The Blackrock and SFX matters were settled, with the individual CCOs agreeing to pay a penalty of $60,000 and $25,000 respectively. However, in a strongly worded dissent, Commissioner Daniel M. Gallagher noted that the settlements illustrate a trend toward strict liability for CCOs under Rule 206(4)-7, which when coupled with a lack of clarity and directions from the SEC, would disincentivize compliance personnel from vigorously performing their indispensable front-line role.
In response, Commissioner Luis A. Aguilar issued a public statement emphasizing that the SEC is not out to headhunt for compliance personnel: “In the seven years that I have served as a Commissioner, it has been my experience that the Commission does not bring enforcement actions against CCOs who take their jobs seriously and do their jobs competently, diligently, and in good faith to protect investors. I do not believe that these CCOs should fear the SEC.” He maintained that SEC enforcement actions are brought against compliance personnel only in the most egregious cases of misconduct.
Judge Elliot’s Decision
Against this backdrop, the significance of Judge Elliott’s recent decision becomes apparent. In the Matter of Judy K. Wolf, the SEC alleged that Wolf, a compliance personnel at Wells Fargo, had altered a document to make it appear that her review of a trader’s activity was more thorough than it was actually. In fact, red flags abounded and Wolf failed to catch them. The SEC obtained a $5.6 million judgment against the trader in question for trading stocks based on non-public information.
In dismissing the case against Wolf, who had 30-years of experience in the securities industry and exercised a key compliance function (although whose salary did not indicate that she was a high-level employee), the Administrative Law Judge analyzed in great detail Wells Fargo’s trade review policies and Wolf’s responsibilities within the firm’s compliance structures. Wolf was found to have aided, abetted and caused Wells Fargo’s breach of securities regulations. However, Judge Elliott refused to impose the sanction sought by the SEC.
According to Judge Elliott, sanctioning Wolf would give other players in the industry the falsified impression that the regulatory breach at Wells Fargo was caused by a low-status worker, which would not prompt them to examine their own compliance practices and corporate cultures, when as a matter of fact, Wells Fargo had more systemic problems than one bad apple.
Judge Elliott also noted that sanctions against compliance personnel have a chilling effect on compliance programs generally. Given that firms tend to compensate compliance personnel “relatively poorly, especially compared to other associated persons possessing the supervisory securities licenses” and that, by virtue of their function, they are prone to “receive a great deal of attention in investigations”, competent individuals may be deterred from taking on positions in compliance departments if the risk continues to disproportionately outweigh the compensation of the job.
“Again, I do not condone Wolf’s misconduct” concluded Judge Elliott, “But now that the evidence has been fully aired, it is clear that sanctioning Wolf in any fashion would be overkill.”
The Situation in Canada
In Canada, while securities regulators have expressed concerns about CCOs not performing their responsibilities adequately, they have largely resisted going after the low hanging fruit represented by administrative sanctions against individual compliance personnel.
Moreover, in contrast with the U.S., Canadian regulators have provided guidance as to how compliance personnel may fulfill their duties and responsibilities. IIROC Notice 12-0379 contemplates a collective responsibility approach towards compliance, with each of the Ultimate Designated Person, CCO, Chief Financial Officer, Executives, Directors and Supervisors (as these terms are defined in the Dealer Member Rules) working as a team and fulfilling their specific functions to effect a strong culture of compliance.
Nevertheless, recent regulatory initiatives in Canada may undermine continued efforts at fostering a cooperative relationship between regulators and compliance personnel. As previously discussed, the new whistleblower program proposed by the OSC, which does not strictly require the whistleblower to report through internal compliance mechanisms, may potentially result in heightened pressure on a business’s internal compliance programs.
Compliance personnel play a crucial regulatory function that has, and continues to, evolve in Canada, the U.S. and Europe, particularly in a world that has seen accounting scandals and market meltdowns. The compliance team, whose role includes ensuring that the firm’s business is conducted in accordance with appropriate professional, ethical and regulatory standards, is therefore is crucial to a firm’s ability to effectively identify and mange legal, regulatory and reputational risk, to the benefit of officers, directors, employees and stakeholders. More than front-line staff, the compliance team is a catalyst in fostering trusting and respectful relationships both within the organization, and externally with regulators.