A recent SEC case involving Theodore W. Urban underscores how difficult it can be to determine whether legal and compliance officers are also “supervisors” of business line-level employees.
The SEC issued an order instituting administrative proceedings against Urban in 2009, alleging that he ignored red flags and failed to supervise Stephen Glantz, a registered representative at Ferris, Baker Watts, Inc. (FBW). At the time of the alleged events, Urban was general counsel of FBW, where he headed the compliance, human resources, and internal audit departments. While Urban did not consider himself to be Glantz’s supervisor, and this belief was supported by direct evidence, the SEC’s chief ALJ found in 2010 that (i) Glantz engaged in securities law violations, (ii) Urban was Glantz’s supervisor, and (iii) Urban “performed his responsibilities in a cautious, objective, thorough and reasonable manner.” In reviewing the ALJ’s decision earlier this year, however, three SEC Commissioners recused themselves without explanation and the remaining two could not agree. Under an SEC Rule of Practice that applies in these odd circumstances, the ALJ opinion has no effect.
Thus, although the SEC alleged, and the ALJ found, Urban to be a supervisor, the question remains completely unresolved. The case illustrates, however, what SEC Commissioner Gallagher, speaking at a recent conference, dubbed a “dangerous dilemma” where the Commission’s position on supervisory responsibility for legal and compliance personnel may have the “perverse effect of increasing the risk of supervisory liability in direct proportion to the intensity of their engagement in legal and compliance activities.”
Until the Commission provides further guidance, legal and compliance officers of broker-dealers and investment advisers may find themselves well served by reviewing current procedures. Taking steps to strengthen the firm’s compliance and supervisory infrastructure, and its system to implement the firm’s policies and procedures, should go a long way toward reducing future risk of failure-to- supervise liability for legal and compliance personnel.
This article draws upon the author’s outline (“Clear as Mud: The Status of Legal and Compliance Officers as Supervisors After the Urban Case”) presented at the ACLI Compliance and Legal Sections Annual Meeting on July 17, 2012, in Las Vegas.