More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
A recent report by the law firm Sutherland Asbill & Brennan analyzes recent SEC and FINRA actions against chief compliance officers at broker-dealers and advisory firms, highlighting examples of conduct that regulators have identified as “sanction-worthy.”
From November 2010 through June 2011, Sutherland found that the SEC and FINRA brought disciplinary actions against CCOs for a range of conduct, including: playing a role in their respective firms’ inadequate due diligence of private placement products, failing to supervise registered representatives, aiding and abetting their firms’ underlying violations, permitting an unregistered individual to trade securities, failing to preserve emails and failing to provide anti-money-laundering supervision.
This spring, FINRA filed two complaints naming CCOs for their roles in their firms’ due diligence violations regarding private placements.
In a March 2011 complaint, FINRA alleged that a firm, acting through its CCO (who also served as chief legal counsel), failed to supervise the due diligence review of a private placement offering and failed to supervise sales of that offering on an ongoing basis, Sutherland found.
The complaint alleged that in advance of approving the offering, the firm, acting through the CCO, failed to: Obtain or review financial statements for the product sponsor; research the background of the product sponsor’s officers; and, use the services of third-party due diligence providers that drafted due diligence reports concerning the offering.
In an April 2011 complaint, Sutherland’s report notes that FINRA alleged that another CCO, who was also general counsel, failed to conduct reasonable due diligence in connection with a private placement offering. “The CCO allegedly approved the selling agreement for the offering at issue before he had completed due diligence and received all of the information he requested from the product sponsor. This conduct was contrary to the firm’s procedures,” Sutherland says.
In addition to filing complaints, FINRA settled numerous due diligence cases with CCOs through Letters of Acceptance, Waiver, and Consent (AWCs). A few of the AWCs specified that the firms’ due diligence written supervisory procedures (WSPs) were inadequate.
Sutherland notes that in a settled action from January 2011, FINRA found that a CCO had failed to ensure that his firm established, maintained and enforced a reasonable supervisory system because his firm’s WSPs were deficient.
“In particular, the WSPs did not specify: Who was responsible for performing due diligence on private placement offerings; Procedures for satisfying due diligence requirements; How due diligence was to be documented; Who was responsible for reviewing due diligence and approving an offering; and Who would perform ongoing supervision of
Under securities laws, emails must be retained, even if they include “imprecise and ill-considered comments,” Sutherland reported. So failure to retain such communications has led to numerous disciplinary actions against both firms and individuals.
For example, in a default decision in March 2011, FINRA sanctioned a CCO (who was also the firm’s president) for violating NASD Conduct Rule 2110 by failing to ensure that his firm preserved its emails in accordance with Exchange Act Rule 17a-4, which requires broker-dealers to preserve all business communications for a period of not less than three years.
The CCO and another registered person, Sutherland says, “sent and received emails (including emails to FINRA) using personal email accounts not linked to the firm’s email preservation system.” The hearing officer noted that the CCO: was responsible for the firm’s compliance with Rule 17a-4; personally sent some of the noncompliant emails; and had previously been cited for email deficiencies of exactly the same kind at issue in the present case.
For these violations, among others, Sutherland says the CCO was suspended for 30 business days and fined, jointly and severally with the firm, $35,000.
Sutherland concludes at the end of its report that, “unfortunately for CCOs and other registered persons, once they have a ‘mark’ on their Forms U4 or U5, those marks generally cannot be removed by laser or otherwise.” The goal, Sutherland says, “of any CCO is to avoid getting that mark or tattoo while, at the same time, providing advice and guidance so that a firm can grow and prosper.”