More On Legal & Compliancefrom The Advisor's Professional Library
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- 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.
While chief compliance officers are on the frontlines of making sure that their colleagues and firms adhere to securities rules and regulations, they can also become targets of regulators for their own misdeeds.
In its annual compilation of disciplinary actions brought by the Securities and Exchange Commission and the Financial Industry Regulatory Authority against chief compliance officers, the law firm Sutherland found a bevy of violations.
From January to June 2013, the SEC and FINRA brought disciplinary actions against CCOs and in-house counsel for a range of conduct, including failure to supervise, due diligence failures, aiding and abetting primary violations, anti-money laundering (AML) deficiencies, failure to report customer complaints, advertising violations, registration deficiencies, books and records violations, and suspension from practicing before the SEC.
As the Sutherland attorneys Brian Rubin and Katherine Kelly note, being a CCO or in-house counsel poses “very real challenges,”´because while they’re responsible for keeping their colleagues in line, they don’t necessarily have the power to enforce their advice.
The following are some of the actions that Sutherland highlights that were taken against CCOs in the above mentioned areas.
In a case where a firm allegedly failed to have adequate procedures, a CCO was disciplined in April 2013 in connection with his firm’s sale of nonexempt unregistered securities.
Three customers had opened accounts at the firm, deposited shares of unregistered securities into their accounts, and then sold the unregistered shares to others. According to FINRA, the registered representative for the accounts failed to conduct a “searching inquiry” to ensure that the sales were proper. FINRA determined that the firm failed to have adequate written supervisory procedures (WSPs) in place designed to prevent the sale of nonexempt unregistered securities The CCO was suspended in any principal capacity for six months, but was not fined due to a demonstrated inability to pay.
In another case, in a March 2013 settlement, FINRA alleged that a CCO failed to maintain and implement an adequate supervisory system for filing and amending Forms U4.
Specifically, the CCO, who was responsible for the firm’s Forms U4 and U5, failed to amend registered representatives’ U4s to reflect customer complaints involving compensatory damages of $5,000 or more. For this and other conduct, the CCO was fined $5,000 and suspended in a principal capacity for 10 business days.
Supervision of Individuals
CCOs or in-house counsel may be considered supervisors, and therefore potentially liable as such, when they have sufficient “responsibility, ability, or authority to affect the conduct of the employee whose behavior is at issue.”
In a March 2013 settlement, FINRA disciplined a CCO for failing to supervise his firm’s owner (and producing manager), who excessively traded in at least five customer accounts.
Another case illustrated the perils of CCOs acting as direct supervisors. In an April 2013 settlement, a CCO was disciplined for failing to supervise a registered rep in connection with the sale of non-exempt unregistered securities. Three customers opened accounts with the firm, deposited unregistered securities in the accounts, and shortly thereafter sold the unregistered securities. The CCO was the direct supervisor of the registered rep who effected the sales of the unregistered securities.
The CCO was suspended in any principal capacity for six months, but was not fined due to a demonstrated inability to pay.
Three recent cases against CCOs involved inadequate oversight of private placement investments.
In January 2013, FINRA disciplined a CCO in connection with his firm’s allegedly inadequate due diligence of private placement investments. FINRA determined that the CCO failed to respond reasonably to red flags indicating risks associated with a particular private placement offering.
In August 2008, the CCO approved a private placement offering despite knowledge that the issuer of that private placement had missed payments of distributions to customers on a prior offering and eventually suspended sales in that offering.
In a March 2013 settlement, a CCO was disciplined for failing to conduct adequate due diligence of private placement offerings consisting of preferred stock. As president and CCO, he was responsible for approving private placement offerings for sale.
Books and Records
In a March 2013 default decision, a CCO was disciplined for, among other things, his firm’s failure to retain, preserve and review incoming and outgoing correspondence in conformity with NASD Rule 3110.
In particular, FINRA found that the firm failed to retain all incoming and outgoing correspondence from 2009 through July 2010 and most incoming and outgoing correspondence for the following year and a half. For this and other conduct, the CCO was fined $10,000.
In June 2013, the SEC affirmed FINRA’s imposition of a bar against a CCO who had ordered that records be destroyed prior to his termination. In that case, FINRA had found that the CCO (who was also president of the firm) had violated NASD Conduct Rule 2110 when, in anticipation of being fired, he resigned from his firm and invited others to help him remove books and records, erase electronic files and remove backup tapes, which they did.
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