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.