SEC Commissioner Daniel Gallagher said Friday that the question of what makes a legal or compliance officer a supervisor remains “disturbingly murky,” and signaled that he’d like the securities regulator to develop “clearer guidance” on the issue.
Gallagher, speaking at the SEC Speaks conference in Washington, held by the Practising Law Institute, said the “old issue” of “failure to supervise” has become very relevant again.
As Gallagher explained, broker-dealers and investment advisors employ legal and compliance personnel to provide advice and guidance to firms and their employees regarding the application of laws and regulations to their businesses. Almost by definition, he said, “legal and compliance personnel work outside the direct chain of supervision for business activities, and few, if any, would think of themselves as ‘supervising’ day-to-day activity.”
A key question, therefore, he continued “is at what point can legal and compliance personnel be reasonably deemed ‘supervisors’ as they carry out their responsibility to prevent and, if necessary, address violations of laws or regulations by firm employees and to provide advice and guidance to management?” Over the course of the past three decades, he said, “this question has been raised in a series of commission broker-dealer enforcement cases, but it has never been answered in the clear and definitive manner such a weighty issue deserves.”
The Securities and Exchange Commission’s failure-to-supervise precedent provides limited guidance for determining whether a given member of a firm’s legal or compliance staff is a “supervisor” for the purposes of Exchange Act and Advisers Act liability, Gallagher explained. The clearest guidance, he said, was set forth in the Gutfreund Section 21(A) report issued by the SEC in 1992 in connection with an administrative proceeding involving the general counsel of a broker-dealer.
In that report, Gallagher said, “the commission noted that legal and compliance personnel do not become ‘supervisors’ for purposes of [the Exchange Act] … solely because they occupy those positions.” The commission explained, however, he said, “that an in-house lawyer can be deemed a supervisor when other members of senior management ‘involve him as part of management’s collective response to the problem.’”
What Gutfreund and similar proceedings make clear, Gallagher said, “is that once a person becomes involved in formulating management’s response to a problem, he or she is obligated to take affirmative steps to ensure that appropriate action is taken.
Brian Rubin, a partner in the law firm Sutherland in Washington, says that chief compliance officers and in-house counsel “must be careful that when they are involved in decisions such as disciplining a rep, a member of the business team must ultimately be responsible.”