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.