A recent report by the New York City Bar Association offers some “sensible recommendations” on how to move the chief compliance officer liability conversation forward, according to SEC Commissioner Hester Peirce.
The Republican commissioner tackled in a recent speech “a concern that is not new — the question of how to define the parameters of personal liability for compliance officers.”
Peirce remarked on a 2018 speech in which she spoke briefly on the role that the commission’s Division of Enforcement plays with respect to compliance functions.
“I noted that I shared the concerns expressed in some quarters that the increasing specter of personal liability could cause talented individuals to forgo a career in compliance, among other negative effects,” Peirce said.
She noted the recent New York City Bar paper that suggests creating “public-private advisory groups ‘charged with meeting periodically to discuss current and potential regulatory, examination, and enforcement efforts, and to publish guidance and recommendations to compliance officers and regulators reflecting the insight of both regulators and the regulated.’”
The “most fruitful way to provide greater clarity is through a collaborative effort,” Peirce said. “Because we want you to be successful in infusing good compliance practices into your firms, your day-to-day challenges and concerns should inform the way we approach liability for compliance officers.”
Also, the agency needs to “examine how well the compliance rules under the Investment Advisers and Investment Company Acts are functioning,” Peirce said.
Peirce noted three types of actions the agency typically takes against CCOs.
The first, which Peirce said “should not be controversial,” is clearly unlawful conduct.
An example: “when a person knows that an investment advisor is misappropriating client funds, does nothing to stop it, and participates in a scheme to hide the theft, she is liable for that conduct no matter her compliance functions,” Peirce said. “In cases such as these, compliance personnel are liable on the same terms and to the same extent as any other bad actor.”
The second category of cases relates more directly to compliance functions, Peirce continued. “These cases typically involve facts where a compliance officer obstructs or misleads the commission’s staff.”
A recent example that Peirce supported: a compliance officer created and backdated compliance memoranda. “When she subsequently provided them to the commission’s examination staff, she described them as a contemporaneous memorialization of the events, an assertion she knew to be false.”
Third are cases involving “a wholesale failure of a compliance officer,” which “understandably generates the most controversy and is the most challenging area for me,” Peirce said. “Typically, in such cases, the commission charges the compliance officer with aiding and abetting the company’s violations, causing the company’s violations, or both. The distinctions between these charges matters a great deal.”