SEC Commissioner Hester Peirce encouraged additional clarification on the potential liability faced by compliance officers in the execution of their responsibilities.
In remarks before the National Society of Compliance Professionals, Ms. Peirce referenced former SEC Enforcement Director Andrew Ceresney's categorization of the circumstances in which the SEC has charged compliance officers: (1) the participation of a compliance officer in the misconduct in question, (2) the obstruction of SEC staff by a compliance officer and (3) the "wholesale failure" of a compliance officer to carry out their responsibility.
Ms. Peirce focused on the third prong as the one "generat[ing] the most controversy." Ms. Peirce said that using the presence of "an act or omission" that a compliance officer "should have known" as the sole determining factor for finding fault as to a company's violation may be overly aggressive and shifts the blame for a company's wrongdoings from the company to its compliance officer. Further, Ms. Peirce stated that Advisers Act Rule 206(4)-7 ("Compliance Procedures and Practices") exacerbates the liability imbalance between compliance officers and their firms, as the rule supports "negligence-based charges" against a compliance officer, which places responsibility on a compliance officer for causing a violation by virtue of not knowing to stop a violation that does not require scienter.
Ms. Peirce cautioned that placing unfair liability on compliance officers for the violations of their firms may encourage compliance officers to obscure failures rather than openly fix them, for fear of being subject to career-altering enforcement action.
To address the liability imbalance, Ms. Peirce recommended that the SEC:
- give more context in its decisions to charge or not charge compliance officers in order to provide a more detailed image to compliance professionals of "what doing the job right looks like";
- provide guidance regarding the circumstances under which it will bring an enforcement action against a compliance officer; and
- revisit Advisers Act and Investment Company Act compliance rules.
Additionally, Ms. Peirce recommended that a public-private advisory group (such as the SEC's investor, Small Business, or Fixed Income Advisory Committee) be established to aid in the production of a draft framework concerning compliance personnel liability. Ms. Peirce indicated that she is considering creating a framework to share with her colleagues that would address enforcement action against compliance personnel.
Commentary Steven Lofchie
While enforcement actions against compliance officers are fairly unusual, they are still very daunting to those in the role who feel themselves potentially exposed to a personal charge for any misconduct by the firm. While no one doubts that a compliance office should be subject to personal liability under the first two of Mr. Ceresney's three-pronged analysis, when the SEC brings a charge under the third prong, if it seems doubtful, it sends a strong message of fear through the industry, as any personal charge brought against a compliance officer is likely to be career-ending.
Ms. Peirce is quite right that the open-ended potential for liability discourages professionals from accepting the role of chief compliance officer at a broker-dealer or advisor. It is simply not worth taking the enforcement risk if there are other comparable job opportunities or if one does not have to take the title.
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