New York Bar Compliance Guidelines on Enforcement Actions Against CCOs
Over the past 15 years, compliance officers (“CCOs”) of financial services companies have come under increased scrutiny as the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have brought more frequent enforcement actions. seeking to hold CCOs personally accountable. CCOs have understandably been concerned about this trend and financial services firms have focused on the deterrent effect that enforcement actions can have on the vital role CCOs play in their organizations and the quality of the COO candidate pool. .
Although SEC commissioners and staff, as well as various FINRA executives, have attempted to allay concerns and offer advice on when they will personally bring an action against a CCO for conduct related to their compliance functions (COO Conduct Charges), there is no formal framework defining the factors that regulators should consider in determining whether to charge CCOs.
In a recently released report, the New York City Bar Compliance Committee (the “Committee”) attempted to fill this void with a “proposal for non-binding factors that the SEC must consider in creating a framework within which to assess whether must bring. . . CCO conduct charges under federal securities laws.
The Committee recommended a general affirmative factor that should be considered in all charges of CCO conduct and specific affirmative factors relevant to three types of claims against CCOs: 1) the CCO has demonstrated “default”. general ”to fulfill his responsibilities; 2) the OCC obstructed the investigation; and 3) the CCO was directly involved in the fraud. The Committee also recommended certain mitigating factors that should be considered in the decision to lay charges.
Affirmative: general factor
The Committee recommended that in all cases, the SEC “carefully consider whether [charging the CCO] helps the SEC meet its ultimate regulatory goals. One of these main purposes is deterrence and the Committee maintains that accusations of ACO conduct do not significantly deter ACOs from improper conduct. Instead, it may actually increase future violations of securities law, as it may result in the departure of qualified people from the profession or result in their withdrawal from deep involvement in their organizations due to fear of prosecution. futures. Thus, the Committee recommended reducing enforcement procedures and resolving the conduct underlying many CCO conduct charges through a default letter or other non-public methods. Basically, the Committee recommended that the SEC have a “slightly higher standard for charging CCOs than against a registrant or a businessman.”
Affirmative: Factors of failure wholesale
The Committee noted that the compliance community was particularly concerned about lawsuits brought against CCOs for “gross failures in carrying out their clearly assigned responsibilities” or “significant failure to implement programs, policies and compliance procedures for which he or she has direct responsibility. . “Therefore, the Committee recommended that regulators exercise reasonable discretion in such cases and conclude that the following factors were present before billing a CCO in such cases:
Didn’t the OCC make a good faith effort to fulfill its responsibilities?
Was the overall failure related to a fundamental or central aspect of a well-managed registrant compliance program?
Did the overall failure persist over time and / or did the OCC have multiple opportunities to remedy the failure?
Was the aggregate breach related to a specific and distinct obligation under securities laws or the registrant’s compliance program?
Has the SEC issued any rules or guidance on the substantive area of compliance to which the overall failure relates?
Did an aggravating factor add to the seriousness of the OCC’s conduct?
The proposed guidelines are based on previous statements by the SEC that “good faith judgments by CCOs rendered after reasonable investigation and analysis should not be called into question” and the reality that CCOs must frequently make decisions. in real time with limited directives. In view of the number of issues dealt with by OCCs, the Committee recommended that OCC liability only apply to certain types of incidents and where aggravating factors were also present. Specifically, the Committee recommended that the OCC’s liability apply to claims related to essential aspects of compliance, such as fulfilling a fiduciary duty, failure to disclose fees and expenses, or conflicts of interest, or other cases involving a monetary impact for investors or customers. The committee also provided examples of aggravating factors, including the fact that the CCO has already had a discussion with the SEC on the matter and has not changed course, or that “the CCO exhibited intentional behavior. , disregard for the regulatory mission of the SEC, or extreme disregard for the responsibilities of the OCC.
Affirmative: Obstructing factors
The SEC can sue an operations manager if they obstruct the SEC in a review or investigation. Before taking such action, the committee recommended that the SEC seek to establish one or more of the following as a means of assessing any type of obstruction:
Have the acts of obstruction or false statements been repeated?
Was the obstruction denied when confronted, or did the OCC not immediately turn the tide and cooperate?
Was the obstruction related to a necessary or highly relevant part of the review or investigation?
Did the evidence show other indications of intent to deceive or contempt for cooperation with the SEC’s regulatory mission?
Affirmative: Active participation in fraud
The Committee recommended that, if there is a charge of CCO conduct related to suspected fraudulent conduct, the SEC demonstrate that “the CCO’s conduct has somehow ‘added value’ to fraud committed by the company or other accused persons ”. The SEC can demonstrate such conduct with evidence indicating that “the OAC’s conduct helped major offenders avoid detection, increased damage to investors, or exacerbated fraud in some other way.” The committee made it clear that while the fraud is unrelated to the CCO’s compliance obligations, the SEC should not consider other factors in laying charges against the CCO.
The committee also suggested specific mitigating factors the SEC should consider in its tax decision, including:
Have any structural or resource issues affected the performance of the CCO?
Did the OCC in question voluntarily disclose and actively cooperate?
Have the policies and procedures been proposed, adopted or implemented in good faith?
The mitigating factors suggested by the Committee reflect the concern that the OCC or the compliance function does not have the adequate resources or authority to make decisions that could have prevented the alleged misconduct and, therefore, it would be unfair to hold the OCC accountable, especially when they have been prevented from doing their job fully.
Much of the framework proposed by the Committee has been suggested by Commissioners and staff in speeches, conferences or other communications. Hopefully the Committee’s report will lead to a more in-depth dialogue between the securities industry and the SEC to develop formal guidelines regarding situations in which the SEC will pursue claims against a CCO. We note that the Committee’s report only applies to the SEC and does not address the oversight of CCOs by other regulatory bodies such as FINRA, Office of the Currency Controller, Commodity Futures Trading Commission. or the National Futures Association. Many CCOs work for entities regulated by multiple regulators, and they may seek to have a broader dialogue with all of their regulators to formalize guidelines on when CCOs may have personal liability.
© 2021 Epstein Becker & Green, PC All rights reserved.Revue nationale de droit, volume XI, number 160