New York, NY – Chief Compliance Officers at broker-dealers and registered investment advisers have seen their jobs expand in scope as the Dodd-Frank Act has increased the number of regulations that financial services firms must comply with. However, the personal liability for these CCOs is also increasing as the SEC and FINRA has started bringing disciplinary actions against them and their firms for a wide range of conduct they didn’t address in the past. The following blog is based on an article written by Brian L. Rubin and Katherine L. Kelly of Sutherland Asbill and Brennan, LLP which focuses on the disciplinary actions taken by regulators against CCOs between November 2010 and June 2011.
Inadequate Due Diligence
Registered broker-dealers have an obligation to have reasonable grounds for recommending an investment to their customers. Consequently, CCOs need to make sure their firms conduct adequate due diligence about the potential risks and rewards of a security before allowing these products to be recommended to clients.
In the spring of 2011, FINRA filed two complaints against CCOs alleging that they had failed either to obtain or supervise their firm’s due diligence of private placement offerings. In addition to filing complaints, FINRA settled numerous due diligence cases in 2011 with CCOs through Letters of Acceptance, Waiver, and Consent. In addition, FINRA levied fines and suspended CCOs in a number of the cases that were settled.
Failure to Supervise
Besides their responsibilities to make sure that a broker-dealer or investment adviser complies with appropriate regulations, CCOs may also be subject to personal liability for failing to supervise particular employees. This is relevant when compliance officers are deemed to have sufficient “responsibility, ability, or authority to affect the conduct of the employee whose behavior is at issue.”
This was at issue in the Theodore W. Urban decision, as well as the April 2011 SEC administrative law judge decision against Ronald S. Bloomfield. In both of these cases, the CCOs’ arguments that they did not “supervise” the employee whose behavior was in question was rejected.
Aiding and Abetting
Traditionally, aiding and abetting requires providing substantial assistance in committing a violation. In some cases this assistance would be satisfied by someone acting in a reckless manner. However, CCOs may also be found liable for aiding and abetting a violation through an act or omission that is seen to “cause the violation”, even if that act or omission is a result of negligence.
This was the basis of the regulators’ allegations in the Marc A. Ellis case which was settled in April, 2011; the Wunderlich Securities, Inc. case which was settled in May, 2011, and the Aletheia Research and Mgmt., Inc. case which was settled in May, 2011.
Permitting Unregistered Individuals to Trade
The CCO is responsible for making sure that all registered personnel working in the securities business of a member firm is properly registered in an appropriate category.
In a Letter of Acceptance Waiver and Consent to George Edward Dragel dated December 2010, FINRA found that the CCO had allowed an individual he knew to be unregistered to trade in the firm’s proprietary account, thereby violating NASD Rule 1031, which imposes the registration requirement. For this violation, the CCO was suspended in any supervisory capacity for two months.
Failure to Preserve E-Mails
Securities firms are required by law to retain any e-mail communications relating to the business for a minimum of 3 years. However, over the years numerous individuals and firms have been sanctioned for their failure to do so.
In March 2011, FINRA sanctioned a CCO for failing to ensure that his firm preserved its e-mails in accordance with Exchange Act Rule 17a-4. For these violations, the CCO was suspended for 30 business days and fined (in conjunction with the firm) $35,000.
NASD Conduct Rule 3011 and Rule 17-a-8 of the Securities Exchange Act requires broker-dealers to implement an antimony laundering (AML) program designed to comply with the Bank Secrecy Act of 1970. As part of this program, the person responsible for the AML program is responsible for filling out “Suspicious Activity Reports” (SARS) if they discover activity which appears to trigger various red flags which hint at potential illicit activity.
Recently, FINRA has brought a number of administrative actions against CCOs for a variety of failures relating to their firms’ AML policies and procedures. This includes cases against Elizabeth Pagliarini in February, 2011, and Zulina Visram, in May 27, 2011. Sanctions for these failures include both fines and suspensions.
What is clear from the article written by Rubin and Kelly, is that many of the recent administrative actions taken by FINRA and the SEC in the past eight months indicate that the personal liability of Chief Compliance Officers at Broker-Dealers and investment advisers is on the rise. Not only do CCOs have many more regulations they need to make sure their firms comply with, but they also need to be wary of the risks that they face on an individual basis if they fail to fulfill these regulations in a manner that the regulators feel is appropriate. The stakes are certainly getting higher for CCOs.
Click here to read the full text of the article called The Girl with the SEC/FINRA Tattoo: Disciplinary Actions Taken Against Chief Compliance Officers (November 2010 – June 2011) written by Brian L. Rubin and Katherine L. Kelly.