The Wall Street Journal recently reported concerns expressed by SEC Commissioner David Gallagher concerning the potential for enforcement actions by the SEC against compliance officers to encourage them to avoid responsibility. That’s a rather pessimistic view of the situation – a different opinion might look at what happened and say that the SEC is just incentivizing compliance professionals to become securities whistleblowers.
Both enforcement actions cited by the paper against the chief compliance officers of the companies fined them for failure to implement certain policies and procedures within the compliance department. In one case, the SEC held the CCO liable for failure to implement written procedures designed to prevent the violations, as well as for knowing about the violations and failing to report them to the board of directors. In the other, the Commission argued that appropriate implementation of compliance policies would have detected a multi-year client asset theft.
The charges were brought for violations of Rule 206(4)-7 under the Investment Advisers Act of 1940. The rule requires the adoption and implementation of written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.
Gallagher expressed concern that the rule is unclear, the SEC hasn’t provided sufficient guidance on its interpretation of the rule, and that it may be holding compliance officers strictly liable for poor implementation of internal rules by business professionals, rather than a compliance failure.
On the other hand, if the business isn’t able to implement its compliance procedures, perhaps the solution is for those responsible for overseeing them to tell the Securities and Exchange Commission about the company’s failures. One of the purposes of the Dodd-Frank Act’s program to incentivize whistleblowers is to get the SEC involved in problem situations earlier. Moreover, the SEC whistleblower program expressly allows compliance professionals to report their company when the rule’s express time period for internal reporting has passed.