CCO Liability – Line in the Sand

In an October 2013 speech that delved into CCO liability, SEC Chair Mary Jo White said, “(a)lthough we do occasionally bring enforcement actions against compliance personnel, compliance officers who perform their responsibilities diligently, in good faith, and in compliance with the law are our partners and need not fear enforcement action.”

As the saying goes, actions speak louder than words, so until the SEC draws a hard straight line in the sand indicating the level of follow-through/due diligence by a chief compliance officer (CCO), there will be a need for protecting yourself against escalating defense cost. Remember, a CCO needs to fight for his or her reputation to ensure future employment. The “broken window” approach does not allow for settlement without an admission of guilt. This is contrary to the CCO’s goal of continuous employment and a secure financial future.
3Recently, I attended the Investment Company Institute (ICI) Compliance Conference in Washington, DC that reinforced the belief that CCOs need to protect themselves and that not everything is warm and fuzzy with the regulators. As a matter of fact, from my perspective as an insurance broker dealing with investment industry claims regularly, the concerns go beyond the SEC and carry over to the DOL. It makes you wonder how closely the two agencies are working together when initiating investigations against investment management firms.

As stated at the ICI Conference, “Notwithstanding those reassurances, the SEC has brought actions against CCO’s for negligence in conducting reviews of client accounts and for failing to put policies and procedures into place. These cases seem to fall outside the more egregious actions one would expect of enforcement action. Orders stating that the CCO was responsible for “implementation” of firm’s policies and procedures prompted dissent from former Commissioner Gallagher, who believes that the SEC is trending toward strict liability for CCO’s actions. This sends “a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that, under (the Rule), is the responsibility of the adviser itself.”

The point is, the CCO is a target, and the legal defense costs are going to add up. Don’t expect the regulators to reimburse you, even if you come out on top. This is demonstrated by the Thomas Delaney case that recently went through an EAJA (The Equal Access to Justice Act) administrative hearing to recoup attorney fees and litigation expense. Within the SEC Initial Decision Release No. 976 Administrative Proceeding File No. 3-15873, it states the following

The Division acknowledges that its position encompassed two charges – aiding and abetting, on the one hand, and causing, on the other.” Div. Resp. at 8. But it argues that Delaney’s victory on the aiding and abetting charge is meaningless for EAJA purposes because it was not a “discrete” portion of the proceeding. Id. at 8-10. I reject the Division’s assertion, for which it cites no legal precedent, that claims cannot be discrete if they involve the same underlying facts. Although I found, and the parties agree, that similar evidence was relevant to both the aiding and abetting claim and the causing claim (see Initial Decision at 49; Delaney Supp. Resp. at 4; Div. Resp. at 9-10), this does not displace Congress’s creation of different substantive law standards and remedies for the two distinct theories of secondary liability.

The bottom line is this: defense costs continue and they add up whether you did something wrong or not. This creates the need to consider an individual liability policy for Chief Compliance Officers. Unless the firm’s bylaws appoint the CCO as a corporate officer and/or filed with the state in which the firm is incorporated, they are under no obligation to indemnify the CCO’s legal fees. As a matter of fact, the CCO could be at odds with his/hers employer; thus, they may withhold any indemnification. There is an insurance product that provides the necessary defense costs, including situations where the employer withholds indemnification for a certain period of time. Keep in mind that the employer’s liability policy may not have the appropriate coverage in place and that it’s the employer who owns and controls the insurance policy, not you, the CCO.

 

Andrew J. Fotopulos is President of Starkweather & Shepley Insurance Corp. of Massachusetts and their Financial Institution Practice Group.  He also developed CCO Protect (www.ccoprotect) offered through RISCO Insurance, the wholesale division of Starkweather & Shepley Insurance.

Related Content

Latest Content

Do your Fund Documents Clearly Disclose Receipt of Accelerated Monitoring Fees?

Somewhat more reminiscent of the broken-windows enforcement era, two affiliated private equity advisers managing billions settled with the SEC on charges that they failed to make pre-commitment disclosures in fund governing documents related to accelerated fees received from portfolio companies. Interestingly, according to the Settlement Order, the advisers had made some disclosures in fund documents … Continued

With New Risk Alert, SEC Doubles Down on Best Execution

On July 11, 2018, the SEC issued a Risk Alert outlining commonly found compliance issues related to best execution by investment advisers. Advisers have an obligation to seek best execution of client transactions, taking into consideration quantitative factors such as execution quality and commission rate, as well as more qualitative factors such as the value … Continued

The Cost of Compliance: Understanding and Leveraging Resources

For compliance officers, obtaining the necessary tools and resources to build an effective compliance program can be costly and difficult to implement. How do you distinguish the best in class, the most cost-efficient and effective for use in your program? In this ComplianceCast, speakers David Porteous of Faegre Baker Daniels and Korrine Kohm of Ascendant … Continued

California Privacy Law Brings GDPR-Lite to the U.S.

New Act Will Give Consumers Rights to Access and Delete Their Data In what has become an ongoing race among states to have the toughest privacy regulation in the U.S., California has jumped to the front. On June 28, 2018, California’s legislature unanimously passed a privacy bill that was later signed by Governor Jerry Brown, … Continued

SEC Deficiency Letters Require Swift Action

On the topic of SEC Deficiency Letters, if you have received one, you must promptly take corrective action. The SEC will not tolerate inappropriate delay. The SEC recently imposed an $8 million civil penalty on an adviser who, among other things, failed to promptly take corrective action in its Form ADV filing, following receipt of … Continued

Mailing List

Subscribe to the Ascendant Compliance email list for the latest compliance resources, conferences, ComplianceCasts™, and more.

Loading form...

Contact Us

Ascendant works together with clients to identify and assess critical needs through customized plans. If you need assistance with compliance functions, regulatory services, cybersecurity or technology tools, we’d love to speak with you.