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SEC Affirms Industry Bar and Financial Penalties against Chief Compliance Officer 

The SEC upheld an Administrative Law Judge’s decision against a Chief Compliance Officer related to his participation in a Ponzi scheme.  The SEC upheld penalties including an industry bar, disgorgement of compensation, and fines.  The SEC held that the CCO acted at least negligently in approving marketing materials that contained unverified statements despite numerous red flags raised by regulators, clients, and a clearing broker.  The respondent also served as the firm’s “due diligence officer” with responsibility for verifying statements in marketing materials.  The SEC rejected the respondent’s claim of immunity because of his role as CCO, citing an FAQ about Failure to Supervise liability for broker dealers: “A compliance role does not preclude liability where the respondent engages in conduct that ‘otherwise violate[s] the securities laws or aid[s] and abet[s] or cause[s] a violation.’”  The SEC criticizes the respondent for his failure to carry out his due diligence responsibilities by stating that it was his “actions and failures to act, not his designation as chief compliance officer, that is the basis for his liability.”

OUR TAKE: This is a very troubling precedent for CCOs, despite the damaging set of facts presented.  The SEC could have found liability solely because the respondent served as an officer of the company and continued to help create and approve marketing materials in the face of obvious red flags.  However, the SEC went further by suggesting that it need only prove that a CCO acted negligently with respect to the duties undertaken.  Moreover, the SEC points to its failure to supervise standards utilized in broker-dealer regulation to determine where compliance ends and management begins.