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Federal Court Rules that Chief Compliance Officer Lacked the Necessary Qualifications

 A federal court found that a Chief Compliance Officer violated the Advisers Act’s compliance rule because he was unfit for the role he undertook.  The court determined that the CCO acted recklessly by assuming the compliance position despite his “complete lack of qualifications for that job.”  The court also found that the CCO aided and abetted his firm’s other regulatory violations including commingling of client assets, inflating valuations, and misappropriating assets.  The CCO was fined and barred from the industryThe firm and the firm’s principal were also fined and barred.

The Chief Compliance Officer must be “competent and knowledgeable” in the Advisers Act, according to the compliance rule’s adopting release.  An unqualified CCO in and of itself violates the compliance rule and can result in significant firm and personal liability.  Every firm should retain a third party CCO firm or hire a qualified regulatory professional.  Appointing whoever drew the short straw at the management meeting won’t cut it with the SEC.

CCO Again Loses Appeal that He Failed to Conduct Adequate Email Reviews

 The Chief Compliance Officer of a broker-dealer lost another appeal of FINRA discipline for failing to review emails.  The firm’s Written Supervisory Procedures required daily email reviews, but the CCO only sporadically reviewed emails and completely ignored email reviews for three months.  Although the WSPs stated that the CEO had email review responsibility, the CCO knew that the CEO was not conducting email reviews and that the job fell to the CCO.  The SEC rejected the CCO’s attempts to blame the third party email service.   The same CCO lost a similar appeal last year with respect to his prior employer.  The SEC notes that the firm and the CEO had responsibilities, but those obligations did not exculpate the CCO.

CCOs must proceed with caution with WSPs and work expectations to avoid assuming responsibilities that s/he will not or cannot undertake.  You may think you’re helping out or just being a good team player when, in fact, you are assuming significant regulatory liability.  No good deed goes unpunished when the work doesn’t get done.

CCOs Liable for Failing to “Meaningfully” Implement Compliance Programs


A unanimous SEC, in a decision upholding sanctions against a Chief Compliance Officer, stated that it will not exempt a CCO from liability if the CCO “fails meaningfully” to implement the compliance program.  Although the Commission will defer to “good faith judgments of CCOs made after reasonable inquiry and analysis,” the SEC will hold the CCO liable where the CCO engages in wrongdoing (or attempts to cover it up), “crosses a clearly established line,” or fails to implement policies and procedures for which he or she has direct responsibility.  In the case itself, the SEC upheld FINRA’s findings of CCO liability because the CCO abdicated his obligation to review emails and failed to follow up on red flags relating to payments to a disqualified individual.

We think the standard should be much higher i.e. that a CCO should only be liable if s/he participated in the wrongdoing, actively covered it up, or directly and personally benefited.  We in no way condone the lack of diligence alleged in this case.  Perhaps, the CCO should have been terminated (or never hired in the first place).  However, so long as the SEC continues to hold CCOs liable based on retrospective and subjective determinations of how well the CCO implemented the program, good compliance people will continue to either leave the industry or demand hazard pay.

CCO Fined and Barred for Failing to Conduct Rule 144 Due Diligence


A broker-dealer Chief Compliance Officer was fined $50,000 and barred from the industry for failing to implement procedures to prevent the unlawful liquidation of microcap securities.  FINRA asserts that the firm and its principals liquidated 74 million shares of microcap securities without satisfying Rule 144, thereby distributing securities in violation of the Securities Act.   The firm’s Written Supervisory Procedures designated the CCO as the person responsible for Rule 144 compliance.  FINRA rejected the CCO’s defense that the WSPs did not reflect how the firm actually operated.  FINRA also faulted the CCO for adopting inadequate WSPs, which failed to outline procedures to conduct adequate due diligence.

The CCO should review the compliance manual or WSPs and ensure s/he understands and undertakes all designated responsibilities.  If the CCO can’t or won’t follow the procedures, then s/he must revise the procedures to satisfy regulatory requirements while reflecting the firm’s accurate allocation of authority.

Compliance Officer Charged with Securities Fraud

The SEC charged a compliance officer with securities fraud and aiding and abetting his employer’s violations by “adding an aura of legitimacy” to an oil and gas offering fraud.  The SEC accuses the compliance officer with ignoring misstatements in offering documents and client communications and with failing to conduct required investor eligibility due diligence. The SEC also charges the compliance officer with filing false Form Ds with the Commission.

OUR TAKE: This is what we call “voodoo compliance” i.e. using purported compliance as a tool to further securities law violations.  The SEC has become wise to firms that implement sham compliance programs.