There is no “just following orders” defense for employees of registered investment advisers. We can appreciate the conundrum when your boss and mentor engages in wrongdoing; but, failing to resign and call out the wrongdoing can lead to significant civil and criminal penalties.
Corporate executives cannot avoid accountability by claiming that they were just following orders. The SEC has maintained that senior executives have a duty to investors and the markets to stop financial wrongdoing at the companies they steward. Once charged, the SEC will often use its leverage to encourage cooperation in cases against others in the C-Suite.
OUR TAKE: Compliance officers should avoid signing certifications that facilitate securities transactions. If the situation requires a certification, a CCO must conduct adequate due diligence to ensure the accuracy of all statements made. Also, we would recommend that a CCO obtains back-up certifications from others in the organization.
The SEC has charged a broker and his customer for conspiring to conceal alleged kickbacks in exchange for preferred IPO and secondary offering allocations. According to the SEC, the defendants agreed that the customer would kick back 24% of his trading profits. The defendants attempted to conceal the scheme by laundering the payments through multiple bank withdrawals of less than $10,000. The SEC maintains that the broker and the client repeatedly lied on compliance certifications about conflicts of interest and payments, which were required by the firms’ policies and procedures that specifically prohibited any type of conflict, allocation or payment scheme.
OUR TAKE: The SEC doesn’t often prosecute standalone (i.e. not dual hat) CCOs without an underlying client loss, but it will if the CCO ignores obvious compliance deficiencies of which he has notice. This is what we call “compliance voodoo” i.e. an appearance of compliance infrastructure without an effective program. This CCO had a compliance manual, did some quarterly testing, and hired a third party consultant. But, neither the CCO nor the firm took any action to actually implement relevant procedures to address cited compliance deficiencies.
OUR TAKE: It is noteworthy that the Head of Regulatory Reporting was the only individual specifically charged by the SEC in this action even though the firm paid a staggering settlement. Regulatory officers, including CCOs and FINOPs, continue to be targeted by the regulators.
OUR TAKE: It is noteworthy that the SEC took action against the trader himself rather than his firm, which presumably avoided liability because it had implemented adequate policies and procedures. SEC Commissioner Piwowar has previously indicated that the SEC should pursue individuals rather than firms.