SEC members split on whether agency unfairly targets compliance officers

Gallagher, Aguilar at odds on how regulator treats CCOs

Jul 1, 2015 @ 2:01 pm

By Mark Schoeff Jr.

Add a debate about whether chief compliance officers are unfairly being targeted by regulators to the list of issues dividing members of the Securities and Exchange Commission.

Two weeks ago, Commissioner Daniel Gallagher issued a dissent to two recent cases that the agency brought against compliance officials for failing to monitor advisers' outside business activities and failing to set up procedures to stop theft from client accounts.

The SEC's focus on compliance operations will backfire, Mr. Gallagher said. A section of securities laws, known as 206(4)-7, requires firms to write and implement compliance policies.

“Given the vitally important role played by compliance personnel, I am very concerned that continuing uncertainty as to the contours of liability under Rule 206(4)-7 will disincentivize a vigorous compliance function at investment advisers,” Mr. Gallagher said.

On Monday, Commissioner Luis Aguilar countered that Mr. Gallagher's statement was off the mark.

“In the seven years that I have served as a commissioner, it has been my experience that the commission does not bring enforcement actions against CCOs who take their jobs seriously and do their jobs competently, diligently, and in good faith to protect investors,” Mr. Aguilar wrote in a statement Monday. “I do not believe these CCOs should fear the SEC.”

Mr. Aguilar provided statistics that show that only eight out of 130 SEC cases against investment advisers in 2014 involved chief compliance officers. That's a smaller share — 6% — than in 2013 (27 out of 140, 19%), 2012 (16 out of 147, 11%) and 2011 (14 out of 146, 10%).

Although Mr. Aguilar has the statistics backing him up, Anna Hawkins, managing director of compliance consulting firm Blue River Partners, said that she agrees with Mr. Gallagher. She asserts that the SEC rules for compliance programs are too vague.

“[Mr.] Gallagher makes a very good point that CCOs are not given a clear line of sight on what their responsibilities are,” Ms. Hawkins said. “They always say to us, 'I don't know what I don't know.' They're being given an impossible task.”

Todd Cipperman, principal at Cipperman Compliance Services, also sides with Mr. Gallagher. He contends that the SEC should never target a compliance officer unless he or she actively participates in a fraud.

“I think it sends all the wrong messages,” Mr. Cipperman said. “It pits the CCO against his or her own management. They become more concerned about their own liability than helping the firm build a culture of compliance.”

An SEC official said that the agency is not focusing specifically on chief compliance officers.

“It's not [our] intent to put a target on the CCO's back,” Mavis Kelly, assistant director of the SEC National Examination Program, said during a panel at an Insured Retirement Institute conference on Monday.

Even if the SEC isn't going after CCOs, the agency must give them better parameters on how to do their jobs, according to Ms. Hawkins.

“The SEC needs to work directly with these CCOs and give them specific guidelines,” Ms. Hawkins said.

Another way to remedy the situation is for the SEC to go after senior management, rather than CCOs, for violations, Mr. Cipperman said.

“They'll view [compliance] as their responsibility and not treat the CCO as the person to take the bullet if something goes wrong,” he said.


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