The SEC has compliance officers in their sights, but by dismissing a recent case against one of them, the commission failed to give clear instructions on the scope of their responsibilities.
What is apparent is that the Securities and Exchange Commission sees compliance as an area ripe for scrutiny.
“Compliance programs are front and center for us,” Bruce Karpati, co-chief of the Asset Management Unit in the SEC's Division of Enforcement, said at a compliance seminar last week. “There's going to be more soon on that in terms of enforcement actions.”
The most recent signal from the SEC regarding compliance, however, left plenty of room for interpretation — and misunderstanding.
In a decision Jan. 26, the SEC split 1-1 on whether Theodore Urban, former general counsel of Ferris Baker Watts Inc., should have taken action to fire a rogue broker rather than recommend that the broker's supervisors discipline him. The tie resulted in the dismissal of the case.
That leaves unresolved questions surrounding whether compliance officials also are supervisors and how much latitude they have in imposing punishment.
“It's good for Mr. Urban, but it leaves everyone else in a state of confusion on this issue,” said Linda Riefberg, special counsel at Fried Frank Harris Shriver & Jacobson LLP.
Compliance officials are “unsure about what their legal liability is. It changes the scope of their responsibility and how they see themselves,” Ms. Riefberg said.
THE BACKGROUND
Brenda Murray, the SEC's chief administrative-law judge, ruled in September 2010 that a Ferris Baker Watts broker, Stephen Glantz, violated securities laws and that Mr. Urban was a supervisor. But she dismissed the proceedings against Mr. Urban, finding that he had done all that could reasonably be expected to prevent Mr. Glantz's behavior.
The SEC commissioners heard the case on appeal, but SEC Chairman Mary Schapiro and commissioners Elisse Walter and Dan Gallagher recused themselves. An SEC spokesman declined to comment about why they sat out.
The SEC would have had to reach a conclusion if all five commissioners had participated in the appeal.
The recusals didn't sit well with Brian Hamburger, managing director of MarketCounsel, a law firm that specializes in compliance.
In his view, the commissioners who stayed on the sidelines abdicated their duty.
“This is one of the things that I'm so fed up with,” Mr. Hamburger said.
“It's a real disservice to the industry. There's no answer that comes out of [Mr. Urban's case] other than: "We don't have effective leadership at the SEC,'” Mr. Hamburger said.
After numerous instances of misconduct by Mr. Glantz came to light, Mr. Urban in December 2004 wrote a memorandum to Louis Akers, vice chairman and head of retail sales, and Patrick Vaughn, assistant head of retail sales, recommending that Mr. Glantz be fired.
Mr. Akers, described as having a “domineering personality,” didn't dismiss Mr. Glantz, a top revenue producer, but rather put him under special supervision.
It was generally understood at the firm that Mr. Akers' decisions wouldn't be challenged, even by the chief executive or the board.
In 2007, Mr. Glantz, who admitted to a drug problem, pleaded guilty to securities fraud and served one year of a 33-month sentence.
Mr. Urban maintained that he wasn't Mr. Glantz's supervisor and couldn't terminate him without Mr. Akers' concurrence. In its case against Mr. Urban, the SEC staff argued that Mr. Urban was required to take the situation to the company board, and if they did not act, he should have resigned.
LACK OF GUIDANCE
Following the dismissal of Mr. Urban's case, the only guidance that compliance officials have is Ms. Murray's original ruling.
“They should act as if they're going to be looked at as Ted Urban was,” said Ms. Riefberg, a former chief counsel at the Financial Industry Regulatory Authority Inc. “From this moment, they should assume they will be seen as supervisors, if they take on the sort of responsibilities that Ted did, even if they are not the direct-line supervisor.”
But compliance professionals resist being labeled supervisors. In the Urban case, the Securities Industry and Financial Markets Association filed an amicus brief that argued that general counsels, as well as compliance and legal staff, aren't supervisors.
The best approach for compliance employees is to keep track of when they detect a problem, when they report it and how they make firm executives aware of the situation, according to Steve Thomas, director of Lexington Compliance, a division of RIA in a Box LLC.
“If I'm keeping my job, I'm documenting all of that,” said Mr. Thomas, a former South Dakota chief compliance examiner.
Although experts parse what the Urban case means or doesn't mean, the SEC is going to keep the pressure on compliance operations. The SEC's Asset Management Unit penalized three investment advisers in late November for inadequate compliance systems.
At the SEC seminar last week, Rosalind Tyson, director of the SEC's Los Angeles office, said that firms should design compliance programs tailored to their core business activities and then follow through on them.
“For heaven's sake, don't adopt policies that you're not going to implement,” she said. “Make sure you know who should do what and that they're doing it.”
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