When Theodore Urban, general counsel at Ferris, Baker Watts Inc., spotted and questioned a broker's suspicious trading patterns in 2007, he triggered a five-year probe by U.S. regulators who said he failed as a supervisor.
After the U.S. Securities and Exchange Commission began its investigation, Urban, who had worked at the SEC and U.S.
Commodity Futures Trading Commission before joining the broker- dealer, said he had urged senior executives to fire the broker. Even though an administrative law judge exonerated him, his ordeal didn't end until Jan. 26, when the full commission dismissed the matter without an opinion.
In dropping the case, the commissioners didn't explain when a compliance officer or in-house counsel at a broker-dealer or investment adviser becomes a supervisor liable for an employee's actions. Without knowing where their responsibilities lie, compliance officers and in-house lawyers may be reluctant to report wrongdoing when they find it. SEC Commissioner Daniel Gallagher addressed what he called this “dangerous dilemma” last month.
“Robust engagement on the part of legal and compliance personnel raises the specter that such personnel could be deemed to be ‘supervisors' subject to liability for violations of law by the employees they are held to be supervising,” he said in a speech in Washington on Feb. 24. The SEC, he said in a phone interview Feb. 29, needs to offer guidance so that those overseeing compliance “won't be afraid to be zealous because they'll be tagged as a supervisor.”
Guilty Plea
The suspicious trading at Ferris involved Stephen Glantz, a broker. In 2007, the U.S. attorney in Cleveland accused Glantz and an unregistered investment adviser of scheming to artificially increase the stock price of Innotrac Corp., a company that provides e-commerce fulfillment services.
Glantz pleaded guilty in September 2007 to one count of stock fraud and one count of making a false statement. He was sentenced to 33 months in prison. Glantz couldn't be reached for comment; his lawyer, Angelo Lonardo of Cleveland, didn't return a call seeking comment.
The SEC began investigating Urban's supervision of Glantz in 2007, and Urban, the firm's top in-house lawyer, retired that same year. Ferris, which had $18.5 billion under management in 57 offices and was entirely employee-owned, was sold to Royal Bank of Canada in 2008. After RBC acquired Ferris, it changed the name to RBC Wealth Management. Tammy Benson, a bank spokeswoman, didn't return a call seeking comment on Urban's case.
Urban said he was fortunate in some ways because he didn't need to look for full-time employment. Since leaving Washington- based Ferris, Urban has set up a consulting firm to advise on securities matters as well as pension issues.
“After a long and stable career, I wasn't in need of finding another full-time position,” said Urban, who started at Ferris in 1984. “For someone in a different financial circumstance, it would have been almost impossible to bear a five-year ordeal like this.”
Not Litigated
Cases like Urban's aren't typically litigated because of the time and expense involved. Urban hired John Sturc, a partner at Gibson, Dunn & Crutcher LLP, to represent him. Sturc declined to disclose his legal fees in the matter, although Urban said Ferris indemnified him for his expenses.
Sturc said the case presented an important issue.
“There are no standards comparable to generally accepted audit standards by which the SEC can evaluate the conduct of a compliance officer,” he said.
Urban had a hearing before the SEC's chief administrative law judge, Brenda P. Murray, in March 2010. Six months passed before she released her decision, which held that although Urban was, under the law, the broker's supervisor, he “performed his responsibilities in a cautious, objective, thorough and reasonable manner.” As a result, “Urban did not fail to supervise,” Murray said.
‘Pure Folly'
The SEC's Enforcement Division, in a move Urban described as “pure folly,” petitioned the commission for a review of the decision. Sturc filed a cross-motion for a review, urging the full commission to reconsider the finding that Urban was a supervisor.
The amount of the penalty can vary with the case, according to Christian Mixter, a partner in the Washington office of Morgan Lewis & Bockius LLP. Mixter was the head lawyer on an amicus brief filed urging the commission to clarify the role of a supervisor and articulate clear standards on behalf of the National Society of Compliance Professionals.
Arguments were postponed twice. On Jan. 26, the agency dismissed the case, leaving compliance officers and in-house counsel with no guidance.
The dismissal was triggered when three commissioners -- SEC Chairman Mary Schapiro, Elisse Walter and Gallagher -- recused themselves and the remaining two couldn't agree. That prompted Gallagher to address the topic in his speech.
“Firms and investors are best served when legal and compliance personnel feel confident in stepping forward and engaging on real issues,” he said, according to a transcript posted on the agency's website. “Deterring such active involvement will erode investor confidence in firms, to the detriment of all.”
‘Deemed a Supervisor'
Gallagher's current view diverges somewhat from the one he expressed in 2009, when he was co-acting director of the SEC's Division of Trading and Markets. He said then that an in-house lawyer “can be deemed a supervisor when other members of senior management ‘involve him as part of management's collective response to the problem.'”
The difference isn't a change of opinion as much as a change of his status.
“I was a staffer at the time and had a lot less discretion,” Gallagher said in the interview last month. “The standard is too vague and we need to provide further guidance,” he said by phone today.
He said strong compliance officers are even more important with “all of the new investment advisers coming on board.” Because investment advisers have no self-regulatory organization comparable to the
Financial Industry Regulatory Authority, which regulates broker-dealers, there is “no intermediary” to oversee compliance between the firms and the SEC.
As part of those efforts, the SEC on Nov. 28 accused three investment advisers of failing to enact compliance procedures. The three cases settled. In one, the firm's owner, who functioned as chief compliance officer, was separately fined $50,000.
Apparent Deficiencies
The SEC's enforcement division is also focused on ensuring that broker-dealers have compliance programs in place by bringing enforcement actions against those with apparent deficiencies.
Robert Kaplan, co-chief of the Enforcement Division's Asset Management Unit, said in a statement that the “failure to adopt and maintain adequate compliance policies and procedures is a significant violation of the federal securities laws.” Kaplan didn't return a call seeking comment on Urban's case.
The actions create another specter of uncertainty, according to John Walsh, a partner in the Washington office of Sutherland Asbill & Brennan LLP. Walsh, who worked at the SEC for 23 years, created the Office of Compliance Inspections and Examinations.
“For years, when examiners come and find problems they would send a letter to fix the problems,” he said in an interview. “What makes these cases different is that the SEC is hitting the firm, and in one case, the compliance officer, with an enforcement action.”
‘Self-Report'
He said he fears that if chief compliance officers think they could be charged, they may be reluctant to “self-report” information to the SEC.
A joint study by the Society of Corporate Compliance and Ethics and the Health Care Compliance Association found that “most compliance professionals operate under significant amounts of stress, enough so that they are losing sleep and have considered leaving their jobs because of the stress.”
Gallagher said in the interview that he wants his speech to relieve some of the uncertainty in the profession.
“If they're scared of their own shadows, it will be counterproductive,” he said.
--Bloomberg News--
