Watching the Detectives: Concerns and Conflicts Among Compliance Officers

Welcome to the June 2021 edition of our newsletter!  In this issue, we’ll examine how the ability to hold financial-sector compliance officers personally liable for their professional conduct has affected regulations around that conduct.

Eyes on the Inside Guys: Scrutiny of Compliance Officers Grows in Manic Markets

The SEC has often used civil litigation as a means of providing accountability for bad actors as a means of deterrent to prevent others from engaging in similar conduct.  The New York City Bar Association, whose firms include many of the largest financial services firms, recently issued a framework, developed with input from securities industry trade groups, to recommend guidance for holding compliance officers accountable.  The group warned that without proper context, “[t]hese career-ending enforcement actions discourage individuals from becoming or remaining compliance officers and performing vital functions that regulators stretched too thin would otherwise be unable to perform, particularly when other options, such as providing legal advice or becoming an outside compliance service provider or businessperson, involve less personal risk.”  The group added that one of the commissions main goals, deterrence of future bad conduct, may not be accomplished by holding compliance officers personally liable, stating in part: “[t]he system designates CCOs as personally responsible for something –securities law compliance at their firms – that is ultimately determined by other human beings whom the CCO cannot control and, as a cost center, is poorly suited to do so.  CCOs do not have any special anti-retaliation protection beyond standard whistleblower laws available to everyone and that do not apply to internal reporting, and the system does not provide for any minimum number of resources required to be provided to the CCO.  Despite this structure, CCOs must still make yes or no decisions, frequently in real time with limited guidance from regulators and relatively limited factual clarity.  We believe that these constraints, directly or indirectly, result in many of the errors in judgment or even purposeful or neglectful conduct that enforcement actions are brought against. The most efficient way to deter problematic practices by CCOs is to devise mechanisms to eliminate or at least mitigate these constraints.”

The report is careful to separate errors that result in material harm from intentional fraud, urging the SEC to prove that the conduct of a compliance officer that aided others in committing fraud before making a fraud allegation part of a conduct charge.  Another means by which the officer could be charged, the report adds, is by obstructing an inquiry, and the framework sought to establish credit for cooperating with an inquiry versus hindering it.

From the perspective of the accused company – and perhaps its compliance officers as well – one key component to such inquiries is understanding context and relationships.  How long have the relevant parties worked at the company, and in their relevant functions?  What are their working relationships like?  What are their personal lives like, and do stressors exist there which could be used to rationalize bad conduct?  As regulators become more concerned about policing the conduct of large firms, especially in financial services, it is in their interest to obtain an outside perspective that holistically examines issues raised in such conduct charges, and the context of the situation, which may provide evidence of mitigating circumstances.