SEC Commissioner Peirce Weighs-In on CCO Liability
Commentary by Steven Lofchie
In a statement in support of a recently settled action against a chief compliance officer ("CCO"), SEC Commissioner Hester M. Peirce urged the SEC to adopt a "liability framework" for the bringing of enforcement actions against CCOs.
She highlighted a proposal for such a framework by the New York City Bar Association which would require the SEC to address the following considerations:
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whether the CCO made a good faith effort to fulfill its responsibilities;
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if the violation related to a fundamental aspect of a well-run compliance program;
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whether the CCO had opportunities to resolve the compliance failure and for how long the violations persisted;
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whether the violation related to a discrete, specified obligation under securities law or the firm's compliance program generally;
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if the SEC has previously issued rules or guidance on point to the substantive area of compliance to which the violation relates; and
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whether there are any additional aggravating factors that added to the severity of the violation.
Commissioner Peirce measured the facts of the CCO's misconduct against the above framework and concluded that the enforcement action was justified.
Ms. Peirce emphasized that enforcement actions should not be brought against CCOs lightly, as the scope of the job and the complexity of the rulebook almost inevitably results in some level of compliance failures. She expressed concern that rushing to impose charges on compliance officers could deter well-qualified candidates from pursuing compliance positions, which would be detrimental to the industry (see also SEC Commissioner Peirce Recommends Review of Compliance Officer Liability).
Commentary
As the Commissioner points out, the SEC's rulebook is very fat and the SEC is proposing rules to make it materially fatter. There are likely few, if any, firms that are always in compliance with all of the SEC's rules, as those rules may at any time be reinterpreted by the SEC. If CCOs are to be held strictly liable for any compliance failure at a firm, we could just round them all up in advance like in that Tom Cruise movie adapted from the Philip K. Dick book. In the absence of such a strict liability standard, it is appropriate to adopt a legal framework against which the SEC can judge whether it makes sense to bring an enforcement action against a CCO.