Securities Litigation

In a strongly-worded public statement last week, SEC Commissioner Gallagher chided the Commission for "cutting off the noses of CCO's to spite its face." Explaining his dissent in two recent enforcement actions imposing sanctions on investment-advisor Chief Compliance Officers, the Gallagher accused the Commission and its Enforcement staff of wrongly blurring the lines between the CCO's (staff) function of administering compliance programs and the business-line obligation to implement them (through supervision). Gallagher is "especially worried" about creating perverse incentives that will dissuade Compliance personnel from "taking ownership of the implementation of policies and procedures." The problem is especially acute for smaller advisors: "To put it bluntly, for the vast majority of advisers, CCOs are all we have. They are not the first line of defense, they are the only line of defense." Gallagher noted that the SEC oversees about 12,000 IAs - over twice the number of registered broker-dealers and without the interposition of FINRA as a self-regulatory organization.

Gallagher called for clarification of Rule 206(4)-7, whether by amendment or guidance to address distinctions between line management and CCO roles and liability.

The two prior actions involved failure to disclose conflicts of interest, In re Blackrock Advisors, LLC, Rel. No. 2014-71 (Apr. 20, 2015), and a firm president's theft of client assets, In re SFX Financial Advisory Management Enterprises, Inc. , Rel. No. 2015-120 (June 15, 2015).

Commissioner Gallagher's public statement is here: http://www.sec.gov/news/statement/sec-cco-settlements-iaa-rule-206-4-7.html

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Resident in the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.

© 2015 by Thomas K. Potter, III (all rights reserved).