SEC’s Aguilar, Gallagher split on policing advisers’ compliance

June 30, 2015

In a June 18 statement explaining his dissent in two recent enforcement actions against chief compliance officers at investment advisers, Commissioner Daniel Gallagher of the Securities and Exchange Commission pointed out that for the vast majority of the 11,700 investment advisers registered with the SEC, in-house compliance officers are “the only line of defense” against securities law violations. The SEC is undermanned and there’s no self-regulating organization for investment advisers, unlike broker-dealers, the commissioner said. So it’s critically important, he said, for the SEC to encourage chief compliance officers to perform their duties with vigor. According to Gallagher, that means the agency should stop using the blunt instrument of enforcement actions and start think about revising its rules in order to protect compliance officers when other people at their firms do something wrong.

SEC Commissioner Luis Aguilar agrees with Gallagher about the crucial role of chief compliance officers in assuring the integrity of the securities industry. But that’s just about the only ground he and Gallagher share on this topic, based on Aguilar’s public response to Gallagher, issued Monday. Unlike his fellow commissioner, Aguilar believes the SEC is already sending a message of support and restraint to investment advisers’ chief compliance officers. Any misunderstanding of that message, he implied, has been exaggerated by Gallagher’s statements.

“While I respect the views of my fellow commissioners, based on what I’m hearing from the CCO community, the dissent, and the resulting publicity, has left the impression that the SEC is taking too harsh of an enforcement stance against CCOs, and that CCOs are needlessly under siege from the SEC,” Aguilar said.

The contrasting statements by Gallagher and Aguilar represent an unusually public debate among commissioners over the SEC’s enforcement policies. (I owe thanks to Reuters’ SEC beat reporter Sarah Lynch for telling me about the commissioners’ dueling statements.) Interestingly, both Gallagher and Aguilar are expected to depart their seats in the near future. The White House is already vetting replacements for Gallagher, a Republican, who reportedly decided last month to resign after four years on the commission. Aguilar, a Democrat, reached the end of his appointed term earlier this month.

Gallagher’s brief statement, issued after his dissents in a case against BlackRock Advisors in April and against SFX Financial Advisory Investment Management in June, argued that the SEC left too much uncertainty for compliance officers when it issued new rules governing their conduct in 2003. The regulation “offers no guidance as to the distinction between the role of CCOs and management in carrying out the compliance function,” Gallagher wrote. And the SEC’s interpretation of the rule, which has come only through enforcement actions, “are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that  is the responsibility of the adviser itself,” Gallagher wrote. “Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties and responsibilities to avoid liability when the government plays Monday morning quarterback.”

To encourage compliance officers, Gallagher said, the SEC ought to consider amending its rules or at least issuing new commission-level guidance to clarify the officers’ roles and responsibilities. “The status quo simply will not do,” he wrote. “As it stands, the Commission seems to be cutting off the noses of CCOs to spite its face.”

In Monday’s much longer and heavily footnoted response to Gallagher, Aguilar said the SEC’s actions already show that honest and diligent chief compliance officers have nothing to fear from the agency. Since 2009, the SEC has brought fewer than 20 enforcement actions a year against compliance officers, with the exception of 2013, when it brought 27 cases. Those cases typically comprise less than 15 percent of the SEC’s actions against investment advisers and investment companies, Aguilar said – and in most instances in which the SEC did sue a compliance officer, that officer wasn’t just responsible for compliance but was also an owner, CEO, CFO, general counsel or other high-ranking official at the firm.

In fact, according to Aguilar, in the 11 years since the SEC enacted compliance officer rules, the agency has brought a total of only eight cases against executives whose only title was chief compliance officer. Among those eight were the two that prompted Gallagher’s comment.

“I do not believe that these few cases should raise undue concerns,” said Aguilar, whose statement highlighted his own history as general counsel and head of compliance at Invesco. “I also do not believe that the two recently settled cases signify the beginning of some nefarious trend to  target CCOs. The facts involved in these cases-these very few cases  demonstrate egregious misconduct.”

The commissioner also refuted Gallagher’s implication that the SEC is not thinking enough about how to back chief compliance officers. Aguilar said the agency has brought two actions against investment adviser executives who ignored or obstructed guidance from their CCOs and when it revised swaps rules earlier this year added a provision specifically prohibiting swap data repository officials and employees from lying to compliance officers. “These enforcement and regulatory actions bring home the point that firms must support the important work of their CCOs,” he wrote.

It’s certainly possible that both Aguilar and Gallagher are right: Uncertainty about enforcement of the rule for compliance officer could well bring fear, even if that fear isn’t actually justified by the SEC’s actions. Regardless, it’s exciting to see the discussion taking place out in the open.

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