U.S. compliance officers need clarity on status as ‘supervisors,’ industry professionals say

May 8, 2012

By Stuart Gittleman

NEW YORK, May 8 (Thomson Reuters Accelus) – The U.S. Securities and Exchange Commission’s dismissal of failure-to-supervise proceedings against a broker-dealer’s general counsel did little to ease compliance officers’ concerns over their potential for acting in a supervisory capacity, according to leading industry professionals.

In January the SEC in a one-one split dismissed charges against the lawyer, Theodore Urban, for failing to prevent, detect and stop a stock fraud conducted by a registered representative at the broker, Ferris Baker Watts, and a customer of the firm.But regulators, particularly the SEC and the Financial Industry Regulatory Authority, need to provide more clarity on when a compliance officer may be deemed to have acted in a supervisory capacity, directors of the National Society of Compliance Professionals and speakers at a society program said.

FINRA found that Cantone Research and Christine L. Cantone, its chief compliance officer, failed to reasonably supervise a registered rep at the firm to stop him from conducting a fraudulent scheme, said Michael Solomon, FINRA’s New York regional director. He said Cantone, who was also vice president and financial and operations principal at the firm, which had 14 registered persons, “blindly relied” on the rep’s representations and did not follow up on red flags.

Whether FINRA sanctioned Cantone as a compliance executive or in her other roles, chief compliance officers need more clarity on how to act in that capacity, said Glen Barrentine, an NSCP director and special counsel at Cadwalader Wickersham & Taft. For example, a recent SEC order that two OptionsXpress compliance officers, who agreed to cooperate in proceedings against firm and others, cease and desist from violating rule 204 of Regulation SHO, could have been more specific on the supervisory aspect.

The two officers “screwed up” but it is not clear why were they sanctioned, said David DeMuro, the session’s moderator, an NSCP director and deputy general counsel at AIG.

Another area of potential CCO liability involves the self-reporting provisions of FINRA rule 4530, which took effect in July 2011. The rules have been criticized for requiring firms to have a “reasonable conclusion” that they have not committed the pettiest violation.

FINRA expects firms to self-report serious violations and that the regulator has “pretty high standards” that look for “significant systemic failures,” Solomon said. Examiners will ask, “what are the firm’s procedures designed to accomplish?” and whether the firm has a “clear escalation process,” including but not limited to a specific dollar threshold for triggering the obligation, he said.


The Jumpstart Our Business Startups, or JOBS, Act is designed to ease capital formation but it also offers additional compliance uncertainties, said Norman Champ, deputy director of the SEC’s Office of Compliance Inspections and Examinations.

Title I of the JOBS Act, which was effective on passage with no SEC rulemaking, gives “emerging growth companies” some relief from the Sarbanes-Oxley Act and certain registration requirements. Champ suggested that firms and compliance executives review the SEC’s FAQs on the act.

Another provision of the JOBS Act, which does require rulemaking, would exempt certain “crowd-funding” offerings of Internet-based capital raising. The exemptions are being developed, and the SEC is working on the types of capital-raising portals, how and to whom the investments may be marketed, and how to examine them, Champ said.

A key issue in the private placement provisions of the JOBS Act is ensuring that investors are accredited and that brokers are bringing these offerings to market and selling them properly, Champ said. One concern of the SEC compliance office is that since many of the brokers have not advertised before, it may be challenging to determine what types of exams to do.

The SEC has FAQs on the registration and deregistration provisions of the JOBS Act, and FINRA will need to review its rules on research and roadshows, Champ said.

FINRA is already bringing cases over private placement offerings, particularly involving due diligence on products and following up on red flags, said Solomon.

And Investment Management is looking at performance advertising, Champ said. Despite the available guidance, but with the exam warnings in mind, brokers should “take a long, hard look” before taking private companies public, DeMuro said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)


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