Compliance Officers and In-house Attorneys Remembering Rule Number One

Back on July 25, 2011, we blogged about the importance attached to chief compliance officers’ understanding the regulatory framework and guiding principles for what it is they do.  As we said then,

“Rule Number One

: Your Job is to “Administer” the Compliance Program: The CCO’s job function as mandated by Rule 206(4)-7 (the “rule”) is limited to “administering” the investment adviser’s compliance policies and procedures. While the rule contains no explicit definition for what the term administering means, the rule makes one thing clear, it is the adviser who is legally required to “adopt and implement written policies and procedures reasonably designed to prevent violation” of the Investment Advisers Act of 1940. What this means is that you are not the guarantor that your adviser will not experience a compliance failure. Nor is it necessarily true, from a supervisory perspective, that you are responsible for the compliance failures of others in the firm. To the contrary, the failure of a compliance program to find and remedy compliance problems can just as easily be viewed as evidence that the adviser’s compliance program, including its policies and procedures, are not effective.

This doesn’t mean that compliance personnel of an adviser can’t be sanctioned for not properly supervising employees. Of course, they can be and are sanctioned. However, the fact that you are a CCO does 

 

not, in and of itself, give you supervisory responsibility over your adviser’s personnel. In short, if you’re not supervising other advisory personnel, and you limit supervisory responsibility to persons who are part of the compliance staff, the Adopting Release to the rule makes clear that you aren’t necessarily liable for the supervisory lapses of your adviser. ……..”

The signficance of this rule is born out in an article appearing in AdviserOne entitled “” makes reference to a report prepared by the law firm of Sutherland Asbill tracking recent regulatory actions involving CCOs and in-house attorneys facing disciplinary actions covering everything from lapses involving  inadequate supervisory systems, anti-money-laundering (AML) compliance program, inadequate due diligence in private offerings, books and records violations to lying to regulators.

Understanding and remembering first what your role is as CCO or in-house counsel may prove to be the only thing separating you and a regulatory sanction.

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.