SEC Commissioner Hester Peirce Remarks on CCO Liability at the NSCP
November 11th | 2020
SEC Commissioner Hester Peirce recently spoke about CCO liability at a National Society of Compliance Professionals event. Commissioner Peirce noted that compliance officers’ responsibilities are growing, but the nature of the liability they face in executing those responsibilities remains unclear.
Back in 2015, the SEC’s Enforcement Director identified three broad categories of cases where the SEC has charged chief compliance officers: (1) cases where the compliance officer participated in the underlying misconduct unrelated to his or her compliance duties; (2) cases where compliance officers obstructed or misled Commission staff; and, (3) cases where “the CCO has exhibited a wholesale failure to carry out his or her responsibility.”
Commissioner Peirce notes that that the third point, as applicable under Rule 206(4)-7, supports negligence-based charges against an adviser’s CCO, who are “responsible for administering written policies and procedures” that must be “reasonably designed to prevent violation, by you and your supervised persons[.]” Soon thereafter, former Commissioner Gallagher noted a trend towards strict liability for CCO’s under the rule, which Commissioner Peirce notes has some potentially problematic side effects.
Commissioner Peirce concludes with a high note with a few recommendations on how to improve on this aspect on 206(4)-7. Commissioner Peirce suggest adopting an advisory group “charged with meeting periodically to discuss current and potential regulatory, examination, and enforcement efforts, and to publish guidance and recommendations to compliance officers and regulators reflecting the insight of both regulators and the regulated”. This approach seems to have worked with respect to the SEC’s small business, asset management, equity, and fixed income advisory committees, so it is a promising idea compliance professionals will surely be closely watching.