Keynoting the recent 2015 National Society of Compliance Professionals National Conference, U.S. Securities and Exchange Commission Director, Division of Enforcement Andrew Ceresney  addressed (with the proviso that “the views expressed” were just his own…)his department’s perspective on compliance officers and how it approaches enforcement cases that touch on compliance personnel.

It’s not you…it’s them!

In opening the conversation about his division’s efforts to protect the compliance function, Ceresney sought to highlight cases he believes get lost in discussions of compliance-related enforcement actions — those cases, he says which demonstrate the SEC’s support for the compliance function and its resource needs. “In my time at the Commission and in private practice,” he shared, “I have come to appreciate that the state of a firm’s compliance function says a lot about the firm’s likelihood of engaging in misconduct and facing sanctions.” He has found that one can predict the likelihood of an enforcement action by asking a few simple questions about the role of that company’s (your company’s?) compliance department. So like the SEC, consider asking yourself the following:

• Are compliance personnel (you) included in critical meetings?
• Are your views typically sought and followed?
• Do you report to the CEO and have significant visibility with the board?
• Is your compliance department viewed as an important partner in the business and not simply as a support function or a cost center?
• Is compliance given the personnel and resources necessary to fully cover the entity’s needs?

According to Ceresney, “Far too often, the answer to these questions is no, and the absence of real compliance involvement in company deliberations can lead to compliance lapses, which, in turn, result in enforcement issues.”

Really. The SEC says it is them!

Okay…not always. We’ve all read about plenty of Chief Compliance Officers who’ve had their hands slapped. However, Ceresney recognizes the fine line Chief Compliance Officers and their teams often walk. He acknowledges that it “can be difficult for compliance professionals to stand up to management, particularly in organizations where they are not supported. He also recognizes that compliance personnel may sometimes lack the resources and information to do their jobs effectively. So, he says, in the end, while compliance officers have certain responsibilities, it is the business that is primarily responsible for compliance with the law.”

To support that statement, Ceresney cites two recent SEC enforcement actions where the SEC Enforcement Division has recognized these issues and taken them into account in its charging and sanction determinations, and notes that the SEC’s intent in each action was and is to encourage firms to give compliance the prominence and resources it needs to be effective.

SEC charges Pekin Singer Strauss Asset Management with ignoring its CCO

In Pekin Singer, the Commission charged an investment adviser with numerous compliance failures, and also charged the adviser’s president with causing those violations. According to Ceresney,  compliance failures were significant and widespread. Among them was that the adviser failed to conduct timely annual compliance program reviews and failed to implement and enforce provisions of its policies and procedures and that the CCO, who was not charged, was overly tasked with numerous non-compliance responsibilities that severely limited his ability to focus on his compliance function.

The CCO repeatedly asked the firm’s president for help, expressed concern that the firm would not be ready for an SEC examination, and that with all his other responsibilities, compliance would be unable to complete compliance testing. Flash forward one year…the SEC’s examination staff was knocking on Pekin Singer’s  door and…

Good news for the CCO is that he was not charged. Bad news for Pekin Singer’s president is that he was charged with causing the firm’s compliance violations, in large part because he ignored the CCO. The clear message from that case to the business side of firms is to ensure that your calls for resources and support are heeded.

SEC charges Carl Johns with misleading its CCO

The SEC filed its first-ever charge against an individual for misleading and obstructing a CCO in its 2013 enforcement action in Carl Johns. In that case, an assistant portfolio manager at an SEC-registered investment adviser:

• failed to pre-clear or report his personal securities transactions;
• submitted false quarterly and annual reports related to his securities trading;
• altered trade confirmations; and
• manually deleted securities holdings on his brokerage statements.

That alone makes him a very bad boy. But there was more!

When the CCO detected irregularities in the altered documents and confronted the portfolio manager, the manager misled the CCO about the transactions, and even accessed the hard copy file of his previously submitted brokerage statements and physically altered them. Yikes!

The message of Pekin Singer, Carl Johns, and similar cases is clear, says Ceresney. “We will aggressively pursue business line personnel and firms who mislead or deceive you (CCO), or obstruct the compliance function, or who fail to support you in a manner that causes compliance violations.”

But scare tactics don’t answer the question of why CCOs may not get the support they need. Other than firms committing outright fraud, what keeps your CEO from implementing necessary compliance processes and procedures? Time? Money? Lack of personnel?

Protect yourself and your firm

If time/money/people is the problem, consider outsourcing. Because beyond operating within the law, you and your CEO have got to make sure you’ve got the right compliance processes and procedures in place so that your firm has and can produce data and records when the SEC and FINRA demand it. Compliance increasingly is outsourcing the burden of tracking and organizing data and documents to independent regulatory archival and compliance solutions specialists, like us to help keep compliance processes and procedures running smoothly and compliantly. Ask about Patrina’s cost-effective and comprehensive regulatory archival and compliance solutions specifically designed for Broker/Dealers, RIAs, and FCMs.

Let’s talk: 212-233-1155.