Proposed Framework Aims to Guide U.S. Regulators in Decisions to Charge Chief Compliance Officers 

A proposed framework guiding decisions to bring enforcement actions against financial sector chief compliance officers aims to address growing concern over the individual liability of compliance professionals.

The proposed framework, released Wednesday by the New York City Bar Association, asks regulators to evaluate 12 affirmative factors and three mitigating factors in deciding whether to charge chief compliance officers for conduct relating to their job-related duties under federal securities laws.

The proposal is aimed at guiding decisions to charge CCOs made by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, which could decide to adopt the framework.

Representatives for the SEC didn’t immediately respond to a request for comment. A spokesman for Finra didn’t immediately provide a comment.

A compliance officer in the financial services sector can be held personally liable for the day-to-day performance of his or her compliance duties, particularly when there is an assessment made in hindsight regarding what conduct a compliance officer or program ought to have detected and prevented, the New York City Bar Association said in a report last year on this topic.

The increasing importance of personal responsibility in enforcement culture and a greater regulatory focus on compliance in general add to that risk, according to the 2020 report.

Concerns over personal liability have grown in the past five years over enforcement actions brought against compliance officers for alleged derelictions of their duties under securities laws, according to Patrick Campbell, chairman of the New York City Bar Association’s compliance committee, which wrote the framework.

Mr. Campbell added that charges against compliance officers can be damaging to their careers.

“We’re relaying the concerns that compliance officers have and…to build on the dialogue,” said Mr. Campbell, who is a partner at law firm Baker & Hostetler LLP.

The proposal asks the regulators to evaluate the actions of CCO’s through the use of 12 questions, including whether the action or inaction constituted a “wholesale failure,” an active participation in fraud or obstruction.

The questions raised by the framework include whether charging the compliance officer over his or her conduct helped fulfill the SEC’s regulatory goals; whether the officer made a good-faith effort to fulfill his or her responsibilities; and in cases where obstruction or false statements were discovered, whether those actions were repeated.

Mitigating factors include questions such as whether structural or resource challenges hindered the compliance officer’s performance.

Many compliance officers are concerned that as they become increasingly entrenched in fixing potential securities violations, they might be more vulnerable to facing charges, said Adam Felsenthal, who leads the initiative and is the general counsel and deputy chief compliance officer at healthcare investment firm Great Point Partners LLC.


By Mengqi Sun, June 4, 2021, published on The Wall Street Journal

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