NY Bar Proposes Framework for SEC Actions Targeting CCOs

A report and recommendations from the New York City Bar Association aims to address concerns of CCOs regarding personal liability in SEC enforcement actions, particularly for actions that do not result from fraud or obstruction on the CCO’s part. The city bar proposed a framework it says the SEC should follow when deciding whether to charge a financial industry CCO for compliance failures at his or her firm. “While regulators are paying increased attention to the compliance function, we believe that the creation of a formalized regulatory framework … describing nonbinding factors for the SEC to consider in determining whether to charge a CCO is a crucial next step to providing the enforcement clarity CCOs seek.” Among several recommendations, the city bar urges regulators to first consider whether charging the CCO would help fulfill the SEC's regulatory goals. The report then lists affirmative factors that should be present to bring a charge and mitigating factors that, if present, should weigh against a CCO conduct charge. The city bar argues that the most concerning type of SEC actions against CCOs involve charges that a CCO “exhibited wholesale failures in carrying out responsibilities that were clearly assigned to them” or that the CCO “fails meaningfully to implement compliance programs, policies and procedures for which he or she has direct responsibility.” Enforcement cases brought based on this prong “are most likely to result in CCOs leaving the profession or practicing defensively,” the city bar writes. The report calls for a judicious exercise of discretion, a rigorous explanation in the enforcement order, and explanatory remarks from SEC commissioners and staff. The framework also suggests mitigating factors for regulators should consider, such as whether structural or resource challenges hindered the CCO’s job performance, whether the CCO voluntarily disclosed the misconduct in question and cooperated with investigations, and whether there were policies and procedures proposed, enacted or implemented in good faith. Other regulatory bodies, such as the U.S. Department of Justice (DOJ), have similar frameworks as the one proposed by the city bar.