Summary of NSCP meeting with SEC Commissioner Piwowar

NSCP Representatives:

Lisa Crossley, Executive Director NSCP

Jane Riley, Vice President and Chief Compliance Officer for The Leaders Group Inc. and TLG Advisors, Inc.

Charles Senatore, Executive Vice President, Head of Regulatory Coordination and Strategy for Fidelity Investments

NSCP representatives (“NSCP”) met with Commissioner Michael Piwowar and Jaime Klima, counsel to Commissioner Piwowar, on August 17, 2016.  The purpose of the meeting was to update the Commissioner on developments in the compliance officer liability space, with the objective of reinforcing the importance of the accountability of management versus compliance.

NSCP thanked Commissioner Piwowar for his continued interest and oversight of CCO accountability.  We expressed our appreciation for the apparent sensitivity the Commissioners have shown for this issue.  We highlighted as an example that the SEC had adjusted its swap dealer rule by emphasizing the  distinction between management and a compliance officer’s responsibilities.

We urged Commissioner Piwowar to recognize that there appears to be a tendency among regulators over time to drift towards holding compliance officers liable for issues that properly are management accountabilities.  As examples, we cited how the concept of failure to supervise morphed to potentially hold a compliance officer responsible simply because he/she was seen as authoritative and therefore able to affect the conduct of another (the Urban case) after which Trading and Markets did FAQ’s to address the concerns.  We also cited our more recent issue about liability for negligently “causing a violation by another after which Andrew Ceresney spoke at NSCP’s 2015 National Conference, in an effort to address our concerns.  Finally, we cited as the most recent example the NY Department of Financial Services where they had proposed to hold CCO’s accountable to certify that appropriate AML controls were in place under a possible criminal false statement penalty, after which the DFS addressed industry concerns by substituting a board oversight model.

NSCP reiterated to Commissioner Piwowar that commissioners are in unique place to shape outcomes as thought leaders on these issues.  We pointed out that the SEC was the venue most likely to consider compliance officer liability in the context of resolving litigation, and therefore was in a unique position to shape the law’s development.  We reminded Commissioner Piwowar that the thresholds for charging “causing” and failure to supervise are so low that any enforcement lawyer so inclined could bring cases that would withstand a motion to dismiss.  Because they can be easily brought, the true check and balance is in the case approval process.  This is the unique role of the commission in ensuring that only the right cases are brought not just the ones that could satisfy the legal tests.

NSCP further discussed the “wholly failed” standard as articulated in Andrew Ceresney’s NSCP speech.  We noted that the danger is that “wholly failed” is in the eye of the beholder.  We posited that to wholly fail to institute materially significant elements of a compliance program was one thing; “wholly failing” to have technically fulfilled the requirements of one of potentially thousand rules that were otherwise covered was another.    We accordingly encouraged Commissioner Piwowar to continue to probe whether a CCO truly “wholly failed” to a level that was reckless vs. merely negligent.

And particularly, when the alleged wholesale failure was properly the responsibility of management, it sends a troubling and confusing signal in cases when management is not even named.   We pointed out that it is usually counsel for the company that takes the CEO’s interest into consideration when negotiating a settlement, not necessarily the CCO’s.

Also regarding settlements, Commissioner Piwowar noted that there is some sentiment that a settling party is agreeing to the settlement because he/she is guilty.  We pointed out that this is often not true; that consideration of resources, expediency and getting one’s life back more often dominate that decision.

Also, the language of settlements, as well as litigated orders matter to the compliance community.  NSCP stated that compliance professionals read settlements as one of the rare times that the commission is speaking to an issue.

We reiterated that the goal is to have a CCO read an order, and immediately understand and agree that the action and the outcome makes sense.  CCO’s understand that there are instances where they must be held accountable, particularly if they play a meaningful role in aiding or abetting a violation.  Cases where a CCO perceives that compliance has been held unfairly accountable for the failings of the firm, or its management, foster fear and an increased unwillingness for compliance officers to assume personal risk.

Commissioner Piwowar expressed agreement for these principals, and urged us to convey these messages to some of the policy and rulemaking staff within the divisions.  We agreed that such would be worthwhile, and thanked him for the suggestion.

But he also agreed ultimately that the public policy issue of reinforcing the accountability of management vs. that of the compliance officer was uniquely within the province of the commissioners, particularly since they are the ones in the best position to make decisions about the types of cases authorized as well as to craft the language in orders and other releases pertaining to this subject.