SEC's Gallagher Criticizes Recent Enforcement Actions


SEC released the statement on June 18th.

"I recently voted against two settled SEC enforcement actions involving alleged violations of Investment Advisers Act Rule 206(4)-7 by chief compliance officers (“CCOs”): In the Matter of Blackrock Advisors, LLC (April 20, 2015)[1] and In the Matter of SFX Financial Advisory Management Enterprises, Inc. (June 15, 2015).[2] I have long called on the Commission to tread carefully when bringing enforcement actions against compliance personnel.[3] These recent actions fly in the face of my admonition, and I feel compelled to explain my rationale for dissenting.

In Blackrock, the Commission charged a CCO with causing the firm’s Rule 206(4)-7 violations in connection with his alleged failure to ensure that the firm had compliance policies and procedures to assess and monitor the outside activities of employees and disclose conflicts of interest to fund boards and advisory clients. In SFX, the Commission alleged that a CCO failed to implement compliance policies and procedures that, if carried out appropriately, would have detected an alleged multi-year theft of client assets by the president of the firm. In both instances, the Commission’s order states that the CCO was responsible for the implementationof the firms’ policies and procedures.

Both settlements illustrate a Commission trend toward strict liability for CCOs under Rule 206(4)-7. Actions like these are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that, under Rule 206(4)-7, is the responsibility of the adviser itself. Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties and responsibilities to avoid liability when the government plays Monday morning quarterback."

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