A Tale of Two Enforcement Actions Against Compliance Officers: An analysis applying the NSCP Firm and CCO Liability Framework

From Brian Rubin and Amy Albanese in this month’s column for NSCP Currents:

Many compliance officers believe they have targets on their backs. Indeed, according to industry-wide surveys conducted by the National Society of Compliance Professional (NSCP), 72% of compliance professionals are concerned that regulators have expanded the role of compliance officers and the scope of their responsibilities in imposing personal liability and 63% believed that personal liability will be imposed even where compliance did not participate in the violations caused by the company or other executives. Is it any surprise that compliance officers seem to believe that regulators look at them the same way that Mrs. Gamp viewed the living young man:  “He’d make a lovely corpse.”

Read more here.

SEC Examination Priorities for 2022 – Key Takeaways

On March 30, 2022, the SEC’s Division of Inspections and Examinations (“staff”) published its examination priorities for 2022 (“Examination Priorities”). The central theme of the priorities for investment advisers seems to focus on the increasingly complex nature of the investment advisory industry, and the priorities focus principally on private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets.

For a summary of the priorities and guidance for mitigating regulatory risk in the coming year, read more here.

Analysis of FINRA Disciplinary Actions Shows Huge Surge in Financial Sanctions

By reviewing FINRA’s monthly disciplinary reports, press releases and online database, Eversheds Sutherland (US) Partners Brian L. Rubin and Adam C. Pollet identified the following key takeaways:

  • In 2021, fines and restitution spiked despite a decrease in the number of cases compared with 2020
  • FINRA continues to target specific areas, such as anti-money laundering violations, which for the sixth year in a row resulted in the largest amount of fines.
  • Regulators appear to be gearing up for actions involving RegBI/Form CRS

Read the full study here.

How NSCP CCO Framework Could Have Altered FINRA Charges

Every year, FINRA brings hundreds of cases, many alleging that firms have inadequate policies and procedures. In the overwhelming majority of those cases, the Chief Compliance Officer (CCO), who FINRA considers to be “a primary advisor to the member on its overall compliance scheme and the particularized rules, policies and procedures that the member adopts,” is not charged.  With regard to Anti-Money Laundering (AML) cases, AML compliance officers (AMLCOs) are also infrequently charged. Questions that always follow such cases include the following: When are violations “firm issues” and when should the compliance officer get charged?

Despite the relatively small percentage of cases brought against compliance officers, they are (unsurprisingly) concerned about being in the cross hairs of regulators, and being subject to personal liability. Compliance officers are usually the firm’s central point of communications with regulators, responsible for responding to regulatory inquiries, producing documents, and answering questions. In many investigations, they must provide on-the-record testimony, even if the case does not directly involve their core functions.

Due to these concerns, on January 10, 2022, the National Society of Compliance Professionals (NSCP) proposed a “Firm and CCO Liability Framework” (NSCP Framework) to “provide guidance to regulators, chief compliance officers (CCOs), and firms regarding perceived or actual CCO liability.”  The NSCP Framework developed nine questions to be “considered by regulators where a compliance failure may have occurred,” to evaluate CCO liability.

Read more here.


SEC Proposes New Rules for Private Fund Advisers

The SEC recently proposed new rules that would impose additional practice and disclosure requirements on private fund advisers which, if adopted in their current form, could collectively have severe consequences for such advisers. Among other things, the proposed rules would require SEC-registered advisers to:

  • provide quarterly reporting to fund investors including detailed and standardized disclosures about fund expenses and performance; and
  • obtain and deliver audited financial statements for each advised private fund annually and upon liquidation.

Importantly, the proposed rules would prohibit all private fund advisers (including exempt reporting advisers) from:

  • entering into side letter arrangements granting preferential redemption rights or certain portfolio information rights if such rights would have a material adverse effect on fund investors;
  • requiring reimbursement from investors for the adviser’s breach of its fiduciary duties including situations involving simple negligence;
  •  Charging private funds for certain fees and expenses;
  • deducting taxes owed from any clawback they must provide to investors; and
  • Borrowing funds or securities from a fund or receiving an extension of credit from a fund.

Very importantly, the proposed rules do not have a grandfathering provision, and, therefore, if the rules are adopted as proposed, advisers would need to assess whether existing private fund documents must be amended, which can be challenging given that the adviser and fund investors negotiated fund terms based on circumstances prior to the existence of the new requirements.

Read more here.