The SEC / CCO "Partnership": A Dangerous Idea
Every year, the Securities and Exchange Commission hosts national compliance outreach seminars for mutual funds and investment advisers.
As they plan this year's events amidst the political uncertainty that is now Washington, D.C., it's time the SEC staff revise their long-standing messaging that chief compliance officers (CCOs) are the SEC's "partners."
SEC staffers have been following the leader for years. In one beautifully articulate speech by the former SEC Chair Mary Jo White in October 2013, she stated:
“Although we occasionally bring enforcement actions against compliance personnel, compliance officers who perform their responsibilities diligently, in good faith, and in compliance with the law are our partners and need not fear enforcement action.”
Following the theme, the former Director of the Division of Enforcement, Andrew Ceresney, echoed the oft-repeated refrain at a speech to compliance professionals at the NSCP National Conference (November 4, 2015). Oddly, the speech was designed to allay their fears due to certain overzealous enforcement actions against CCOs:
“The Commission and its staff hold compliance professionals in high regard and consider you key partners in our efforts to serve and protect investors.”
Really? How is it that the SEC staff has co-opted key C-level officers of investment advisers as their "partners"? What message does that send to a CCO's real partners, the other C-level officers with whom they share a duty of loyalty to their employer and a fiduciary duty to their clients?
As the SEC staff repeats their call for partnership with CCOs, they are also creating an untenable and misplaced duty of loyalty owed by CCOs to the SEC. The SEC staff's insistence that CCOs are their partners chills and confuses the relationship between CCOs and their C-level colleagues—the very relationships that determine their effectiveness as CCOs.
The idea that the CCO can serve as the SEC’s partner and as a trusted adviser to the CEO is a dangerous myth. By co-opting the loyalty of CCOs, while also requiring them to administer effective compliance programs, the SEC staff creates an unmanageable conflict of interest that sets up those very CCOs to serve as “fall guys” in a no-win situation.
In our experience, the strongest corporate cultures and healthiest compliance programs are those in which the CEO relies on the CCO as a trusted adviser. If the SEC staff is actually committed to supporting the development of strong, effective compliance programs for investment advisers, then they should foster a strong and trusting relationship between CEOs and CCOs, instead of trying to get in the middle of it.
Interestingly, the main purpose of Mr. Ceresney's comments was to allay the fears of CCOs related to "how [the SEC] approach[es] enforcement cases that touch compliance personnel."
That is, the circumstances under which the SEC staff would sue their “partners”:
"[T]hese actions punish misconduct that falls outside the bounds of the work that nearly all of you do on a daily basis; do not involve the exercise of good faith judgments; and are consistent with the partnership we have developed to foster compliance with the laws."
The SEC staff appropriates CCOs with the promise of partnership and then sues them? Oh, my—that is a conundrum.
Yet Mr. Ceresney’s closing remarks gave me an idea. He stated:
“There are three important takeaways from my remarks today. First, you have the Commission’s full support. We rely on you as essential partners in ensuring compliance with the federal securities laws and we will do all we can to help you perform your work.
Second, and to that end, we will bring enforcement actions against business line personnel in appropriate circumstances where they have deceived or misled you, or where their failure to provide you with adequate resources and information causes compliance rule violations.
Third, there has been no change in our longstanding, careful, and measured approach to determining whether we should charge a CCO.”
Here's a thought: in order to support the appropriate relationship between CEOs and their CCOs, the SEC staff should require CEOs of investment advisory to demonstrate the following (strikingly familiar) commitments to their firms’ CCOs.
First, you have the firm’s full support. I rely on you as an essential partner in ensuring compliance with the federal securities laws and I will do all I can to help you perform your work.
Second, and to that end, I will bring internal sanctions actions against business line personnel in appropriate circumstances where they have deceived or misled you, or where their failure to provide you with adequate resources and information causes compliance rule violations.
Third, there has been no change in our longstanding, careful, and measured approach to determining whether we should terminate a CCO.
The SEC staff should use their very public and powerful forum to release CCOs from the misplaced expectation of a partnership with the staff and instead set the expectation that CEOs of investment advisory firms demonstrate their commitment to each of these three promises, thereby supporting a partnership that is the true basis for a strong compliance program.
Ann Oglanian, CEO, ReGroup, LLC