NSCP letter to SEC August 18, 2015 expresses concern about higher standards in enforcement proceedings against compliance officers.
National Society of Compliance Professionals, in their letter dated August 18, 2015, states “Compliance officers are already highly motivated … and do not need the threat of enforcement action to do their jobs well.”
The letter comes on the heels of three important Administrative Proceedings where compliance officers are alleged to have “caused” a primary violation committed by another. See Administrative Proceedings file numbers: 3-16591 (June 2015), 3-16501 (April 2015), and 3-15873 (March 2015). These proceedings portray a higher liability standard for compliance officers. Whereas prior decisions reflect (i) a primary securities law violation, (ii) knowing or extremely reckless conduct, and (iii) substantial assistance to the violator.
As the NSCP points out in their letter, SEC higher standard applies 20/20 hindsight, a valuable resource in learning how to improve procedures and policies; but compliance officers work in real-time. Reviewing someone’s decisions ex-post record and concluding they should have known better at the time, sets a dangerous tone to fundamental policy. The “perfect policy” perspective fails to recognize that real-time decisions are rarely “perfect”. Compliance officers navigate in a landscape where procedures are routinely re-examined and improved based upon lessons learned and new facts uncovered.
A question is, whether enforcement actions will further motivate compliance officers to greater vigilance, or risk demoralizing them into believing that even using their best judgment will not protect against risk of career ending enforcement action. NSCP is concerned that setting this stricter precedent may result in some of the best compliance officers exiting the industry rather than face new risks.
As an additional point, NSCP asserts that compliance officers do not generally operate the business for which they are hired. They are typically an advisory role. Compliance officers establish procedures or policies, but are rarely charged with administering them. Administration rests on the head of executives and line managers. Holding compliance officers accountable for failures linked to implementation fails to recognize the limited scope of power within which many compliance officers operate.
While the NSCP is all for effective enforcement, they base their argument on a matter of fairness. NSCP asks that the SEC place more recognition on the limitations of compliance officers and the difficult landscape in which they make decisions. As noted, even the American Institute of Certified Public Accountants recognizes that controls are limited in nature and may not prevent or detect and correct all errors and omissions, as stated in SSAE-16 statement of standards.
Does the SEC go too far in holding compliance officers accountable for violations committed by others?
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SEC and FINRA have recently announced the priorities for their 2015 examination programs. The priorities are divided into 4 categories: a) retail investors; b) market wide risks; c) data analytics; and d) other areas.
Retail investors: In consideration of recent industry trends, including the fact that registrants are developing and offering to retail investors a variety of new retirement products and services, the program will focus on 4 key areas that tend to center on retirement accounts:
- Fee arrangements: The program will focus on recommendations regarding account types and if they are in the best interest of clients, including the fees charged and the risks.
- Sales practices: The focus will be on the sales approach used regarding the movement of retirement assets from employer plans to individual accounts, including the fees charged and the risks.
- Suitability: The staff will focus on recommendations and determinations to invest retirement assets into complex or structured products and higher yield securities including due diligence conducted, disclosures made and the suitability of recommendations.
- Branch offices: In this area the staff will focus on supervision issues and use its analytics to assess deviations from compliance practices.
Market-wide risks: Focus will be on structural risks and trends that can impact multiple firms or an entire industry. Areas of focus include:
- Large firms: In conjunction with Trading and Markets the program will focus on the largest broker-dealers and asset managers to assess risk at individual firms and across industries.
- Clearing agencies: All agencies assessed as systemically important will be examined using a risk based approach.
- Cybersecurity: Building on an initiative started last year, the program will focus on compliance and controls.
- Execution: The program will focus on potential conflicts involving payments or credits for order-flow and the duty of best execution.
Data analytics: Enhanced analytics will be used to assess the potential to engage in fraudulent and/or other potentially illegal activity including:
- Recidivists: This involves the identifications of those with a record of misconduct.
- Microcap fraud: Identification of brokers and transfer agents that may be involved with microcap fraud such as market manipulations. Enforcement also has a microcap fraud task force which focuses on these areas.
- Excessive trading: The focus here is on clearing and introducing brokers to identify excessive trading. This complements the retail issues listed above.
- AML: This will focus on clearing and introducing brokers that have not filed SARs or have filed reports which are incomplete and brokers who permit deposits of cash or direct access to the markets.
Other areas: Other priorities for the Division include municipal advisers, proxy services, never before examined investment companies, fees and expenses in private equity and transfer agents.
FINRA: Will focus on the sale and supervision of interest rate sensitive and complex products, transactions centered on wealth events for investors and cybersecurity, including platforms that interact with the markets. In addition, FINRA identified the following five broad areas of focus:
- The alignment of firm and customer interests;
- Standards of ethical behavior;
- The development of strong management and supervisory systems;
- The development and marketing of novel products and services; and
- The management of conflicts of interest.
For further information please feel free to contact our office at (818) 657-0288.
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Disclaimer: RND Resources Inc., affiliates, and staff, are not associated with the financial industry regulatory authority (FINRA). Nothing contained herein is intended to describe any such association.
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RND Resources Inc is a proud member of RSM US Alliance. RSM US Alliance is an affiliation of independent accounting and consulting firms in the US. and the leading provider of audit, tax, and consulting services focused on the middle market. For more information about our membership visit: RSM US LLP
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