Mary Jo White SEC

Concern about Higher Standards in Enforcement Proceedings against Compliance Officers

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.

Read the Letter

Does the SEC go too far in holding compliance officers accountable for violations committed by others?  

Investment Advisor Services

Proposed SEC changes to Form ADV; Good or Bad?

RIA cover2May 20, 2015 the Securities and Exchange Commission unanimously approved amendments to Form ADV requesting more information about the composition of client portfolios and risk profiles, and advisers use of social media.  The 60-day comment window for Form ADV is now open. Thus far, the comments are mixed reviews.  


Small investment advisory firms appear to have the greatest concern citing that the changes will create more record-keeping, adding a new burden on already stretched to the limit compliance resources. The growing concern is that for smaller firms; every hour spent reviewing and completing compliance initiatives is an hour not spent with clients growing the practice. In addition, some firms state the proposed information is not really all that meaningful, and that Form ADV already contains too much information which prospective clients often don’t read.

SEC Chair, Mary Jo White indicated in her announcement of the proposal that the amendments are part of a series of rule-makings being put forth to enhance monitoring and regulation of the asset management industry. Further, she states the agency plans to use the additional data to improve its ability to conduct “more targeted” exams. And finally, the information will allow the public and the Commission to better understand the risk profile of individual advisers and the industry.

The proposed changes to investment adviser registration and reporting include:

Require aggregate information related to assets held and use of borrowings and derivatives in separately managed accounts. (Approximately 73 percent of SEC registered investment advisers manage a wide variety of client assets in separately managed accounts, which generally provide advisory clients with individualized investment advice and direct ownership of the securities and other assets in the account.)

Permit (by rule) certain “umbrella registration” filing arrangements that are currently outlined in staff guidance.

Provide additional information about an adviser’s advisory business and including branch office operations and the use of social media.

Proposed changes to Investment Advisers Act Rules

Proposed amendments to Investment Advisers Act Rule 2042 would require advisers to maintain records of the calculation of performance information that is distributed to any person. Currently, advisers are required to maintain performance information that is distributed to 10 or more persons.

The proposed amendments also would require advisers to maintain communications related to performance or rate of return of accounts and securities recommendations.

What are your thoughts regarding the proposed changes? Post a comment here or weigh in on


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Benefit from industry specific knowledge, experienced auditors, and assurance professionals. Call or email us today for a quote (818) 657-0288.

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Join our June 29, 2015 – New York Compliance Roundtable discussion on this topic. See details on our website.