A series of developments threaten to blur the important distinction between the corporation’s legal and compliance functions. These developments arise from federal regulatory action, media and public discourse, policy statements from compliance industry leaders, and new surveys reflecting the increasing prominence of the general counsel. If left unaddressed, they could lead to significant organizational risk, e.g., leadership disharmony, misallocation of executive resources, ineffective risk management, and the loss of the attorney-client privilege in certain circumstances. The governing board is obligated to address this risk by working with executive leadership to assure clarity between the roles of general counsel and chief compliance officer.
Posts Tagged ‘Compliance officer’
Strong oversight by boards of directors—meaning typically by authorized board committees—of compliance-and-ethics (“C&E”) programs can be essential to promoting legal and ethical conduct within companies. In a variety of ways, board oversight should help to ensure that a program is effective and that directors and companies are otherwise meeting applicable C&E-related legal standards. Nonetheless, this is an area of uncertainty for many boards and managers, and can even be a struggle for some.
In Reporting to the Board on the Compliance and Ethics Program, published in the June issue of Compliance & Ethics Professional, we examine various aspects of such oversight from a law and good-practices perspective.
On September 30, 2013, the U.S. Securities and Exchange Commission (SEC)—quietly, and with little fanfare—released an informal statement of policy in the form of frequently asked questions (FAQ), in which it addressed its recent case against Ted Urban.  In doing so, the SEC shed light on when and how the agency will seek to hold legal and compliance personnel responsible for failing to supervise employees on the business side.
As many will recall, the Urban case was closely watched by securities legal and compliance professionals, who worried that a decision by the commissioners could be used by enforcement staff to make such professionals easier targets in future enforcement actions. Ultimately, the commissioners dismissed the case. That said, given the circumstances surrounding the case’s dismissal, legal and compliance officers were left with little guidance as to whether the case against Urban could be used against them to establish supervisor liability.
First, let me thank you all for taking part in today’s program. Events like this are an invaluable tool for regulators and market participants alike — not least of all because we get to see who the early frontrunners are for the next America’s Funniest Compliance Officer contest. As I’m sure you all know, that’s a real contest that was last held in 2011, although, given that there were only a handful of contestants who turned out to compete, maybe it’s more likely that none of you knew. In case you missed it, the winner brought down the house with a joke about a priest, an Irishman, a Frenchman and Rule 15a-6. It was hysterical — not Reg. M hysterical, but still hysterical.
All joking aside, it is essential that we as regulators and you as compliance officials continue to engage in this type of open dialogue and coordination to promote a robust culture of compliance across the securities industry. Indeed, your work is key to enhancing the Commission’s ability to protect investors and ensure that the markets in which they put their capital to work remain fair and efficient, a result which is in all of our best interests.
In January 2011, the Commission, with Commissioners Casey and Paredes dissenting, issued a staff report on a study, conducted pursuant to Section 913 of the Dodd-Frank Act, of the effectiveness of the existing regulatory standards of care that apply when brokers and investment advisers provide personalized investment advice to retail customers. In addition to mandating that study, Section 913 authorized, but did not require, the Commission to adopt rules establishing a duty of care for brokers identical to that which applies to investment advisors — in other words, a uniform fiduciary duty for brokers and investment advisors — and to undertake further efforts to harmonize the two regulatory regimes.
We recently conducted a survey of broker-dealer compliance officers to gather perspectives and practices around new regulatory initiatives and amendments that will likely have a material impact on financial institutions: the Dodd-Frank Act and FINRA’s know-your customer (KYC) and suitability rules.
We thought it would be useful to understand how firms and their compliance functions are responding.
The survey consisted of 12 questions focused on 4 specific initiatives:
- 1. The uniform fiduciary standard under Dodd-Frank Title IX
- 2. Regulation of the over-the-counter (OTC) derivatives markets under Dodd-Frank Title VII
- 3. The Volcker Rule regulating proprietary trading under Dodd-Frank Title VI
- 4. FINRA’s new KYC and suitability rules (FINRA Rules 2090 and 2111)
The role of the chief compliance (and ethics) officer is currently a hot, if confused topic. What does she do — ensure good process or enforce strict compliance? To whom does she report — GC/ CFO or to CEO/board? What is her role in shaping the company’s voluntary adoption of ethical standards — beyond what the law requires?
This issue has been thrust into high relief by regulators and enforcers who, in light of various scandals, want a more independent compliance function in corporations. For example, changes in the federal sentencing guidelines would give corporations extra credit if the “specific individual” in the corporation with “day-to-day operational responsibility for the compliance and ethics program” has direct access to the board of directors. The issue has also received attention in the resolution of various high-profile cases, including a recent Pfizer Inc. settlement of criminal and civil matters with the U.S. Department of Justice and the U.S. Department of Health and Human Services, which required that the company’s chief compliance officer bypass the GC and report directly to the CEO.
Let me offer a somewhat contrarian, more nuanced view about the critical importance of a chief compliance officer, but in a right-sized role.