(Article from Registered Funds Regulatory Update, January 2024)
For more information, please visit the Registered Funds Resource Center.
In a speech at the New York City Bar Association Compliance Institute, Division of Enforcement Director Gurbir Grewal stated that the SEC rarely brings enforcement actions against compliance officers because it does not second-guess their good faith judgment made after reasonable inquiry and analysis. However, it will bring enforcement actions against compliance officers for wrongdoing where there is (i) evidence that the compliance officer participated in misconduct unrelated to their compliance functions; (ii) misled a regulator; or (iii) there was a “wholesale failure” by the compliance officer to carry out their compliance obligations. Grewal noted that the SEC has filed over 1,000 standalone cases under his tenure but only a handful of those involved charges against compliance officers.
With regards to the first category, Grewal emphasized that a compliance position does not come with a “get-out-of-jail” card, meaning compliance officers will be held accountable to the same extent as anyone else when they violate the securities laws. As a recent example, he noted the SEC recently charged a CCO with insider trading for allegedly trading on material nonpublic information, and tipping it to his friends who also traded on the information, that he surreptitiously obtained from his girlfriend’s laptop about an upcoming merger her employer was involved in.
The second category involves conduct obstructing or misleading regulators or providing false information to them. Grewal cited two recent actions, where in each the CCO was charged with falsifying compliance reports provided to the SEC as examples of deliberate conduct by a CCO to thwart the SEC’s ability to effectively oversee compliance functions.
Finally, Grewal explained that the “wholesale failure” category involves actions where there is no education, engagement, or execution by a compliance officer. Rather, the compliance officer failed to conduct even basic inquiry and analysis. As one example, Grewal cited a recent enforcement action where the CCO to an investment adviser was charged with failing to adopt and implement a compliance program reasonably designed to prevent violations of the federal securities laws. The adviser had adopted a handbook published by a professional trade organization that was not even tailored to the adviser’s actual business. In fact, the handbook did not even include the applicable federal securities laws. Moreover, the adviser failed to conduct any compliance trainings or annual reviews of its program.
Grewal also flagged in his speech three traits crucial for fostering “a culture of proactive compliance” to restore public trust in financial institutions: (i) education, or sufficient awareness of compliance responsibilities and the firm’s conduct; (ii) engagement, or maintaining adequate contact with the company’s staff; and (iii) execution, or implementing the right compliance policies.
Gurbir S. Grewal, SEC Division of Enforcement Director, Speech, Remarks at New York City Bar Association Compliance Institute (Oct. 24, 2023), available at: https://www.sec.gov/news/speech/grewal-remarks-nyc-bar-association-compliance-institute-102423.