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Commissioner Says the SEC Picks on Compliance Officers

June 22, 2015

The SEC’s Daniel Gallagher, the Republican commissioner who announced his resignation in May, says the agency unfairly targets RIA-based chief compliance officers, causing confusion about their responsibilities, InvestmentNews writes.

In a dissenting opinion on two recent SEC settlements, Gallagher says the agency is “sending a troubling message” and causing uncertainty among compliance officers with regard to Rule 206(4)-7, which requires advisors to conduct annual reviews of compliance policies and procedures, according to InvestmentNews.

In one case, the SEC went after BlackRock Advisors for not having a compliance program over its advisors’ outside business activities. And in the second case, the agency said the compliance officer at SFX Financial Advisory Management Enterprises failed to implement the company’s procedures preventing theft from customer accounts, according to the newspaper. Gallagher says the “contours of liability” as they are currently defined by Rule 206(4)-7 “disincentivize a vigorous compliance function at investment advisors.”

As InvestmentNews interprets Gallagher’s views, these actions suggest the SEC has a habit of forcing compliance officers to enforce compliance procedures that aren’t always suited to — or even strict enough for — some practices and then to take responsibility for the actions of colleagues when in-house rules fall short.

Experts with whom InvestmentNews spoke agree the SEC’s approach causes confusion about the role of the compliance officer. As a result, they say that the agency should define firms’ responsibilities in this area more clearly. According to Dennis Stubblefield, an attorney with Shustak & Partners and a former SEC branch chief of enforcement, “Compliance personnel are very, very concerned about the uncertainty of when they will or will not end up being deemed a supervisor.”

To avoid getting in hot water, compliance officers have little choice but “do their job” until the SEC makes changes to its approach; and they should be careful to keep a good record of their recommendations to their companies’ management, Amy Lynch, president of FrontLine Compliance, tells InvestmentNews.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.