GC Exonerated in Failure to Supervise Case
The SEC’s Chief Administrative Law Judge dismissed an SEC action against a broker-dealer’s General Counsel, who the SEC alleged failed to supervise a broker who admitted to securities fraud. In a very fact-based opinion, the ALJ determined that the GC reasonably relied on the supervisory structure of the firm, which required branch managers to undertake direct supervision. The ALJ explained that the GC had no reason to believe that the chain of direct supervision failed to supervise the broker, and, in fact, several senior managers lied to him about their supervisory activities and responsibilities. Additionally, upon becoming aware of illegal activity, the Respondent took reasonable actions including recommending certain sanctions to senior management and Compliance.
OUR TAKE: The standard of care applicable in failure to supervise cases is subjective and fact-based. As a result, they are difficult to defend. This case runs counter to many recent cases where the SEC has prosecuted lawyers and compliance professionals for failure to supervise.