CCO Suspended for Failing to Implement Custody Checks
The SEC suspended from the industry a Chief Compliance Officer who it charged with failing to implement reasonable policies and procedures. The SEC alleges that the CCO’s failures to implement custody procedures enabled a firm employee to misappropriate funds from client accounts. The SEC asserts that the employee controlled clients’ custody accounts including obtaining standing instructions and powers of attorney to move funds. The SEC charges that the CCO knew (or was reckless in not knowing) the violations of the custody rule and failed to take sufficient action. In particular, the SEC faults the CCO for failing to investigate the standing instructions and the employee’s control over the custodial accounts, allowing a custody account not in the name of the clients, failing to review transactions in client accounts, allowing the use of an outside e-mail account, and failing to conduct compliance audits. The SEC charges the CCO with failure to supervise and aiding and abetting violations of the custody rule (206(4)-2), the compliance rule (206(4)-7), and the books and records rule (204-2).
OUR TAKE: The SEC continues to target CCOs who it alleges knew or should have known about misconduct but failed to take action that may have prevented wrongdoing. CCOs must demonstrate active due diligence and follow-up with respect to matters brought to his/her attention.