CCO Punished for Code of Ethics Violations
The SEC censured, fined, and barred a Chief Compliance Officer for failing to implement and test the Code of Ethics, thereby failing to stop or detect the insider trading by a portfolio manager. The SEC says that the CCO failed to: (a) include the subject security on a watch/restricted list when the portfolio manager’s father served on the Board; (b) collect required trading reports from an investment club that the portfolio manager beneficially owned; (c) review holdings reports; (d) investigate trading in client accounts in the subject security even though the firm generally purchased mutual funds; (e) update and customize the Code of Ethics; (f) conduct an adequate annual review of the Code of Ethics; and (g) change procedures after an exam cited specific deficiencies. The SEC cited violations of the Code of Ethics, books and records, and compliance rules. The SEC also charged the respondent, who was also president of the firm, with failure to supervise (Section 203(e)(6)) because he did not have a reasonable cause to rely on adequate policies and procedures.
OUR TAKE: In the event of wrongdoing by a rogue employee, robust policies and procedures can be a shield against regulatory actions. However, a weak compliance program can be used as a sword by the SEC’s Enforcement Division. Senior executives should also take notice that the SEC will hold them accountable for failure to supervise if the firm has a weak compliance program.