NYC Bar Recommends Framework for Chief Compliance Officer Liability
The New York City Bar Association has issued a framework for Chief Compliance Officer liability, which would limit enforcement actions to wholesale failures.
The NYC Bar report recommends that the SEC only charge a CCO where s/he exhibited wholesale failures in carrying out the compliance responsibilities. The Bar report would limit these wholesale failure cases to situations where (i) the CCO did not make a good faith effort, (ii) the failure related to a fundamental aspect of the compliance program (rather than a “broken windows” approach); (iii) the CCO repeatedly fails to remedy the breach after notice and an opportunity to cure; (iv) the legal obligations were unambiguous; and (v) there were aggravating factors such as intentional misconduct or extreme disregard. The Report would also allow for cases where the CCO actively participated in the fraud or misconduct by adding value to the wrongdoing or engaged in a pattern of obstructing the SEC. The Report also recommends that the SEC consider mitigating factors including lack of authority and access and constrained resources. The NYC Bar is concerned that prosecuting CCOs does not further the SEC’s mission because it deters qualified professionals from serving as CCO and may impact their willingness to become too involved. The City Bar states unequivocally that the SEC should have a higher standard for charging CCOs than for the firm or its principals.
This is great work by the NYC Bar that the SEC should consider. We would accept this liability framework as a great improvement over the current state of affairs which has defined CCO liability on an enforcement case-by-case basis. Nevertheless, we believe that CCO liability should only attach where the CCO participated, actively concealed, or benefited from the wrongdoing, similar to liability for outside counsel. No matter how the SEC defines “wholesale failure,” the inherent subjectivity will drive away qualified professionals.
Read Framework here.