Weekly RoundUp
July 8, 2015

Financial Services Weekly News

CCO Point/Counterpoint: SEC Commissioners Debate Enforcement Actions Against Chief Compliance Officers. In a dissenting statement on June 18, SEC Commissioner Daniel Gallagher explained his reasons for voting against two settled enforcement actions involving alleged violations of Investment Advisers Act Rule 206(4)-7 by chief compliance officers (CCOs) of registered investment advisers. Gallagher stated his views that the settlements “illustrate a Commission trend toward strict liability for CCOs under Rule 206(4)-7” and send “a troubling message that CCOs should not take ownership of their firm‘s compliance policies and procedures, lest they be held accountable for conduct that… is the responsibility of the adviser itself.” Gallagher argued that the problem was not only enforcement actions but lack of clarity about Rule 206(4)-7, both of which could lead to worse, not better, compliance, stating: “Given the vitally important role played by compliance personnel, I am very concerned that continuing uncertainty as to the contours of liability under Rule 206(4)-7 will disincentivize a vigorous compliance function at investment advisers.”

On June 29 Commissioner Aguilar responded with his own statement, titled “The Role of Chief Compliance Officers Must be Supported.” Aguilar’s statement was intended to dispel the impression of the CCO community “that the SEC is taking too harsh… an enforcement stance against CCOs, and that CCOs are needlessly under siege from the SEC.” Aguilar stated his view, based, among other things, on his former experience as the general counsel and head of compliance at a global asset management firm and his current role as SEC Commissioner, that the SEC has “brought relatively few cases targeting CCOs relating solely to their compliance-related activities.” The vast majority of the cases, according to Aguilar, involved CCOs who “wore more than one hat,” and whose activities “went outside the traditional work of CCOs, such as CCOs that were also founders, sole owners, chief executive officers” or other principals. Aguilar stated his belief that, rather than targeting CCOs, “the Commission has approached CCO cases very carefully, making sure that it strikes the right balance between encouraging CCOs to do their jobs competently, diligently, and in good faith, and bringing actions to punish and deter those that engage in egregious misconduct.” Aguilar went on to say that an effective compliance program starts at the top, and that an adviser’s senior leadership “should be strong advocates for a robust and enduring culture of compliance.” The Commission’s support for CCOs was illustrated, Aguilar stated, by the SEC enforcement action In re Pekin Singer Strauss Asset Management (June 23, 2015), in which “the firm’s President did not provide the CCO with sufficient guidance, staff, and financial resources, despite the CCO’s pleas for help” which “contributed substantially to Pekin Singer’s compliance failures.” While the President was suspended for 12 months, Aguilar noted that the SEC order did not include any charge against the CCO. CCOs, who, as a group, are haunted by the specter of undiscovered violations and procedures that, in hindsight, are found to be imperfect, may still wonder whether their efforts will be appreciated by the SEC. Aguilar finished with an attempt at encouragement: “the Commission works to support CCOs who strive to do their jobs competently, diligently, and in good faith—and these CCOs should have nothing to fear from the SEC.”

Regulatory Developments

Agencies Post Public Sections of Resolution Plans

In a July 6 joint press release, the Federal Reserve Board and FDIC announced that they have posted the public portions of annual resolution plans for large financial firms. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) as systemically important periodically submit resolution plans to the FDIC and the Federal Reserve. A plan must describe the company’s strategy for rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure of the company. Each firm is required to submit a public section with a summary of the resolution plan that describes certain aspects, including the firm’s material entities and core business lines, and information on how the resolution plan would be executed. The agencies have also provided guidance requiring more detail in firms’ public plans, including greater detail on each material entity, a discussion of the strategy for resolving each material entity in a manner that mitigates systemic risk, a high-level description of what the firm would look like following resolution, and a description of the steps that each firm is taking to improve its ability to be resolved in an orderly manner in bankruptcy. The agencies are posting the public portions of the resolution plans, as provided by the firms, on the FDIC and Federal Reserve Board websites. The plans have not yet been reviewed by the agencies, which will now be beginning their review process.

Client Alert: Federal Agencies Issue Final Policy Statement Regarding Standards for Assessing Diversity Policies and Practices

As reported in the June 17, 2015 Roundup, federal financial regulators issued a final policy statement establishing joint standards for assessing the diversity policy and practices of financial institutions and other entities regulated by the OCC, FRB, FDIC, NCUA, CFPB or SEC. Goodwin Procter’s BankingConsumer Financial Services and Labor & Employment practices have jointly issued a client alert providing additional analysis of the policy statement.

Enforcement and Litigation

Memo: SEC Sanctions Auditor, Administrator and Trustee in Connection with Auditor-Trustee Relationship

On July 1, 2015, the SEC issued a consent order instituting administrative and cease-and-desist proceedings against the former auditor of three closed-end funds, an administrator of the Funds that provided compliance services and a former member of the Funds’ boards of trustees in connection with violations of auditor independence rules. Goodwin Procter’s detailed analysis of this enforcement action can be found here.

SEC Charges Individual with Operating Unregistered Brokerage Business in Secondary Market Re-sales

On June 11, the SEC announced that it had filed a complaint against an individual, Joshua Yudell, and his controlled entities for doing business as an unregistered broker. The SEC alleged that for a period of four years, Yudell and his controlled entities entered into agreements with securities owners pursuant to which he would obtain custody and control over their securities, attempt to sell the securities into the market through accounts at registered brokers, and then provide the net proceeds, minus Yudell’s fees, to the securities owners. The SEC also alleged that the securities of at least one of the issuers fell into the category of “penny stock” as defined in the federal securities laws. Yudell consented to an injunction and agreed to pay a total of $4.4 million, including disgorgement of estimated profits of $4.2 million, to settle the charges. The SEC issued a final order on June 22.

Webinar - Tibble v. Edison: Implications of the Supreme Court's First ERISA Fee Decision

On July 23 from noon to 1 p.m. EDT, Goodwin Procter partners Jamie Fleckner and Scott Webster will host a complimentary webinar discussion on the Ninth Circuit's Tibble v. Edison, Int'l decision, highlighted in our quarterly newsletter, ERISA Litigation Update. They will analyze the implications of that ruling for ERISA litigation and fiduciary decision-making. To register for the webinar please click here.