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The Life of a CCO: One in a Series

State Law versus Federal: Who will protect the CCO?

We may not be the first to tell you, but it is important to note that the challenges presented to those holding the CCO title and their duty to supervise recently became more complicated following a decision of the New York Court of Appeals which upheld last month the right of a hedge fund manager to terminate a CCO (who was an at-will employee) for allegedly voicing objections over inappropriate securities trading by his employer (Sullivan v. Harnisch).

The CCO alleged that he was dismissed for doing his job and “speaking out” internally about a securities violation as he was supposed to do given his position. He argued that the manager should not be able to dismiss him under such circumstances. The New York Court of Appeals disagreed.  It found that discharging his obligations under the federal securities laws did not protect the CCO from dismissal under state laws and implied that if the federal legislature wished to protect employees from such at-will termination, it would have to enact new laws.  In the court’s view, an employee is protected from anti-retaliation only if the employee reports the wrong-doing to the SEC and does so under the Dodd-Frank whistleblower statute.  The court also noted that the firm had no express company anti-retaliation policy.

It is interesting that the Chief Judge of the New York Court of Appeals dissented and said that “the message that will be taken from the majority’s decision is self-evident: if compliance officers (and other similarly situated) wish to keep their jobs, they should keep their hands down and ignore good-faith suspicions or evidence they may have that their employers have engaged in illegal and unethical behavior, even where such violations could cause or have caused staggering losses to their employers’ clients”. This decision puts CCOs in a difficult and conflicting situation. On one hand, they face enforcement actions and personal liability from the SEC for failure to supervise. On the other hand, they are not protected from retaliatory termination for doing their job correctly. This is not an optimal result and hopefully, Congress or the SEC will provide guidance. Until then, CCOs could do a few things:

  1. Encourage independent review and testing of the compliance program either internally by an independent audit department or a third-party provider as recently advised by two senior SEC officials, Carlo di Florio, the Director of the Office of Compliance Inspections and Examinations (“OCIE”) and Norm Champ, the Deputy Director of OCIE. See the rest of the recommendations by the SEC in our previous Communiqué “When should newly registered private fund managers expect to be examined by the SEC?”. Independent review procedures should be established before problems arise and when there is more internal consensus on their adoption. A second set of eyes and an independent report can help the CCO make a case that he or she supervised “reasonably” and may, in some instances facilitate communications with the firm’s management as well. 
  2. Encourage the adoption of anti-retaliation policies in their firms’ compliance programs and employee handbooks.
  3. Document in detail their efforts to inform management about possible violations and management’s reaction and efforts to correct and/or address violations even if the actions taken by the CCO, while reasonable, are not exhaustive and did not entail pursuing every possible course of action, such as whistleblowing. 
  4. Do extensive due diligence before accepting the CCO title. Is there tone at the top?  If you find yourself in a position where you are holding the CCO title, there is limited tone at the top and you are unable to implement change, seriously consider calling a headhunter.
 

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Communiques

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On Friday, September 28, 2018 the SEC charged LendingClub Asset Management (LCA) and its former president Renaud Laplanche with fraud for improperly using fund money to benefit LendingClub Corporation (LendingClub),... read more »

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The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment... read more »

SEC Adopts Fund Liquidity Reporting and Disclosure Changes

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More SEC Settlements - This Time Form PF Filing Deficiencies

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Two Recent Enforcement Actions Against Private Fund Advisers

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Events

Chief Compliance Officer Roundtable: Breakfast Briefing - November 8, 2018

When: November 8, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Dorsey PF 2018 Symposium

When: September 26, 2018 (8:30 am - 6 pm Where: Dorsey & Whitney LLP | 51 W. 52nd Street | New York, NY 10019 Directions > SEC3’s President, Janaya Moscony will join...

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...