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The Life of a CCO: Second in a Series

Adequate Supervision

Section 203(e)(6) of the Investment Advisers Act of 1940 permits the SEC to bring an enforcement action against a registered investment adviser or an associated person who, among other things, has failed to supervise a person who commits a violation, if such person is subject to their supervision.

Notwithstanding the confusion recently created after the New York Court of Appeals upheld the right of a hedge fund manager to dismiss a Chief Compliance Officer ("CCO") who reported alleged violations of the securities laws (See our Communiqué from last week), a "failure to supervise" enforcement action is serious and, depending on the circumstances, can be brought against senior members of a firm including the CCO. Fortunately, Section 203(e)-6 also provides a “safe harbor” that will help guard against SEC actions for failure to supervise.

Section 203(e)-6 in part reads:

“…no person shall be deemed to have failed reasonably to supervise any person, if--

  1. there have been established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person, and
  2. such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and system were not being complied with.”

Subparagraph A simply means that you have adequate policies and procedures and is the easier part of the safe harbor to satisfy. Satisfying subparagraph B is more difficult. In order to adequately demonstrate that you “reasonably discharged” your duty to supervise and put these procedures into practice, you need to establish compliance workflow routines and related documentation. Timely testing related to areas where supervision is expected (among them, personal trading, portfolio management, and review of electronic mail) should be part of these workflow routines. It is also important to document compliance procedures and supervision. No two compliance programs are exactly alike; accordingly, the documentation and testing related to supervision should be unique to each firm.

Having a great compliance manual encompassing written policies and procedures that are customized to adequately address your unique business model, risks and conflicts of interest is thus nothing more than a good start. If you cannot demonstrate that your firm has followed its compliance policies and procedures, you are failing. SEC examiners will expect firms to be able to demonstrate and provide documentation evidencing how their compliance program functions on a daily basis and how the various compliance issues are addressed including how the program is monitored (i.e. supervised).

The best advice we can offer CCOs, who are clearly "supervisors" and who want to avoid an action for failure to supervise, is to be proactive. If your firm is newly registered, don’t put your compliance program on hold (See our recent Communiqué regarding the SEC’s intentions to potentially start the examination of newly-registered private fund advisers this fall). In addition, make sure you have adequate resources to satisfy your responsibility which may require discussions with senior management.

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Communiques

SEC3 Newsletter

Commentary: How Compliance Officers & Firms Can Help Limit CCO Personal Liability This article originally appeared on the Thomson Reuters Regulatory Intelligence subscription service for compliance and risk professionals and is... read more »

Wishing One-and-All a Happy, Healthy and Prosperous New Year

We hope each of you found some peace and tranquility in the company of loved ones this holiday season and want to wish one-and-all a happy, healthy and prosperous New... read more »

Understanding How to Mitigate Liability and Navigate Insurance Options (Part II)

In June, we shared our thoughts around common insurance gaps and insurance riders that CCOs as well as managers should understand. One of the gaps we shared related to pre-claim... read more »

Cybersecurity - What have we learned and what have we done?

Regulatory Landscape In April 2015, the Securities and Exchange Commission ("SEC's") Division of Investment Management issued a guidance update, identifying cybersecurity as a critical issue. Several regulators are in fact focusing... read more »

Gatekeepers in SEC Crosshairs

Ever since the enforcement cases were announced as part of the SEC’s “Operation Broken Gate,” the SEC enforcement division has continued to ramp up scrutiny of gatekeepers including third-party service... read more »

Anna M. Bencrowsky, CRCP, CMFS Joins SEC3

We are pleased to announce that Anna M. Bencrowsky, CRCP, CMFS has joined SEC3 as a Senior Consultant. Prior to joining SEC3, Anna held several executive compliance positions. Anna recently retired... read more »

Events

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...

Webcast: SEC 2017 Examination Focus Area – Cybersecurity Testing

Penetration Testing & Vulnerability Assessments - Examining the SEC & FINRA Requirements When: Wednesday, January 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder,...

Chief Compliance Officer Roundtable: Breakfast Briefing

When: October 20, 2016 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Thomas Westle and Janaya...

Practicing Law Institute - Hedge Fund Management 2016

When: September 15, 2016 Where: New York & concurrent webcast | 1177 Avenue of the Americas | New York, NY 10036 Schedule: 9:00 am – 5:00 pm Janaya Moscony, President of SEC3 will...

CHIEF COMPLIANCE OFFICER ROUNDTABLE: BREAKFAST BRIEFING

When: April 13, 2016 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 22nd Floor Boardroom Thomas Westle and Janaya Moscony, along with industry experts,...

COMPLIANCE SCIENCE SUMMIT 2015

When: November 17, 2015 Where: Convene Midtown East | 730 Third Avenue | New York, NY 10017 Janaya Moscony, President, SEC Compliance Consultants, Inc. will be moderating a...