February 29, 2012 / 6:31 PM / in 6 years

An SEC commissioner's plea for clarity

(Reuters) - Daniel Gallagher, the newest member of the U.S. Securities and Exchange Commission, is worried about an old conundrum for compliance officers and the investors they help protect.

The issue has been around for decades, but Gallagher is now speaking out on a “disturbingly murky” area of the law that creates conflicts for compliance officers, when regulators come after them as “supervisors” for trying to fix problems.

Chief compliance officers make sure their companies follow industry rules to protect their firms and investors. They’re supposed to be independent of other managers, so no one can convince them to bend the rules.

But regulators have likened their involvement in some situations to the role of supervisor, a title that requires meeting various industry standards. Slapping that label on compliance officers may inhibit them from taking an aggressive stand on wrongdoing because regulators may be more likely to persue disciplinary cases against them.

Gallagher, sworn in as an SEC commissioner in November, recently had to recuse himself for a related case at the request of the SEC’s ethics office for undisclosed reasons.

While Gallagher could not rule in the case, he is not keeping quiet, noting that the only guidance the SEC has on the point is a report it issued 20 years ago.

The continued lack of clarity from regulators “has made the position of compliance officer a job no one is going to want to take on,” said Joan Hinchman, executive director of the Connecticut-based National Society of Compliance Professionals.

Her point is not lost on Gallagher. Currently, the more expertise that compliance officers have, the more likely they may be deemed supervisors. That would encourage compliance officers to stay “ensconced in a dark corner of the firm,” and do little to protect investors, Gallagher said on Friday at the Practising Law Institute’s SEC Speaks conference in Washington.

“Firms and investors are best served when legal and compliance personnel feel confident in stepping forward and engaging on real issues,” he said.

The role of chief compliance officer isn’t often visible to the public. The position involves everything from disciplining employees to creating policies for advisers to follow when recommending securities to clients. A supervisor, whose responsibilities may include managing a department or branch, carries out those policies.

But the SEC’s recent dismissal of a controversial enforcement case against a compliance officer, raises questions about where to draw the line between compliance officer and supervisor. While the label may be appropriate for compliance officers who get involved in day-to-day supervisory roles, such as hiring decisions, it shouldn’t apply when they step up to fix a problem, say compliance professionals.


The issue came into focus most recently in January, after the SEC dismissed a three-year-long case against Theodore Urban, former general counsel at Ferris Baker Watts LLC, a Washington, D.C.-based brokerage and investment bank that is now part of RBC Wealth Management.

Gallagher was one of three SEC commissioners who recused himself from voting.

The SEC’s enforcement unit had accused Urban of failing to supervise a rogue broker - despite evidence that Urban made efforts to intervene and even recommended firing the broker.

The two commissioners who did not recuse themselves disagreed on whether compliance officers should be considered supervisors. That led to dismissal of the case.

Compliance officers had hoped for a written SEC opinion that would clarify the issue, but they did not get one.

Now, Gallagher wants the SEC to spell out its views clearly to provide guidance for the industry. The compliance community is also urging the SEC to provide guidance.

Compliance officers who do their jobs “are frequently going to be the first ones to be at the scene of the problem,” said John Walsh, a lawyer at Sutherland Asbill & Brennan LLP in Washington. “And if they’re a (labeled) supervisor they will always be totally responsible for that problem.”

Walsh should know. In September, he retired from his post as associate director of the SEC’s Office of Compliance Inspections and Examinations after 23 years at the agency. He called Gallagher’s concerns “spot-on.”

Reporting By Suzanne Barlyn; Editing by Jennifer Merritt, Walden Siew and Tim Dobbyn

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