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Compliance Officers in the Crosshairs?

Posted  November 23, 2015

By the C|C Whistleblower Lawyer Team

Are compliance officers being targeted by government regulators?   An increased focus on individual accountability is making those professionals feel particularly vulnerable, even as regulators in the United States and abroad emphasize their partnership with compliance officers.

Andrew Ceresney, director of the Security & Exchange Commission Division of Enforcement, addressed the National Society of Compliance Professionals in November 2015 and attempted to offer some reassurance. He stressed that the SEC “is in your corner when your work is hindered by uncooperative or obstructionist business personnel.” Ceresney characterized those instances where the SEC brought actions against compliance officers as falling into three categories: where the compliance officer is involved in misconduct unrelated to their compliance function; has tried to mislead or obstruct Commission staff; or has exhibited a wholesale failure to carry out his or her compliance duties. These followed  similar remarks made by Chair Mary Jo White at the Compliance Outreach Program for Broker-Dealers.

U.S. Assistant Attorney General Leslie Caldwell, the head of the Dept. of Justice’s Criminal Division, echoed Ceresney’s comments, telling the Securities Industry and Financial Markets Association that the DOJ is not looking to prosecute compliance professionals and in fact views them “as the good guys and as our allies.”

But a recent survey by Thomson Reuters shows that the compliance community believes there is a growing focus on personal liability, that it is world-wide, and that compliance officers are at greater risk than other executives. At a Governance, Risk and Compliance Summit held this year in New York, 67 percent of the audience responded that the compliance officer’s role carries the greatest risk of personal liability.

Their concern is not without basis. The survey cites instances of enforcement actions brought against compliance officers by regulators in the UK, Hong Kong, and Dubai.  In addition to SEC enforcement, U.S. compliance officers have been subject to discipline by the U.S. Financial Industry Regulatory Authority (FINRA) and the Financial Crimes Enforcement Network (FinCEN).

Scrutiny of compliance officers may increase in the UK. The Financial Conduct Authority has announced final rules that go into effect next year and aim to improve individual accountability in the banking sector.

Compliance officers who know of wrongdoing but cannot get management to correct the problems or to self-report have options, particularly if the company is subject to Dodd-Frank.

Although compliance officers are generally barred from acting as whistleblowers under the SEC program authorized by Dodd-Frank, there are certain exceptions set out at 17 CFR § 240.21F-4(b)(4)(v).  A compliance officer can be an SEC whistleblower if he or she believes disclosure is necessary to prevent substantial injury to the financial interest of the entity or investors; believes that the entity is impeding an investigation; or if more than 120 days have elapsed since the officer disclosed the allegations to the firm’s audit committee, chief legal officer, chief compliance officer, or supervisor.

These incentives are not merely theoretical.  In April 2015 the SEC announced an award of over one million dollars to a compliance professional  who assisted in an enforcement action.  This was the second SEC whistleblower award made to a compliance officer.  The Commodity Futures Trading Commission has a similar compliance officer whistleblower rule, 17 CFR 165.2(g)(7), but has not yet announced an award to a compliance officer.

Compliance officers who are prevented by management from fulfilling their responsibilities may want to think about satisfying those responsibilities by whistleblowing.  That is a better option than nervously waiting for a visit by the SEC.

Tagged in: CFTC Whistleblower Reward Program, SEC Whistleblower Reward Program,