September 26, 2022

Volume XII, Number 269


September 26, 2022

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The SEC’s Latest CCO Case and the Ongoing Need for a Framework

On June 30, 2022, the SEC filed a settled action against Hamilton Investment Counsel, LLC (the “Firm”) and its chief compliance officer (“HIC CCO”). Notably, the SEC charged the HIC CCO with willfully aiding and abetting the Firm’s violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder – or more simply stated, the SEC charged the HIC CCO with aiding and abetting the Firm’s compliance rule violations. The primary underlying conduct involved compliance failures related to an investment advisory representative (“IAR”) not disclosing outside business activities to the Firm.

Other key aspects of the order instituting proceedings include:

  • The HIC CCO served as the principal of the Firm, and a registered representative associated with the broker-dealer used by the Firm;

  • The SEC charged the HIC CCO with aiding and abetting, not causing or failure to supervise;

  • The HIC CCO allegedly became aware of the IAR’s outside business activities and  failed to formally report such activities on multiple occasions;

  • The charges against the Firm were limited to compliance rule violations; and

  • No allegations of client harm were alleged.

While cases against chief compliance officers are historically rare, past cases have involved individuals who serve in various roles at firms or “wear multiple hats.” That is consistent with the facts here. What is novel about this case, however, are the charges only focus on aiding and abetting, and the violations only involve the compliance rule itself, as opposed to more egregious conduct involving client harm.

Commissioner Hester M. Peirce issued a statement with the release of this settled action. While Commissioner Peirce opened her statement by supporting the settlement, she then repeated concerns that she had previously raised publicly regarding the “importance of thinking carefully about when to impose liability against a [chief compliance officer].” In her statement, Commissioner Peirce referenced the framework proposal of the Compliance Committee of the New York Bar Association (“NY Bar Framework”), which, in summary, focuses on the following factors:

  • Did the CCO not make a good faith effort to fulfill his or her responsibilities?

  • Did the Wholesale Failure relate to a fundamental or central aspect of a well-run compliance program at the registrant?

  • Did the Wholesale Failure persist over time and/or did the CCO have multiple opportunities to cure the lapse?

  • Did the Wholesale Failure relate to a discrete specified obligation under the securities law or the compliance program at the registrant?

  • Did the SEC issue rules or guidance on point to the substantive area of compliance to which the Wholesale Failure relates?

  • Did an aggravating factor add to the seriousness of the CCO’s conduct?

Applying the NY Bar Framework to her view of the facts, Commissioner Peirce concluded that this settled action “lays out a sound basis for concluding that the [HIC CCO’s] conduct here fell materially short.” She closed by encouraging engagement “on designing a properly calibrated CCO liability framework….”

Commissioner Peirce’s call to action is the latest in a line of efforts to clarify this controversial area that dates back for years:

With the HIC CCO only being charged with aiding and abetting a compliance rule violation based on facts and circumstances that did not involve fraud or customer harm, the need for a better framework and more certainty continues to increase in importance for the compliance industry. 

© 2022 Foley & Lardner LLPNational Law Review, Volume XII, Number 222

About this Author

Brooke Clarkson, Foley Lardner Law Firm, Litigation Attorney

Brooke D. Clarkson is senior counsel with Foley & Lardner LLP, where she is a member of the Securities, Enforcement & Litigation Practice.

During law school, Ms. Clarkson was a summer associate with Foley, where she focused on securities litigation, government agency decisions, and regulatory standards. Prior to entering law school, she worked in the District Attorney’s Office of New York County, NY in the Frauds Bureau as a trial preparation assistant where she was involved in the prosecution of major white collar crimes. Her work...

Thomas J. Krysa Litigation Attorney Foley & Lardner Denver, CO

Thomas J. Krysa is a partner and litigation lawyer with Foley & Lardner LLP. Tom is based in the firm’s Denver office where he is a member of the Securities Enforcement & Litigation Practice. His practice focuses on advising clients in securities enforcement and litigation matters, government investigations, and complex commercial disputes. Tom, a former SEC senior officer and federal prosecutor, brings extensive government experience to the forefront to solve his clients’ problems short of government action, while at the same time preserving their interests should litigation and...

James G. Lundy Chicago Securities Attorney Foley Lardner

Jim Lundy is a partner and litigator within the Securities Enforcement & Litigation Practice Group at Foley & Lardner LLP, based in the firm’s Chicago office. Jim successfully resolves high-stakes enforcement matters by drawing on his deep technical insights and emotional intelligence.

Margaret Nelson Financial Attorney Foley & Lardner
Of Counsel

Margaret Gembala Nelson is of counsel with Foley & Lardner LLP, where she represents accounting firms, financial service entities, corporations and their professionals in auditor liability matters, government enforcement investigations and examinations, and complex securities and business litigation. She also conducts internal investigations on behalf of clients and advises on regulatory compliance and risk management issues.

Margaret has more than 15 years of experience as a regulatory and litigation lawyer focusing on complex securities, accounting, compliance, and commercial...