New York City Bar Association Releases Report on Compliance Officer Liability; Makes Four Recommendations to Regulators

New York, February 4, 2020 – Compliance Officers face unnecessary risks that undermine effectiveness and regulatory goals, according to the “Report on Chief Compliance Officer Liability in the Financial Sector” (the “Report”) written by the Compliance Committee of the New York City Bar Association in partnership with the Association for Corporate Growth, American Investment Council, and the Securities Industry and Financial Markets Association.

“Financial firm compliance officers serve as essential gatekeepers to prevent, detect, and remediate violations of laws, regulations, and internal policies and rules,” states the Report. However, this role subjects compliance officers to inherent risk of regulatory investigation and personal liability. As the Report notes, increased apprehension of liability stems from a real “increase in enforcement actions brought against compliance officers, recent regulatory focus on holding individuals liable for compliance failures, and an expanding set of regulatory requirements.” According to the Report, these investigations can “discourage appropriate activity by compliance officers” and “threatens to reduce the ranks of effective, qualified candidates seeking and remaining in compliance positions.”

The Report outlines compliance officers’ regulatory concerns, recent enforcement actions against compliance officers and several proposals to bolster regulatory and compliance communication, interaction and understanding between regulators and the compliance community.

The Report makes four proposals for consideration by regulators policing the financial sector, such as the Securities & Exchange Commission and the Financial Industry Regulatory Authority:

• Release formal guidance articulating specific factors guiding discretion on charging decisions against chief compliance officers.

As explained in the Report, which provides six suggested factors to guide discretion, “formal guidance from financial regulators outlining the principles that will be used to determine whether to pursue regulatory action, individually or personally, against compliance officers will both further regulatory goals and grant compliance officers greater certainty that good faith conduct will not likely lead to personal liability.”

• Communicate greater detail on the conducting of inspections and investigations of chief compliance officers in existing methods of informal guidance, through providing greater detail in enforcement action releases, or in other public communication methods.

Offering greater detail in this way, according to the Report, “may offer greater clarity and present a less costly way to articulate regulatory priorities and highlight good practices that the regulator would like to see adopted.”

• Create an ex ante method of communication between compliance officers and regulatory staff.

As the Report notes, “compliance officers face an information gap when existing guidance does not cover a novel circumstance or close question,” and the “potential for advertent errors” can be mitigated “by establishing fora in which compliance officers and regulators can communicate and gain a preliminary understanding of each other’s positions, views, and challenges.”

• Create an ongoing advisory group between regulators and the compliance community to discuss areas of mutual concern.

“These are practical recommendations that, if implemented, can help the compliance community and the regulating authorities better achieve their shared goals without any fundamental legislative or regulatory actions,” stated Patrick Campbell, Chair of the Compliance Committee.

The full report can be read here: http://bit.ly/36WijwB.

About the New York City Bar Association

The mission of the New York City Bar Association, which was founded in 1870 and has 24,000 members, is to equip and mobilize a diverse legal profession to practice with excellence, promote reform of the law, and uphold the rule of law and access to justice in support of a fair society and the public interest in our community, our nation, and throughout the world. www.nycbar.org

About the American Investment Council

The American Investment Council (AIC) is an advocacy and resource organization established to develop and provide information about the private investment industry and its contributions to the long-term growth of the U.S. economy and retirement security of American workers. Member firms of the AIC consist of the country’s leading private equity, private credit, and growth capital firms united by their successful partnerships with limited partners and American businesses.  Learn more at www.investmentcouncil.org.

About the Association for Corporate Growth (“ACG”)

The Association for Corporate Growth’s mission is to drive middle-market growth. ACG is a trusted and respected resource for its 14,500 middle-market dealmakers and business leaders who invest in growth and build companies. In 2017, ACG’s Private Equity Regulatory Task Force published the ACG Private Equity Regulatory and Compliance (PERC) Principles, which provide industry consensus on regulatory and compliance principles for small and midsized private equity firms. ACG hosts a robust database that tracks job creation through private equity investment that can be found at www.GrowthEconomy.org. Learn more at www.ACG.org.

About the Securities Industry and Financial Markets Association (“SIFMA”)

SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).