LeClairRyan’s Despo offers advice in the face of stepped-up SEC investigations at Regulatory Compliance LLC conference
BOCA RATON, Fla. (10/14/15) — With the Securities and Exchange Commission taking a tougher line on broker-dealers and registered investment advisers, companies and individual officers have to be more prudent than ever, according to William A. Despo, a Newark-based member of national law firm LeClairRyan’s Financial Services Regulation and Securities Litigation Practice Area Team.
“Registered Investment Advisors (RIAs) and their firms are coming under increasing scrutiny by the SEC when it comes to conflicts of interest, cybersecurity and other issues,” warned Despo during the Regulatory Compliance LLC conference, “Fostering a New Understanding of Compliance,” held in Boca Raton from September 24 through 26. The veteran securities attorney took part in two panels: one focused on RIA regulatory issues, and the second addressing risk management and liability issues related to Chief Compliance Officers (CCOs).
“Recent high-profile cases – like the SEC’s allegation that Guggenheim Partners Investment Management LLC breached its fiduciary duty by failing to disclose a potential conflict of interest when a senior executive received a $50 million loan from an advisory client – illustrate the agency’s expanded approach to RIA responsibility,” he said. “Even ordinary trading is coming under greater scrutiny. For example, simply executing a client’s orders in a timely manner may not be enough. Instead, RIAs must also look for a cost-efficient way of executing the transaction while still delivering the highest speed and best quality.”
Despo suggested that CCOs of RIA firms may be able to reduce their exposure by being on the lookout for any potential conflicts of interest within their firm and disclosing them in a timely manner to appropriate officials. He also advised that CCOs take a proactive approach to other potential issues, such as reviewing firm-wide emails and employee broker accounts to help detect insider trading by employees.
Addressing the growing pressure on CCOs, Despo noted that the SEC appears to be holding them to an unreasonably high standard.
“Charges brought against companies like Blackrock Advisors LLC and its CCO Bartholomew Battista indicate that the SEC is increasingly imposing strict liability on CCOs, holding them personally liable for unintentional lapses in the proper implementation of policies and procedures,” he said. The SEC had blamed Battista for Blackrock’s failure to disclose a conflict of interest involving the outside business activity of a portfolio manager.
“Even an SEC Commissioner, Daniel Gallagher, has expressed concern that this approach may backfire,” Despo noted. “It could drive CCOs to institute less-comprehensive policies and procedures, with fewer specified duties, in an effort to avoid personal liability.”
To help protect themselves, Despo said CCOs should consider reviewing their firm’s risk governance structure, and ensure that a clearly defined chain of authority is in place with clear roles, responsibilities and accountability. Business units should also be responsible for their own compliance processes, he added.
“Firm management should be engaged in the compliance process, and CCOs should insist on being supplied with adequate compliance resources,” advised Despo. “Additionally, CCOs should not ignore any ‘red flags’ that indicate improper activity and should not hesitate to report any concerns to upper management.”
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