In a 30-day period, the U.S. Securities and Exchange Commission (“SEC”) has released guidance in three ways regarding certain views on the important role and potential liability risks of chief compliance officers (“CCOs”). SEC Commissioner Hester M. Peirce first raised these topics in a speech to the National Society of Compliance Professionals, advocating for greater clarity regarding the SEC’s decisions to impose individual liability on compliance professionals and challenging the wisdom of charging chief compliance officers “based on mere negligence.” Hester M. Peirce, When the Nail Fails—Remarks before the National Society of Compliance Professionals (Oct. 19, 2020). Book-ended thirty days later, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a “Risk Alert” titled OCIE Observations: Investment Adviser Compliance Programs (“OCIE Compliance Risk Alert”). That same day, OCIE Director Peter Driscoll gave a speech that served as the Opening Remarks at National Investment Adviser/Investment Company Compliance Outreach 2020, titled The Role of the CCO – Empowered, Senior and With Authority, Peter Driscoll (Nov. 19, 2020). It is unprecedented for the SEC to discuss this important topic utilizing several platforms in such a short period. Taking notice of this, below we analyze the guidance provided by each. We also observe that the SEC’s focus on the role of compliance is not new but that sometimes the SEC’s support for compliance has not appeared to extend beyond OCIE. Cf. Lori Richards’ (then-OCIE Director) October 2007 Speech “Working Towards a Culture of Compliance: Some Obstacles in the Path” (observing that an effective compliance program required management support, a “seat at the table” for the CCO, adequate compliance staffing relative to the size and risks of the firm’s business, and “tone at the top” from the CEO down); with Luis A Aguilar’s (then SEC Commissioner) June 2015 Speech “The Role of the Chief Compliance Officers Must be Supported” (defending recent SEC enforcement actions against CCOs and explaining that those CCOs acting in “good faith” should not fear the SEC).
Weeks after touting its record-breaking enforcement haul, the Commodity Futures Trading Commission (“CFTC”) Enforcement Division issued a memorandum providing guidance for enforcement staff to use when recommending the recognition of cooperation, self-reporting and remediation during the enforcement process. The historic enforcement performance demonstrated that the CFTC can wield a large stick, but the latest guidance is aimed at recognizing efforts in resolving violations.
Ever since the creation of Bitcoin in the late 2000s, the SEC has warned that, depending on the circumstances, “initial coin offerings” (ICOs) involving digital tokens or coins may be subject to regulation under the federal securities laws.1 The SEC has provided “facts and circumstances” guidance regarding whether a particular cryptocurrency offering involves a security. See, e.g., the SEC’s Framework for “Investment Contract Analysis of Digital Assets.” But officials have opined that cryptocurrencies sold only to be used to purchase a good or service, such as Bitcoin or Ethereum, may not be securities.2
In Faegre Drinker’s “Enforcement Highlights” inaugural podcast, Jim Lundy moderates a panel with fellow SEC and Regulatory Enforcement partners Mike MacPhail and David Porteous, Capital Markets Team Co-Leader Beth Diffley, and Investment Management Group partner Jillian Bosmann to discuss the pandemic’s impact on the SEC’s Division of Enforcement and the potential impacts of the 2020 election on the SEC and its future.
On October 6, 2020, the Commodity Futures Trading Commission (“CFTC”) issued a release describing its record-breaking enforcement year. The release noted that in fiscal year 2020 (“FY2020”), the CFTC filed more enforcement actions than any other year in the history of the agency. CFTC Chairman Heath P. Tarbert stated “[w]e are tough on those who break the rules, and this historic year only further underscores this point.”
The most recent headlines emphasize the CFTC’s enthusiasm in pursuing spoofing-related actions. Of note, the CFTC ordered a registrant and affiliates associated with one of the largest bank holding companies to pay a record $920 million for spoofing and manipulation that spanned over eight years. This penalty comes as the largest monetary relief in the agency’s history. In September alone, the CFTC announced three other spoofing settlements with fines totaling nearly $1.8 million, and brought charges against a trading firm and two of their traders.
On September 17, 2020, the SEC announced the imposition of a cease-and-desist order against private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson), an SEC-registered investment manager, in connection with alleged violations of reporting obligations under Section 13(d) of the Securities Exchange Act of 1934 (Exchange Act). The SEC alleged that Welsh Carson had failed to timely amend a Schedule 13D report – commonly known as a beneficial ownership statement – after its investment position changed from an intent to acquire and restructure a company to an intent to liquidate its entire position in the company. In connection with the entry of the SEC’s cease-and-desist order, Welsh Carson agreed to pay a civil penalty of $100,000.
On September 28, 2020, the U.S. Securities and Exchange Commission (the “SEC”) announced two settlements against public companies and individual charges against the former controller and chief accounting officer and the former chief financial officer of one of the companies. In its accompanying public announcement, the SEC advised that “The actions are the first arising from investigations generated by the Division of Enforcement’s EPS Initiative, which utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.” This initiative exemplifies the harnessing of “Big Data,” i.e., large data sets that may be analyzed computationally to reveal patterns, trends, and associations.
On September 10, 2020, the CFTC announced the issuance of new, public, guidance to its enforcement staff on evaluating the adequacy of corporate compliance programs. The new guidance provides enforcement staff a framework with which to assess participants’ compliance programs, and is intended to ensure consistency and transparency in such reviews.
The latest publication continues the Commission’s efforts to increase transparency in the enforcement process. In May, the CFTC formally issued guidance regarding Enforcement’s decisions to recommend the imposition of civil monetary penalties, and last year the Division issued its first public Enforcement Manual. More details on these previous issuances from the CFTC can be found here and here.