Securities Litigation

In an August 18 letter to SEC Enforcement Director Ceresney, the National Society for Compliance Professionals ("NSCP") urged the SEC to adopt an internal guideline requiring a higher "aiding and abetting" standard for compliance-officer liability in enforcement actions. While underscoring its commitment to a strong enforcement program in appropriate circumstances, NSCP expressed concern over the hindsight breadth of the "caused" standard used in recent actions against compliance professionals. The group urged the SEC to consider several issues when making charging decisions. First, the SEC should consider the staff function of compliance (distinct from line supervision): The role of compliance generally is to advise, monitor, test and escalate to management. Second, NSCP cautioned against prosecutorial mission-creep toward a hindsight negligence standard of secondary liability that always second-guesses whether inherently imperfect compliance and risk-avoidance controls might have been better. Third, NSCP urged consistency with previous public statements that compliance officers should not face liability unless they (i) affirmatively participated in the misconduct; (ii) mislead regulators; or (iii) wholly failed to discharge a clear reasonability. NSCP urged the Staff to base secondary-liability charging decisions against compliance-officers on the aiding-and-abetting standard requiring; (i) a primary violation; (ii) knowing or extremely reckless conduct; that (iii) substantially assisted the primary violator. Compliance-officer liability has been a topic of public debate among the SEC's Commissioners over the past several months, with departing Commissioner Gallagher having issued a strongly-worded dissent to some Commission sanctions. The NSCP is the nation's largest securities-industry organization devoted exclusively to serving compliance officers. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. He is a member of NSCP. See attorney profile. © 2015 by Thomas K. Potter, III (all rights reserved).