Recent SEC enforcement actions suggest that being a CCO is not all that it’s cracked up to be; the SEC recently sanctioned two CCOs. SEC Commissioner Gallagher’s dissents and his recent comments regarding those dissents have really framed the issue.
The SEC Rules only provide that an “adviser” must have and implement written supervisory procedures. Yet, the SEC sanctioned CCOs even though they are not the “advisers”. By doing so, Commissioner Gallagher sees this as an improper opening of the door for CCO liability because the SEC has not provided any guidance on the meaning of the applicable rule.
Commissioner Gallagher’s objections are well-noted. All a CCO can do is provide the written supervisory procedures to the advisers who have to follow/enforce them. If they fail to do so, the CCO has no ability to fire or sanction that failure, only a supervisor would have that authority. So what should CCOs do?
Without further guidance from the SEC, a couple of scenarios are possible. You may see that qualified people no longer want to serve in this capacity. Alternatively, you may see very detailed paper trails to avoid having the SEC look at the CCO for a failure to supervise issue.
Neither result is all that palatable. In the absence of some real SEC guidance, the best thing CCOs can do is well document their actions. Hopefully with that sort of “paper trail” the SEC will not sanction the CCO when someone at the firm violated the supervisory rules governing the firm.*
* photo from freedigitalphotos.net