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News December 13, 2004 Issue

SEC Won’t Put CCO ‘Head on Spike’ to Enforce Compliance Program Rule . . . But CCOs Still Could Be Named

Okay. We’ve heard the round of CCO-friendly speeches delivered by SEC officials at recent industry conferences. So what’s with the continued warnings that SEC enforcement cases against CCOs are coming down the pike? To take but one example: Anthony Evangelista of PricewaterhouseCoopers LLC is predicting that we’re going to see SEC enforcement actions against CCOs in the next year or so. "I do think they will come," Evangelista told IM Insight. "I’m not so sure it’s within the next few months, but I would suspect [we’ll see them] within a year or 18 months, concurrent with the delivery of the first annual reviews." And, he added, "if there’s a major debacle in the interim, I think the SEC will in fact look to a [CCO] to see where they were" regarding whatever happened. If a debacle occurs, whether industry-wide or firm-specific, "I do think that [CCOs] will be subject to scrutiny and review."

Evangelista added that his view is "based primarily on anxiety from chief compliance officers." The CCOs he’s talked to "believe that it’s imminent, notwithstanding what [SEC officials are] saying either in public speeches or elsewhere that they want to have a collaborative relationship with CCOs."

Meanwhile, at last week’s ICI Developments conference, Division of Investment Management director Paul Roye said that the SEC is looking for "opportunities to reach out" to CCOs and "engage in a meaningful dialogue on compliance developments and other issues."

What’s going on?

IM Insight

asked an SEC staffer, and here’s what we learned: the SEC is not planning to quickly bring enforcement cases under the new compliance program rule to make examples out of CCOs. "The SEC is not going to put teeth into the rule by hanging a CCO or by putting a head on a spike for all the world to see," said the staffer. "That is not in the plans. I’ve never heard anyone say anything like that."

But don’t relax just yet: Because Division of Enforcement director Stephen Cutler has instructed the SEC enforcement staff to name individuals, not just firms, we may very well see CCOs featured in future enforcement cases.

"I think where the confusion lies" is that Enforcement, "in the last year or so," increasingly has been bringing cases against individuals, said the staffer. "This came from Cutler." In bringing cases, "we’re not just going to name a firm, we want to name a person who is responsible for the shortcoming."

And that approach, he noted, "just happens to coincide with the adoption of the compliance rule." Putting those two events together — Enforcement’s desire to name individuals, and the emergence of the CCO as a senior officer of the firm — "the SEC going forward probably is going to be naming some CCOs." When the SEC decides to bring an action and looks for a individual to name, he explained, the CCO is going to be the "natural" person to get the "first glance," although he added that "perhaps the CEO would be the better person."

So there you have it.

Back to Roye’s speech: although he didn’t specify what type of outreach efforts were planned, one project apparently involves a mechanism for CCOs to share compliance ideas. Roye emphasized the need for CCOs to reach out beyond their own organization to the broader industry in order to understand how new rules are being implemented, what new compliance challenges are facing the industry as a whole, and how other CCOs are approaching their role. In that regard, he said, the SEC staff "can be a helpful resource for CCOs, serving in some ways as a repository for the latest compliance-related issues and developments." CCOs, said Roye, should not be working in isolation. "There can be no doubt that outreach and a healthy sharing of ideas and experiences" will enable CCOs to better perform their duties, he said.

On the flip side, Roye encouraged the industry to reach out to the SEC staff for assistance when implementing the rules. "When you have questions, whether regarding the legal interpretation or practical implications of our rules, you should contact us," said Roye. "Having an industry that is uncertain about what is required by a specific rule serves no one’s interests," he said.