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News December 20, 2004 Issue

Plaze Downplays Likelihood of SEC Enforcement Cases Against CCOs

Is the CCO really the "natural" person to get the "first glance" by SEC enforcement attorneys, as suggested by an unnamed SEC staffer in an article in last weekís IM Insight?

SEC Division of Investment Management associate director Robert Plaze doesnít think so. "Whoever said the CCO is a Ďnaturalí ought to have his head examined," he said. While the SEC may be going after individuals "who are bad actors" to ensure that SEC enforcement penalties are not viewed as merely the "cost of doing business," the CCO is an "internal person" who typically is not an "actor" in the marketplace, said Plaze. "Heís not giving investment advice. Heís not effecting transactions in securities. Heís not dealing with clients."

However, Plaze said that he could foresee the SEC going after a CCO if the CCO facilitates fraud, covers up, looks the other way, or fails to cooperate with the Commission. He also noted that if the CCO is an executive with other responsibilities, and commits fraud in connection with those activities, he could be named. Otherwise, said Plaze, "I would think it would be unusual" for the SEC to name CCOs in enforcement cases.

Plaze said that while CCOs should do the best they can, the SEC will not expect perfection. "I donít think anyone here is expecting the CCO to successfully prevent all violations," said Plaze. "No one is expecting the compliance officer to find everything. We are all human beings, we all have limitations." He noted that the "real risk" is that the CCO is in a position to know whatís going on. "Itís not what you do, itís what you are in a position to know because of your responsibilities."

What should a concerned CCO do?

"What you donít do," said Plaze, "is tolerate behavior within the organization that you have reason to know violates the law. You donít look the other way, you donít ignore it, you donít cover it up, and you certainly donít participate."

Plaze said that the recent round of telephone interviews with CCOs was "the first step" in the SECís efforts to reach out to CCOs. "That was a Ďget-to-know-youí phone call," said Plaze, describing it as a "conversation" designed to convey the idea that "weíre in business together now." It was not, he added, "a trolling for violations."