Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News August 21, 2017 Issue

Chief Compliance Officers: Know When and How to Resign

Few chief compliance officers want to resign for any reason other than accepting a better offer at another firm. The reality, however, is that CCOs may find themselves in positions where, for compliance reasons and to protect their own career credibility, they have little choice but to consider resignation. The key is recognizing when those times arise and knowing how to extricate themselves from their errant firms safely.

Itís a tough situation, and itís not good for the advisory firm, either. "The SEC pays†attention to CCOs coming and going," said Mayer Brown attorney Adam Kanter, adding that advisers have to make note of CCO changes on their Form ADV. "The agency does look at these things. It tracks them. If they see a pattern, or even a CCO leaving after a short time on the job, they may want to know why."

Kanter said he saw one advisory firm where three CCOs resigned over a four-year period, prompting the SEC to investigate. "There may be good reasons for such a turnover," he said, "such as the first CCO leaving to take another job, the second one was a temporary†replacement, and the third is the current CCO, who is still there."

Reasons to leave

"The situation most CCOs think about is when the CCO tells the firm what they need to do and then the firm doesnít do it," said Sidley Austin partner Hardy Callcott. "But in reality the reason to leave can be broader than that."

It all comes down to your firmís culture and its commitment to compliance. Without that commitment, any one of a number of situations may arise where a CCO may consider resigning. Among them are these:

  • Thereís fraud going on and you tried to correct it, but management was unwilling to do so. This creates a situation where the CCO cannot do his or her job, Kanter said. "No CCO wants to be associated with a firm that is engaged in bad conduct. That kind of thing can follow a person around, even if the CCO was not engaged in the misconduct and no action was taken against the CCO." A related reason to leave in such a situation, he said, is to avoid having enforcement actions taken against the CCO.
  • When the CCO loses confidence that management is being honest with him or her. "If management is consistently not telling you the truth about an initiative, that can be a problem," said Callcott. At that point, it becomes very difficult for a CCO to perform his or her job effectively.
  • The CCO is put in a position where the firm doesnít value compliance or provide adequate resources. "The CCO might feel his or her ability to do the job is compromised," Kanter said. This might be the case if the CCO gets a refusal after requesting more†resources from management, although there might be other reasons for such a refusal. "There was a lot of this during the economic downturn, when compliance, since it is not a profit center, was not as much of a priority."

Resignation timing

Just how a CCO should go about resigning depends on the circumstances surrounding his or her leaving, said Kanter. "Was it because of fraud at the firm, and the CCO plans to become a whistleblower?" If so, he said, "the CCO is probably going to want to discuss exit options with his or her legal counsel."

Barring a situation where the CCO is in danger of†becoming "tainted" by fraud going on at the firm, the best course is to provide two weeks or more of†notice, the best move is to keep the parting as amicable as possible. You might even want to allow time for an "off ramp" so the firm can find a replacement before you leave, Kanter said. As with any job, if you provide less than two weeks notice, there could be career consequences as word gets out. "Itís a relatively small†industry we all work in," he said. "If the parting is amicable and not because of fraud, you can provide proper†notice. A firm might also appreciate it if you wait to leave until after its latest Form ADV update is filed or its annual review is completed, depending upon the timing of your proposed exit."

On the other hand, Kanter said, "If there is fraud, then you may simply want to get out of there ASAP."

Protect yourself

What should a resigning CCO say in his or her resignations letter? One option would be to spell out in your letter the reasons you are leaving, including any credible belief you may have that there is fraud and that the firm is doing nothing about it, despite any compliance†advice you may have given. "As an attorney representing an advisory firm, I would hate, hate to see a letter like that," Kanter said. At the same time, he acknowledged, it might provide some protection for the departing CCO.

Such a situation, though, can hopefully be avoided. "The CCO has to do an annual compliance report and you must document what the deficiencies are, including any proposals made on corrective actions," said Callcott. If youíve done that, there is no need for listing the problems again in a resignation letter. Should a compliance issue arise mid-year, however, you might, depending on the facts and circumstances surrounding it, need to make clear in your resignation letter that you sought to escalate the issue to management, if only to protect yourself, he said.

Also be aware of this warning from Callcott: "If youíve got concerns and you havenít put them in your annual compliance report, you may have compliance problems personally."

CCOs considering taking copies of memorandums or emails showing the compliance recommendations they made and the response from management would be wise to speak with an attorney first. "It might not be legal to take company property, such as documents showing that you uncovered potential fraud, and that the firm did nothing to correct it," Kanter said. While CCOs and others are protected to some extent when sending files showing such recommendations to the SEC pursuant to the whistleblower program, he said, it is not clear that even those files can be taken home.