As a compliance officer, how far do you need to go in
dealing with a problem employee? The Urban case was trying to address
this question, but got twisted up in procedural machinations. In dropping the
case, the two SEC commissioners didn't explain when a compliance officer or
in-house counsel at a broker-dealer or investment adviser becomes a supervisor
liable for an employee's actions.
The case began with suspicious trading at Ferris,
Baker Watts, Inc. by Stephen Glantz, a top-performing broker. In 2007, the U.S.
attorney in Cleveland accused Glantz and an accomplice of scheming to
artificially increase the stock price of Innotrac Corp., a company that
provides e-commerce fulfillment services. Glantz pleaded guilty in September
2007 to one count of stock fraud and one count of making a false statement. He
was sentenced to 33 months in prison.
The SEC moved up the chain and began investigating
Theodore W. Urban, Ferris, Baker Watts, Inc.'s, General Counsel, Executive Vice
President, and a voting member of the Board of Directors, the Executive
Committee of the Board, and the Credit Committee. The SEC's claim was that Urban
was a supervisor of Glantz and that he failed to properly supervise him.
Urban had a hearing before the SEC's chief administrative
law judge in March
2010. The judge decided that that although Urban was, under the law, the
broker's supervisor, he "performed his responsibilities in a cautious,
objective, thorough and reasonable manner." As a result, "Urban did not
fail to supervise."
Apparently, the SEC was not happy with losing that case,
so the Enforcement Division petitioned the commission for a review of the
decision. On Jan. 26, the SEC dismissed the case, leaving compliance officers
and in-house counsel with no guidance on when you are a supervisor.
SEC Chairman Mary Schapiro, Elisse Walter and Daniel
Gallagher recused themselves for unexplained reason. The remaining two, Parades
and Aguilar, couldn't agree.
Commissioner Gallagher to address the topic in his speech at The SEC
Speaks in 2012:
Once again, I want to stress that firms and investors are
best served when legal and compliance personnel feel confident in stepping
forward and engaging on real issues. An overbroad interpretation of
"supervision" risks tacitly deputizing as a supervisor, with concomitant
liability, anyone who becomes actively involved in assisting management in
dealing with problems. Deterring such active involvement will erode investor
confidence in firms, to the detriment of all.
Looking at the Enforcement Division's view of a
Gutfreund 51 S.E.C. 93 (1992):
the person was not a line supervisor and others shared supervisory responsibility;
still, he was a supervisor because he had the requisite degree of
responsibility, ability, or authority to affect the person's conduct when
senior management informed him of the misconduct to obtain his advice and
guidance and to involve him as part of management's collective response to the
Kirk Montgomery, 55
S.E.C. 485, 500 (2001): a chief compliance officer is a supervisor because it
was sufficient if the person plays a significant, even if shared, role in the
firm's supervisory structure and that his authority was subject to countermand
at a higher level.
Urban was required to take concerns about Glantz's
conduct to the Ferris Board or Executive Committee, and, if they did not act,
he was required to resign and report the matter to regulatory authorities.
That is a very harsh standard for compliance officer or
general counsel when dealing with an employee that he or she does not directly
supervise. The final decision by the SEC leaves it murky as to whether that
position by the Enforcement Division is the position of the Commissioners.
If you can't get a compliance problem fixed what should
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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