Agency, Authority, and Compliance

Abstract

Compliance can and often does serve as a conduit through which regulators and enforcement authorities enlarge their authority beyond statutory bounds. The potential to do so is a function of the symbiotic relationship between compliance officers and regulatory authorities. Compliance officers owe their professional existence and their organizational authority to the interventions of regulators and enforcement agents. This creates a unique incentive structure and renders compliance officers especially receptive to regulators’ extra-legal pronouncements. As a result, the separation of compliance from legal and the elevation of the compliance function as the co-equal of the legal department, a structure often insisted upon by regulators and enforcement authorities, effectively enlarges the compliance conduit through which the government may abuse the rule of law. Rather than separating compliance from legal, compliance should be subordinated to legal so that an officer accountable exclusively to the best interests of the firm is charged with interpreting the law and advising the firm on what the law requires. Only after this determination has been made should compliance officers be charged with the task of executing on these decisions. A necessary condition to realigning organizational responsibilities in this way, however, is for the government to stop insisting on the alternative. More broadly, the government should not involve itself in the organizational details of compliance, but rather should limit itself to making and enforcing the law.

Keywords: compliance, corporate governance, enforcement, regulation, ethics, legal, general counsel, chief compliance officer, rule of law, ethics officer, administrative procedure act, prosecutor

JEL Classification: K22, K23, K14