The "Wholesale Failure" of the SEC's Approach to Chief Compliance Officer Liability
David B. Lourie, The “Wholesale Failure” of the Sec’s Approach To Chief Compliance Officer Liability, 21 Hastings Bus. L.J. 3 (2024).
53 Pages Posted: 14 Jan 2025
Date Written: November 12, 2024
Abstract
Chief Compliance Officers (“CCOs”) at financial services firms are essential in ensuring that the approximately 15,000 SEC-registered firms, including investment advisers, broker-dealers, and private funds, comply with federal securities laws. These firms collectively manage over $114 trillion in assets for investors and are the “lifeblood” of the U.S. economy. The CCO position is so crucial to regulators that CCOs can and have been held personally liable for compliance violations of their firms, even when the CCO was not involved in the misconduct, which has caused negative consequences.
Significantly and problematically, the SEC has not promulgated a legal standard for when CCOs may be held personally liable for violations committed by their firms, and their attempts to clarify the factors that would put a CCO in danger of liability have only added to the confusion. This paper proposes a recklessness legal standard for when CCOs are to be held personally liable for violations committed by their firms and demonstrates that this standard will benefit CCOs, firms, and regulators.
This paper takes a unique approach, not just rehashing existing ideas but utilizing cutting-edge research from organizational studies, compliance, behavioral studies, and information from legal authorities to demonstrate what creates strong organizational cultures that prevent unlawful behavior. These studies feed into the legal standard I propose, demonstrating that it will promote the appropriate incentivizes to meet the SEC’s regulatory goals of protecting investors and ensuring fair and efficient markets, rather than the current problematic incentives for a CCO to create an ineffective, check-the-box, reactionary compliance program to protect themselves from liability. This legal standard will also remedy other negative consequences of the SEC’s approach, such as the chilling effect on knowledgeable and competent CCOs and reflects both the modern realities of the CCO position and what research shows is required to build strong organizational compliance cultures.
This paper has significant and timely implications for compliance, securities and legal scholarship more broadly. First, as the conscience of firms managing trillions in assets on behalf of investors, including individuals, pensions, and universities, CCOs play an integral role in promoting behavior that protects these investors and promulgating the legal standard proposed will benefit these investors and the U.S. economy. Second, this paper applies novel research regarding the ex-ante function of law, where CCOs and other organizational actors must take proactive, preventative actions to ensure violations do not occur in the first place. The far majority of legal scholarship focuses on the ex-post function of law, where the legal system responds to past behavior; however, such an approach is ineffective in promoting an organizational culture of compliance, which has important consequences for organizations across industries.
Keywords: Compliance, SEC, Securities, Organizational Studies, Chief Compliance Officer, Financial Regulation, Business Organizations, Supervision, Liability Standard, Regulatory Enforcement, Corporate Governance
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