Compliance Officers May Face More Scrutiny

(Dow Jones) An enforcement action by the Securities and Exchange Commission against a chief compliance officer could add to growing concerns about a possible heightened regulatory focus on the role.

Broker-dealer Buckingham Research Group and its former chief compliance officer, Lloyd Karp, have agreed to pay a combined $160,000 to settle SEC charges that they failed to have adequate policies in place to prevent misuse of nonpublic information.

The settlement announced Wednesday resolves a case in which Buckingham and its investment-advisory operation, Buckingham Capital Management, were accused of replacing missing pre-approval forms for more than 100 employee trades and replacing incomplete compliance logs during preparation for a 2006 SEC examination.

Karp, the compliance officer, was on medical leave during the 2006 examination, but was alleged to have been responsible for other procedural failures, such as not checking compliance logs or conducting an annual compliance review in 2005. The settlement required no admission of guilt.

Many compliance professionals are concerned that regulators will scrutinize their roles more aggressively and blame them for misconduct simply because it occurred on their watch. Enforcement cases against chief compliance officers aren't unusual, but are typically brought when the officer actively participates in the wrongdoing.

"A sea change is probably coming," says Katherine Hanks, a compliance consultant in North Bethesda, Md., who believes regulators are becoming more interested in making chief compliance officers more broadly responsible for corporate liability. She doesn't see the SEC's case against Buckingham and Karp as marking a clear start to that change because of Karp's alleged role in the problems, but a heightened regulatory focus reflected in the Dodd-Frank Act is likely to help give it momentum, she says.

Compliance professionals at a seminar in New York recently discussed an SEC enforcement action against Theodore Urban, the former general counsel of Ferris Baker Watts Inc., now a unit of the RBC Wealth Management U.S. Division. The case could become a precedent for bringing enforcement actions against compliance officers who aren't actively involved in wrongdoing. An administrative law judge in September deemed Urban to have supervised a broker who participated in a stock manipulation scheme because Urban's opinions were viewed as "authoritative" and his recommendations were "generally followed," among other things.

Urban was exonerated in the case, despite being deemed a supervisor, because of efforts he made to stop the wrongdoing, according to the ruling. The SEC, however, is appealing the judge's decision to its five commissioners.

Susan Merrill, a lawyer at Bingham McCutcheon LLP in New York, said during the seminar that many compliance professionals are "between a rock and hard place" because of the standards the judge in the case used to determine whether an officer has a supervisory responsibility.

"Of course you want your opinions to be followed, otherwise you're nothing more than a potted plant," said Merrill, who used to be enforcement chief of the Financial Industry Regulatory Authority, Wall Street's self-policing organization.

The SEC's case against Buckingham and its chief compliance officer on Wednesday highlights the basic rule that "you can't have just paper policies," says Deborah Meshulam, chair of the securities-enforcement practice at DLA Piper who formerly served as an assistant chief litigation counsel in the SEC's Enforcement Division. "You have to have the right policy and enforce that policy," she says.

An interest among regulators in gatekeepers, such as chief financial officers and chief compliance officers, is another reason to do the job right, says Meshulam. "Anyone with those responsibilities really has to pay attention," she says.