Chief Compliance Officer Liability: Setting the Record Straight October 2008

Chief Compliance Ofﬁ cer Liability: Setting the Record Straight October 2008

By Theodore J. Sawicki and Kerry K. Vatzakas1

he U. S. Securities and Exchange Commission (“SEC”) ini- Ttially addressed the potential concern over chief compliance offi cer liability at the time it adopted rules formally requiring investment advisers, investment companies and broker-dealers to designate chief compliance offi cers to oversee compliance policies and procedures. When the rules were adopted, the SEC explained that it is not the title of chief compliance offi cer (“CCO”) itself, but rather the assignment of supervisory responsibilities to the CCO and whether the CCO has fulfi lled those responsibilities that may lead to liability. Recent decisions imposing liability on individuals Tod Sawicki is a partner in Alston Bird’s Securities Litigation Group and is one of who are CCOs have raised concerns that the scope of chief com- the group’s specialists in broker-dealer, pliance offi cer liability is being expanded to include supervisory investment advisory and hedge fund litiga- matters. Th ose decisions, however, do not expand or change the tion, arbitration, regulatory counseling and scope of CCO liability. Rather, they support the proposition that representation. the monitoring role of a CCO does not, in and of itself, expose the CCO to liability.

Background In 2003 and 2004, a series of rules were adopted or approved by the SEC to enhance compliance with applicable NASD rules and securities laws and regulations. During this time, the SEC adopted Rule 38a-1 under the Investment Company Act of 1940, 15 U.S.C. § 80a, and Rule 206(4)-7 under the Investment Advisers Act of 1940, 15 U.S.C. § 80b, and approved proposed rule changes to Rules 3012 and 3013 of the National Association of Securi- Kerry Vatzakas is an associate in in Alston ties Dealers (“NASD” n.k.a. the Financial Industry Regulatory Bird’s Securities Litigation Group. Her Authority or “FINRA”) (collectively the “Rules”).2 Among other practice focuses on a variety of securities litigation matters and other complex com- requirements, these Rules directed that investment companies and mercial and business-related litigation, investment advisers registered with the Commission and FINRA including contract and partnership disputes member broker-dealer ﬁ rms designate a chief compliance oﬃ cer and professional liability matters. (“CCO”) responsible for administering the policies and procedures

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of the investment company, investment adviser, Investment Advisers. Investment advisers re- or broker-dealer. quired to be registered under Section 203 of the Investment Advisers Act of 1940 must also adopt Requirements Under the Rules and implement written policies and procedures reasonably designed to prevent violations of the Th e Rules require that registered investment compa- Investment Advisers Act and the rules that the nies, investment advisers, or broker-dealers, adopt Commission has adopted under the Investment and implement written policies and procedures Advisers Act.11 Th ese policies and procedures must reasonably designed to prevent violations of the be reviewed annually to determine their adequacy applicable securities laws, rules, and regulations, and the eff ectiveness of their implementation.12 review those policies and procedures annually Further, Rule 206(4)-7 requires that the investment for their adequacy and the eff ectiveness of their adviser designate a Supervised Person13 as CCO to implementation, and designate a chief compliance be responsible for administering the compliance offi cer responsible for administering those policies policies and procedures.14 and procedures. Broker-Dealers. FINRA member broker-dealers Investment Companies. Rule 38a-1 requires must establish, maintain, and enforce written su- each registered investment company and business pervisory control policies and procedures designed development company (“fund”) to adopt and to achieve compliance with applicable securities implement policies and procedures approved by laws and regulations and with applicable NASD the fund’s board of directors that are reasonably rules, including NASD Rule 3012.15 Rule 3012 designed to prevent violations of federal securities also requires that an annual report be submitted to laws and regulations by the fund, including policies members’ senior management, detailing each mem- and procedures that provide for the oversight of ber’s system of supervisory controls, the summary of compliance by each investment adviser, principal test results and signifi cant identifi ed exceptions, and underwriter, administrator and transfer agent of any additional or amended supervisory procedures the fund.3 Th ese policies and procedures must be created in response to the test results.16 reviewed at least annually.4 Rule 38a-1 also requires NASD Rule 3013 further requires that each funds to designate one individual as CCO to be member designate a principal to serve as CCO responsible for administering the fund’s compliance and that each member’s CEO certify annually that policies and procedures.5 the member has in place processes to establish, In addition, Rule 38a-1 contains provisions de- maintain, review, modify, and test policies and pro- signed to promote the independence of the CCO cedures reasonably designed to achieve compliance from the management of the fund. Th e fund’s with applicable NASD rules and federal securities board of directors must approve the designation of laws and regulations.17 As of July 16, 2007, FINRA the CCO, must approve the CCO’s compensation, member fi rms may designate multiple CCOs to and may remove the CCO from her responsibilities discharge the requirements of Rule 3013.18 at the direction of (and only with the approval of) the board.6 Also, the CCO reports directly to the SEC Addresses Potential CCO Liability fund’s board.7 Th e CCO must annually furnish the board with a written report on the operation Th e SEC addressed potential concerns over CCO of the fund’s policies and procedures and those of liability in its adopting release for Rules 38a-1 and its service providers.8 Further, the CCO must meet 206(4)-7. Th e SEC explained that: in executive session with the independent directors on the board at least once a year, without anyone Having the title of chief compliance offi cer else present.9 Because funds typically delegate does not, in and of itself, carry supervisory re- management and administrative functions to one sponsibilities. Th us, a chief compliance offi cer or more service providers, the SEC envisioned that appointed in accordance with rule 206(4)-7 fund CCOs would often be employed by the fund’s (or rule 38a-1) would not necessarily be sub- investment adviser or administrator.10 ject to a sanction by us for failure to supervise

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other advisory personnel. A compliance offi cer According to Walter Ricciardi, Deputy Direc- who does have supervisory responsibilities can tor in the SEC’s Enforcement Division, the SEC continue to rely on the defense provided for in “would not be looking to target the compliance section 203(e)(6) of the Advisers Act [15 USC offi cer due to the misbehavior by the employee 80b-3(e)(6)]. Section 203(e)(6) provides that where the compliance officer fulfilled their a person shall not be deemed to have failed to responsibilities.”22 Th us, if a chief compliance reasonably supervise another person if: (i) the offi cer develops and implements a monitoring adviser had adopted procedures reasonably system reasonably designed to prevent violations of designed to prevent and detect violations of securities laws, liability should not result. Recent the federal securities laws; (ii) the adviser had cases support this proposition. a system in place for applying the procedures; and (iii) the supervising person had reasonably Recent Cases discharged his supervisory responsibilities in accordance with the procedures and had no Careful reading of recent regulatory enforce- reason to believe the supervised person was not ment decisions involving CCOs reveals that complying with the procedures.19 those decisions have not imposed liability on CCOs merely because they were responsible for A similar safe harbor appears in Section 14(b) monitoring compliance with securities laws and (4)(E) of the Securities Exchange Act of 1934 for regulations. Rather, those cases imposing liability brokers and dealers.20 have involved (i) the CCO’s own misconduct or Based on this language in the adopting release, violation of securities laws and regulations, or it is not the designation as CCO that may lead (ii) a failure to supervise or monitor where the to liability. Rather, generally speaking, it is the CCO was explicitly required to do so and failed assignment of supervisory responsibilities to to take any action after becoming aware of the the CCO and the CCO’s failure to fulfi ll those misconduct or failed to investigate obvious red responsibilities that may lead to regulatory li- fl ags. Where the company and/or the CCO have ability. If the CCO has been assigned supervisory responsibilities, she must fulfi ll those responsibilities. In that event, it would appear that the CCO [It] is not the title of chief compliance should be protected by the defenses listed above offi cer (“CCO”) itself, but rather the where the company and the CCO have otherwise complied with the Rules. assignment of supervisory responsibilities Th e SEC also addressed this point in its release to the CCO and whether the CCO has approving NASD Rule 3013 by noting that “responsibility for discharging compliance policies fulfi lled those responsibilities that may and written supervisory procedures rests with lead to liability. business line supervisors” and “consultation on the certifi cation [required by Rule 3013] does not, by itself, establish a signatory as having such line taken steps to adopt and implement policies and supervisory responsibility.”21 If the CCO does not procedures in accordance with the Rules, the bad have supervisory responsibilities, and, instead, is actor is found liable, but not the company or the solely responsible for establishing and monitoring CCO.23 Further, a review of the cases reveals that compliance policies and procedures, the CCO the actors being held liable often fi ll multiple roles must ensure that those policies and procedures in addition to CCO, such as principal, president are being followed. If, however, the CCO himself or founding partner. Th us, in some cases, liability has supervisory responsibilities assigned to him in attaches due to a failure to act or wrongful con- his role as CCO or otherwise, the CCO then has duct in one of those other roles. direct responsibility for discharging those super- Liability for CCO’s Participation in Wrong- visory responsibilities. ful Conduct. Cases imposing direct liability on

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CCOs often involve situations where the CCO dress the confl icts of interest unique to CSG. himself was involved in the wrongdoing. In ad- As a result of Meals’ actions, the Commission dition, the actor often fi lls roles in addition to barred him from association in a compliance compliance monitoring, such as president or capacity with any broker, dealer, or invest- principal, through which the actor often engages ment adviser, and ordered that he pay a civil directly in wrongful conduct. penalty of $10,000. Here, although Meals For example, David A. Zwick, a principal, was held liable in his capacity as CCO, Meals senior offi cial and chief compliance offi cer of intentionally provided false information to the Suncoast Capital Group, Ltd. (“Suncoast”), SEC in an attempt to show compliance with was held liable for participating in a scheme the Investment Advisers Act. with a salesperson he supervised to provide Sterling Scott Lee was the president, chief kickbacks to a bond trader employed by compliance officer, and principal of a for- New York Life Insurance Company (“New mer NASD member firm who was found York Life”).24 In exchange for the kickbacks, liable for violating Exchange Act Rule Suncoast received securities transactions from 10b-10, which requires the disclosure of New York Life at prices favoring Suncoast markups to customers on riskless principal and through which Zwick received signifi cant transactions.26 The company’s supervisory compensation. Zwick failed to disclose that procedures manual made the CCO – and Suncoast paid these kickbacks to New York thus Lee – responsible for maintaining copies Life in exchange for the business and favor- of transaction confirmations. Lee admitted able prices. Based on the Zwick’s fraudulent that he received copies of the confirmations conduct, he was ordered to pay disgorgement and testified that he had responsibility for of $161,539.58, together with pre-judgement the markups not being posted on the tickets. interest in the amount of $138,609.64, and Lee testified that either he or the CEO had he was ordered to pay a civil money penalty instructed the clearing firm to disclose to of $75,000. In addition, he was barred from customers the compensation that the firm association with a broker or dealer. Zwick’s received in connection with the transactions, supervisory responsibilities were not attributed but Lee failed to follow-through to make sure to his role as CCO. In addition, Zwick not that these instructions were implemented. only failed to fulfi ll his supervisory responsi- Thus, Lee was found to have violated Sec- bilities, but he also personally participated in tion 10(b) and was responsible for the firm’s the wrongful conduct. violations of Exchange Act Rule 10b-10. Lee Joe D. Meals was a founding partner and also was found liable, along with another of- shareholder of Consulting Services Group, ficer/principal, for enabling an unregistered LLC (“CSG”) and was the chief compliance principal to guide the affairs of the firm for offi cer for CSG and its wholly owned broker- more than three years and failing to amend dealer affi liate.25 In violation of Section 204 of the firm’s Form BD to notify NASD of the the Investment Advisers Act and Rules 204-2 unregistered principal’s involvement. Lee was and 204A-1 thereunder, Meals instructed CSG sanctioned to a six-month suspension, with supervised persons to backdate acknowledge- a thirty-day concurrent suspension for his ment forms stating that they had received and violation of Section 10(b). In addition, he read the code of ethics and then provided the was ordered to pay restitution, jointly and false acknowledgments to the SEC. In addi- severally with the other respondent, in the tion, in an attempt to satisfy Rule 206(4)-7’s amount of $20,832.40. This case is another requirement to adopt and implement policies example of someone who filled multiple roles and procedures reasonably designed to prevent and engaged in conduct that violated the violations of the Advisers Act and rules there- securities laws in one of those other roles. under, Meals purchased pre-packaged policies Forde H. Prigot was a compliance offi cer and and procedures that failed to adequately ad- then the CCO of a registered broker-dealer

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and was found liable for aiding and abetting evidence of securities ownership by research the broker-dealer’s deceptive market timing personnel, and to review research person- of mutual funds.27 Prigot, who was respon- nel’s trading activity to ensure compliance sible for communicating with mutual funds with holding requirements. Th us, Strong that had questions about the broker-dealer’s assigned himself direct responsibility for mutual fund market timing customers, know- J&L’s supervision of its research analysts’ ingly gave the mutual funds false information trading practices. Strong, however, failed to about the accounts that were trading. In pre-approve all personal trades by analysts, addition, Prigot enabled the market tim- failed to monitor daily trading to identify ing by allowing numerous accounts to be restricted transactions, and failed to take any opened for the purpose of creating duplicate action even after he learned of misconduct accounts to allow the market timing to con- by one of the research analysts. He also failed tinue. Prigot was suspended from association to alert NASD to the misconduct. “In sum, with any broker or dealer for a period of six the evidence establishes that [the CCO’s] months, and was prohibited from serving as unreasonable inaction eff ectively nullifi ed the an employee, offi cer, director, member of an supervisory system related to the Firm’s com- advisory board, investment adviser, or prin- pliance with Rule 2711 that he himself had cipal underwriter for a registered investment designed and was responsible for enforcing.”30 company or affi liated person for a period of J&L’s procedures also assigned the CCO the six months. In addition, he was fi ned in the responsibility for verifying that J&L research amount of $30,000. reports contained the appropriate disclo- Marc Freedman, the President, CCO, and sures, which he failed to do with reasonable part-owner of TriCapital Advisors, Inc., was diligence. Th us, Strong was held responsible sentenced by a district court to 63 months in for the fi rm’s failure to include the required prison for wire fraud and money laundering disclosures. Finally, Strong violated NASD and was ordered to pay $1,200,000 in resti- Rule 2711(i) because he fi led an attestation tution.28 Th e SEC also barred Freedman from regarding J&L’s procedures two months association with any investment adviser. late. Th e sanctions imposed were reduced to Liability for CCO’s Failure to Supervise. $10,000 from $15,000 based on a number Cases imposing liability on CCOs for failure of mitigating factors: (i) Strong was the sole to supervise or monitor often involve situations compliance person in a 40-person fi rm that where the CCO assumed or was assigned certain had previously neglected compliance; (ii) the supervisory responsibilities pursuant to the fi rm’s misconduct at issue occurred within months policies and procedures and failed to fulfi ll those of Strong joining the fi rm; and (iii) Strong responsibilities. In addition, the CCOs in certain did not personally benefi t in any way from of these cases failed to take any action after becom- his misconduct. ing aware of the misconduct or failed to investigate In another case, Edward H. Price, a president, obvious red fl ags. chief executive offi cer, and chief compliance For example, Robert E. Strong was the chief officer of a registered broker-dealer, was compliance offi cer of Jesup & Lamont Se- found to have failed to exercise reasonable curities Corp. (“J&L”) who was sanctioned supervision over associated persons. He was $10,000 for failing to supervise a research barred from association with any broker or analyst whose personal securities trading dealer in a supervisory capacity and ordered violated association rules.29 When Strong was to pay a $55,000 civil monetary penalty.31 hired as CCO, he prepared written supervi- Price was responsible for supervising two sory procedures that assigned the compliance associated persons at Spencer Edwards. Th e offi cer – i.e., Strong – the responsibility for two associated persons were found to have giving prior approval to transactions in the willfully violated Sections 5(a) and 5(c) of accounts of research personnel, to retain the Securities Act of 1933 by off ering to

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sell, selling, and delivering to members of red fl ags, such as tentative or contingent trade the public shares of common stock when no ticket fi les, suggesting that certain associ- registration statement with respect to those ated persons were permitting late trading in securities was fi led or in eff ect, and no exemp- mutual funds. Because of his cursory review, tion from registration was available. Spencer Pritchard failed to recognize or respond to these indications of wrongdoing. Th e SEC also noted that Pritchard Capital’s written su- Cases imposing liability on CCOs for pervisory procedures did not contain policies or procedures reasonably designed to prevent failure to supervise or monitor often or detect illegal late trading. Pritchard was involve situations where the CCO suspended from association in a supervisory capacity with any broker or dealer for a period assumed or was assigned certain of nine months and was ordered to pay a civil supervisory responsibilities pursuant to penalty in the amount of $50,000. Liability for Failure to Establish, Maintain, the fi rm’s policies and procedures and and Enforce Compliance Policies and Procedures. failed to fulfi ll those responsibilities. Nevertheless, liability can result where a compliance offi cer fails to establish, maintain, and enforce written policies and procedures reasonably designed to Edwards’ policies required that the compli- prevent violations of securities laws. ance offi cer review all client correspondence, For example, Carlos Martinez, the sole compli- but Price allowed the two associated persons ance offi cer at Chanin Capital Partners, was to retain a separate facsimile machine and held liable for aiding and abetting Chanin’s fail- assumed that the associated persons would ure to establish, maintain, and enforce policies bring him faxes if they were important. Also, and procedures designed to prevent the misuse Price allowed this despite the fact that both of material, nonpublic information in violation associated persons had previously engaged in of Section 15(f) of the Securities Exchange Act wrongful conduct and one of the associated of 1934. 33 Chanin, a broker-dealer, had poli- persons had been charged previously with cies and procedures in place to prevent insider off ering and selling unregistered securities. trading, including policies requiring that certain According to the SEC, the CCO’s knowledge forms be signed by employees to acknowledge of this previous misconduct, as well as nu- receipt of the policies, to disclose purchases or merous other red fl ags, demanded a further sales of securities, and to identify private securi- investigation by Price, and his failure to do ties transactions, among other things. Martinez so was unreasonable. had sole responsibility to maintain and enforce Th omas Pritchard, the principal owner, man- these policies and procedures. Martinez, how- aging director, and CCO of Pritchard Capital, ever, had no consistent practice with respect to was found liable for books and records vio- obtaining signed forms or for tracking whether lations and failure to supervise.32 Pritchard employees were complying with the policies. Capital had multiple offi ces throughout the For example, the company did not maintain United States, and Pritchard only visited the a watch list or restricted list of securities and New York offi ce periodically. Pritchard was did not track or monitor employee trading. responsible for developing the supervisory In 2003, the company revised the policies by policies and procedures of Pritchard Capital adding a restricted list to be maintained by and for supervising the activities of certain Martinez and a requirement that employees associated persons. In part due to his infre- identify all securities trading accounts and quent trips to the offi ce in question, Pritchard release copies of their account statements for gave only a cursory look to mutual fund cor- review by Martinez. Th e company also began respondence and trade ticket fi les. He missed mandatory training for its employees and asso-

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ciated persons. Despite these improved policies, SEC commented on the requirements in the the company still had no policy or procedure company’s code of ethics and the compliance in place for continued training of its person- department’s annual compliance meetings at nel on the insider trading policies and did not which employees were educated about and have a policy or procedure in place for tracking reminded of their obligations under the appli- trading accounts opened after personnel made cable rules and regulations. Th e SEC noted that their initial certifi cations. Th us, there was no Brod failed to comply with the SEC’s reporting ongoing assurance of compliance by the em- requirements and the company’s code of ethics ployees. Th e SEC stressed that it “is important, and that he falsely reported to the company that and that broker-dealers must take seriously he was complying with both. As a result, action their responsibilities not only to establish, but was taken only against Brod. to maintain and enforce, suffi ciently robust policies and procedures to prevent the misuse Lessons Learned of material nonpublic information.”34 Th e company itself failed to establish, maintain, and Some lessons can be taken away from the major enforce procedures to prevent insider trading, regulatory enforcement decisions and the SEC’s and Martinez, who was solely responsible for own guidance in the adopting releases for the rules enforcing those policies, failed to take steps to and regulations related to CCOs. ensure compliance. Accordingly, Martinez was Make sure you have a clear understanding of the found to have willfully aided and abetted the demarcation between supervisory responsibili- company’s violation of Section 15(f) of the ties and compliance monitoring responsibilities Exchange Act. Martinez was censured, was within your fi rm. ordered to cease and desist from further viola- Regularly monitor, test and evaluate the ad- tions of Section 15(f), and was ordered to pay equacy and eff ective implementation of your a monetary fi ne of $25,000. fi rm’s compliance policies and procedures. No Liability Where Company Has Adequate Make sure you are familiar with your com- Policies and Procedures in Place. In contrast, pany’s supervisory compliance procedures and where the company has taken steps to adopt, policies and, in particular, any responsibilities implement, and enforce compliance policies and explicitly delegated to you under those policies procedures in accordance with the Rules, there is and procedures. authority for the proposition that the CCO would Take necessary steps to correct defi ciencies in the not be charged even though a bad actor in the fi rm policies and procedures and to correct problems is held accountable for his violation of applicable that have arisen from those defi ciencies. laws, rules and regulations. Investigate any questions of concern and cer- For example, Geoff rey Brod, a portfolio man- tainly any red fl ags, and follow through on that ager at an investment adviser, was found to have investigation. willfully violated certain anti-fraud and report- And most of all, fulfi ll your delegated responsi- ing provisions of the Investment Company Act, bilities, and when appropriate, necessary or even but no action was taken against the company unclear, involve business line supervisors with or the CCO.35 In fact, the CCO was not even direct or ultimate supervisory responsibility over named in the proceeding. In its fi ndings, the the matter.

ENDNOTES

1 Theodore J. Sawicki, Esq. is a partner, and 2 On December 17, 2003, the SEC adopted 10, 2004, the SEC approved the proposed Kerry K. Vatzakas is an associate, in the Se- Rule 38a-1 under the Investment Company rule change to Rule 3013 of the NASD. Self- curities Litigation Group of Alston & Bird LLP Act of 1940 and Rule 206(4)-7 under the Regulatory Organizations; Order Approving in the Firm’s Atlanta office. The authors wish Investment Advisers Act of 1940. Final Rule: Proposed Rule Change and Amendments to acknowledge and thank Lee Augsburger, Compliance Programs of Investment Com- Nos. 1 and 2 Thereto by the National As- Senior Vice President and Chief Compliance panies and Investment Advisers, Investment sociation of Securities Dealers, Inc. Relating Officer of Prudential Financial, Inc., for his Advisers Act Release No. 2204, Investment to Chief Executive Officer Certification and advice and encouragement in the develop- Company Act Release No. 26299, 68 Fed. Designation of Chief Compliance Officer, ment of this article. Reg. 74714 (Dec. 24, 2003). On September Exchange Act Release No. 34-50347, 69

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • NOVEMBER–DECEMBER 2008 31 Chief Compliance Officer Liability: Setting the Record Straight

F.R. 56107-21 (Sept. 10, 2004). The SEC the investment adviser and is subject to the WL 3119764 (Oct. 25, 2007). also approved NASD Rule 3012 on June supervision and control of the investment 25 Consulting Services Group, LLC, Securities 17, 2004. Self-Regulatory Organizations; adviser.” 17 C.F.R. § 270.202(a)(25). Exchange Act Release No. 56612, Investment Order Approving Proposed Rule Change 14 17 C.F.R. § 270.206(4)-7(c). Advisers Act Release No. 2669, 91 S.E.C. and Amendments No. 1 and 2 by National 15 NASD Rule 3012. Docket 2079 (Oct. 4, 2007). Association of Securities Dealers, Inc. Re- 16 Id. 26 Dennis Todd Lloyd Gordon, Securities Ex- lating to Internal Controls and Supervisory 17 NASD Rule 3013. change Act Release No. 57655, 2008 WL Control Amendments and Notice of Filing 18 NASD Amends Rule 3013 and Interpretive 1697151 (Apr. 11, 2008). and Order Granting Accelerated Approval Material 3013 to Permit Members to Desig- 27 Trautman Wasserman & Company, Inc., of Amendment No. 3, Exchange Act Release nate Co-Chief Executive Officers and Multiple Securities Exchange Act Release No. 57329, 34-49883, 69 F.R. 35092-1 (Jun. 17, 2004), Chief Compliance Officers, Notice to Mem- Investment Company Act Release No. 28154, 69 F.R. 35092-1 (Jun. 17, 2004). bers 07-32 (Nat’l Ass’n of Sec. Dealers), July 92 S.E.C. Docket 1860 (Feb. 14, 2008). 3 17 C.F.R. § 270.38a-1(a)(1)-(2). 16, 2007. 28 Marc Freedman Sentenced to More Than 5 4 17 C.F.R. § 270.38a-1(a)(3). 19 Final Rule: Compliance Programs of Invest- Years in Prison for Wire Fraud and Money 5 17 C.F.R. § 270.38a-1(a)(4). ment Companies and Investment Advisers, Laundering in a Scheme to Defraud Investors, 6 Id. Investment Advisers Act Release No. 2204, SEC Litigation Release No. 20534 (Apr. 23, 7 Id. Investment Company Act Release No. 2008), available at http://www.sec.gov/. 8 Final Rule: Compliance Programs of Invest- 26299, 68 Fed. Reg. 74714 (Dec. 24, 2003). 29 Robert E. Strong, SEC Release No. 57426, 92 ment Companies and Investment Advisers, 20 See 15 U.S.C. § 78o(b)(4)(E). S.E.C. Docket No. 2192, 2008 WL 582537 Investment Advisers Act Release No. 2204, 21 Self-Regulatory Organizations; Order Ap- (Mar. 4, 2008). Investment Company Act Release No. 26299, proving Proposed Rule Change and Amend- 30 Id. at *7. 68 Fed. Reg. 74714 (Dec. 24, 2003). ments Nos. 1 and 2 Thereto by the National 31 John A. Carley, Securities Act Release No. 88, 9 17 C.F.R. § 270.38a-1(a)(4). Association of Securities Dealers, Inc. Relat- Securities Exchange Act Release No. 57246, 10 Final Rule: Compliance Programs of Invest- ing to Chief Executive Officer Certification 92 S.E.C. Docket No. 1316, 2008 WL 268598 ment Companies and Investment Advisers, and Designation of Chief Compliance Officer, (Jan. 31, 2008). Investment Advisers Act Release No. 2204, Exchange Act Release No. 34-50347, 69 F.R. 32 Pritchard Capital Partners, LLC, Securities Investment Company Act Release No. 56107-21 (Sept. 10, 2004). Exchange Act Release No. 57704, Investment 26299, 68 Fed. Reg. 74714 (Dec. 24, 2003). 22 Peter Ortiz, SEC Bans Rogue PM, but Leaves Firm Company Act Release No. 28251, 2008 WL 11 17 C.F.R. § 270.206(4)-7(a). Alone, Ignites (Nov. 1, 2007), available at http:// 1820686 (Apr. 23, 2008). 12 17 C.F.R. § 270.206(4)-7(b). www.ignites.com/articles/print/20071101/ 33 A. Carlos Martinez, Exchange Act Release No. 13 A “Supervised Person” is defined as “any bans_rogue_leaves_ﬁ rm_alone. 57755, 2008 WL 1913369 (May 1, 2008). partner, officer, director (or other person 23 See id.; see, e.g., Geoffrey Brod, Investment 34 Id. at 5. occupying a similar status or perform- Advisers Act Release No. 2673, Investment 35 Geoffrey Brod, Investment Advisers Act ing similar functions), or employee of an Company Act Release No. 28022, AP File No. Release No. 2673, Investment Company Act investment adviser, or other person who 3-12611 (Oct. 24, 2007). Release No. 28022, AP File No. 3-12611 (Oct. provides Investment advice on behalf of 24 David A. Zwick, 91 S.E.C. Docket 2079, 2007 24, 2007).

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32 NOVEMBER–DECEMBER 2008 • PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY