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 supervisor:
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 problem.
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 you do?
- Theodore W. Urban: SEC Order Dismissing Proceeding (January 2012)
- Initial Decision: Theodore W. Urban (September 2010)
- SEC’s Gallagher: Supervisor Definition Remains ‘Disturbingly Murky’ by Melanie Waddell in AdvisorOne
- Mamas Don’t Let Your Babies Grow Up To Be Compliance Officers in Investor’s Watchdog
- Commissioner: Guidance needed for when compliance officers morph into supervisors in IA Watch
- Lawyer Who Spotted Broker Fraud Rewarded With 5-Year SEC Ordeal by Ellen Rosen in Bloomberg