Thu, Jul 14, 2022

Risk Alert : The SEC Re-confirms Its Framework For CCO Liability

Any regulatory enforcement matter involving Chief Compliance Officer (CCO) liability always makes a headline. The Matter of Hamilton Investment Counsel, LLC and Jeffrey Kirkpatrick was no exception. But for those in the industry that are interested in identifying key takeaways, you must review this case through the lens of historical SEC guidance and related enforcement actions. 

Beginning in February 2020, the SEC alleged that Jeffrey Kirkpatrick, CCO and principal of Hamilton Investment Counsel, LLC (HIC), identified certain weaknesses in the firm’s compliance program. In particular, there were numerous red flags that were raised regarding conflicts of interest and the outside business activities for a HIC investment adviser representative (IAR). For over a year, the SEC alleged, that Mr. Kirkpatrick demonstrated a wholesale failure to perform his compliance responsibilities by ignoring these weaknesses and failing to address the IAR’s conflicts. As a principal, Mr. Kirkpatrick had the requisite authority to exercise control over HIC and its employees. Nevertheless, despite this authority and numerous instances in which Mr. Kirkpatrick was put on notice regarding these conflicts of interest, he failed to act.

According to the SEC, the CCO willfully aided and abetted and caused the HIC to violate Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. As a result, the SEC barred the CCO for at least five years from acting in a supervisory or compliance capacity with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization and fined the CCO $15,000. The SEC also issued the HIC a civil fine of $150,000.

It’s also worth highlighting that the HIC withdrew its investment adviser registration with the SEC by filing an ADV-W in April 2022. This withdrawal, however, did not recuse the HIC and the CCO from liability. The SEC continued prosecuting this matter against the HIC and the CCO, which ultimately resulted in this settlement on June 30, 2022. 

This case does not reflect a new, aggressive shift by the SEC against compliance gatekeepers; rather, it falls squarely within the position the SEC has pronounced over the years when defining the framework for CCO liability. When articulating this framework, the former Division of Enforcement Director Andrew Ceresney explained in a November 2015 address that when the SEC brings an action against a CCO, it generally falls into three categories:

  1. Cases against CCOs who are affirmatively involved in misconduct that is unrelated to their compliance function
  2. Cases against CCOs who engage in efforts to obstruct or mislead the SEC staff 
  3. Cases where the CCO exhibited a wholesale failure to carry out his or her responsibilities 

The case against Mr. Kirkpatrick clearly falls under Category 3. There are other cases worth reviewing to help better understand this framework and its application: 

 
Category 1. Cases against CCOs who are affirmatively involved in misconduct that is unrelated to their compliance function:
 
  • Securities and Exchange Commission v. Jennifer Campbell, No. 22-cv-00423 (W.D.N.Y. filed June 2, 2022) (CCO allegedly misappropriated funds from client accounts through fraudulent checks and wire transfers)
  • Securities and Exchange Commission v. A.G. Morgan Financial Advisors, LLC et al., No. 2:22-cv-03421 (E.D.N.Y. filed June 9, 2022) (CCO allegedly solicited investors and offered or sold promissory notes to investors in connection with a more than $500 million unregistered fraudulent offering)
 
Category 2. Cases against CCOs who engage in efforts to obstruct or mislead the SEC staff:
 
  • In the Matter of Meredith A. Simmons, Esq. (Administrative Proceeding File No. 3-20114, September 30, 2020) (CCO allegedly provided SEC Examination Staff a backdated and factually inaccurate compliance memorandum and withheld a correctly dated version)
  • In the Matter of Gilder Gagnon Howe & Co. LLC and Bonnie M. Haupt (Administrative Proceeding File No. 3-20014, September 17, 2020) (CCO allegedly created backdated and misleading reports, which falsely reflected required reviews for excessive commissions and trading)
 

Kroll’s Financial Services Compliance and Regulation experts help clients and their CCOs navigate the complex regulatory landscape. By taking a proactive approach in advising our clients on regulatory risks, we create and build the foundation for a robust and evolving compliance program. 

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