Originally published in The Review of Securities & Commodities Regulation - September 12, 2012.
Under the Gutfreund standard, a legal or compliance professional can be held responsible as a supervisor if he has the “responsibility, ability, or authority” to affect the conduct of the employee at issue. This subjective standard, the author argues, has failed in its fundamental purpose of providing legal clarity to the law of supervision. A better reading of Gutfreund, he believes, would be to treat the standard as defining the membership of the control group in collective decision-making and to use control as the essence of supervision in future cases.
The Gutfreund standard has failed. More precisely, the definition of a supervisor set out in the Gutfreund order has worked in conventional settings, where almost any reasonable definition would have sufficed, and failed in those difficult settings, where an effective legal standard was most needed. Efforts to apply the Gutfreund standard to difficult facts have led to incoherent results, creating uncertainty on the very question the standard was intended to resolve: when is a legal or compliance official a supervisor?
This article suggests that it is time to reconsider the Gutfreund standard. Part I reviews the order of the Securities and Exchange Commission that gave rise to the standard: In re Gutfreund. Part II discusses how the definition of a supervisor set out in the order has been applied, and its incoherence when applied to legal and compliance professionals. Part III proposes a new reading of Gutfreund and its standard. Finally, in Part IV, the article concludes by recommending several specific policy goals that could help move forward from the confusion caused by the current standard.
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