SEC Pushes Compliance Programs And Protects Compliance Officers From Lying Employees

by Michael Volkov

sec7The SEC is taking a number of bold steps to promote the importance of compliance.  The SEC already offers companies meaningful compliance carrots as part of its cooperation program, and other enforcement initiatives including FCPA investigations.

In two important enforcement actions, the SEC has reiterated – and even expanded – its commitment to compliance.  In the first decision, the SEC declined to prosecute a company for Regulation Fair Disclosure (“Regulation FD”) violation based in a part on the company’s overall compliance “environment.”  In a second, and equally important enforcement action, the SEC prosecuted a former portfolio manager for making false statements to a chief compliance officer.  Both decisions reflect the SEC’s commitment to incentivize companies to implement robust compliance programs.

In the Regulation FD decision, the SEC charged a former investor relations officer at First Solar, Inc., for a violation because the officer alerted certain analysts and investors in one-on-one conversations about a significant non-public business event.  Significantly, the SEC declined to prosecute the company for the employee’s misconduct citing several factors relating to the company’s compliance program.

The SEC cited the company’s extraordinary cooperation with the investigation, and the following factors: (1) the company’s environment of compliance (and a specific Regulation FD Disclosure Committee); (2) the company publicly disclosed the information immediately after learning of the selective disclosure; (3) the company slef-reported the violation to the SEC; and (4) the company implemented remedial measures to address the conduct, including additional Regulation FD training for employees.sec6

The SEC has devoted significant enforcement resources to Regulation FD and companies should be mindful of these risks, especially in the area of social media disclosures.

In an important second action, the SEC prosecuted a former portfolio manager for forging documents and lying to the firm’s chief compliance officer to conceal the manager’s failure to report personal trades.  Specifically, the manager failed to pre-clear or report several hundred securities trades in his personal accounts as required under the federal securities laws and the code of ethics.

The manager later created false documents and misled the firm’s chief compliance officer in her investigation into his improper trading.  In addition, the portfolio manager falsely certified his annual compliance with the company’s Code of Conduct.

This was the first SEC enforcement action under Rule 38a-1(c) of the Investment Company Act for misleading and obstructing a chief compliance officer.  The former portfolio manager agreed to pay $350,000 and to be barred from the securities industry for at least five years.

In describing the enforcement action, an SEC official stated that ““Securities industry professionals have an obligation to adhere to compliance policies, and they certainly must not interfere with the chief compliance officers who enforce those policies.  [The manager] set out to cover up his compliance failures by creating false documents and misleading his firm’s CCO.”

sec2It is not unusual for company employees to lie or mislead a compliance officer.  It is important to recognize the importance of this enforcement action – it underscores the need for company officials and managers to cooperate and tell the truth to compliance officers.

The SEC’s recent enforcement action should be publicized internally by companies’ compliance and ethics offices.   It will help the CCO’s standing in the organization, the CCO’s credibility in conducting internal investigations, and the ability of the CCO to obtain truthful statements from employees in the company.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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Michael Volkov

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