SEC’s Peirce weighs CCO enforcement case against liability framework

What would it look like if the Securities and Exchange Commission (SEC) implemented a liability structure for chief compliance officers? In a recent announcement, Commissioner Hester Peirce provided a preview of an enforcement action against the CCO of a formerly licenced investment firm.

Jeffrey Kirkpatrick reached a settlement with the SEC on June 30 in which he agreed to pay a $15,000 fine, prevent future breaches of securities laws, and be prohibited from serving in a supervisory or compliance role for five years. Kirkpatrick was the owner and chief compliance officer of Hamilton Investment Counsel (HIC), a Georgia-based firm that was fined $150,000 for failing to create and execute written rules and procedures that were reasonably designed to avoid breaches of the Advisers Act.

The case included Eric Hollifield, co-owner and investment advisor representative of HIC, who was charged by the SEC. Hollifield was accused of stealing at least $1.7 million from advise clients to acquire a property. In its action, the SEC seeks permanent injunctions and monetary remedies.

As CCO, Kirkpatrick was "responsible for running HIC's compliance programme and, as specified in HIC's compliance manual, for implementing the firm's compliance rules and procedures," according to the SEC. He was criticised for insufficiently responding to many red flags regarding Hollifield's outside business operations and for failing to make appropriate modifications to the design and implementation of HIC's compliance programme.

The alleged violations occurred between at least December 2019 and June 2021, when, after more than a year of warnings, Kirkpatrick told a broker-dealer with which Hollifield was also affiliated of the outside business operations. Subsequently, the broker-dealer severed its ties with HIC.

Kirkpatrick neither confirmed nor rejected the agency's conclusions, but Peirce used the opportunity to explain why he deserved the disciplinary action.

Validating the structure

In June 2021, the New York City Bar Association suggested a framework for regulators, including the SEC, that gives a list of nonbinding elements for the agency to examine when determining whether to file charges against a CCO following an inquiry into securities law crimes.

Although the SEC has not embraced the approach or any others presented to handle CCO liability, Peirce's Friday remark puts the NYC Bar's proposal to the test. She agreed that the agency's decisions about whether to charge a compliance officer are "not just important for the specific compliance officer, but for the profession as a whole" and must thus be carefully weighed.

Important to the NYC Bar framework is the concept that charging a CCO should be weighed against the SEC's regulatory objectives. By functioning as principle in addition to CCO, Kirkpatrick is subject to further scrutiny since he "obviously had the power to exercise considerable control over his firm's compliance," according to Peirce's writing. Consequently, he did not make a sincere attempt to meet his obligations.

Peirce went on to say that Kirkpatrick had many opportunity to address the alleged misbehaviour and that the alleged failings lasted for more than a year. She observed that his case was not the result of a lack of SEC advice and was based on "well-established" legal concepts.

"In this instance," she said, "the CCO had the chance to strengthen the compliance programme, but failed to do so despite multiple indications that the programme was not covering outside business operations adequately." "... I believe the order provides a solid basis for establishing that this CCO's conduct in this instance was significantly deficient."

In May, during the Compliance Week National Conference in Washington, D.C., Peirce and departing Commissioner Allison Herren Lee discussed CCO responsibility. “The lack of clarity around CCO liability is problematic,” Peirce said, adding the SEC must do a better job of providing CCOs with information to help them do their jobs properly.

Her remark addressing the Kirkpatrick case is a start in the right direction, but further effort is necessary.

“I look forward to continued engagement with compliance personnel on designing a properly calibrated CCO liability framework, including in light of specific fact patterns such as the one at issue in this enforcement action,” she wrote.

By fLEXI tEAM