SEC’s Gallagher: BlackRock case mishandled

The commissioner decried the enforcement actions against CCOs under Rule 206(4)-7 and urged the SEC to issue further guidance on the rule.

SEC commissioner Daniel Gallagher issued a public statement opposing liability imposed on chief compliance officers in recent enforcement actions. The Republican-appointed commissioner, who is resigning his post after serving four years at the commission, specifically pointed to BlackRock’s recent conflict of interest case, saying that holding CCOs liable under Rule 206(4)-7 is “undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures.”

In May, the SEC held BlackRock CCO Bartholomew Battista responsible for failing to adopt and implement compliance policies and procedures in conflict of interest issue involving one of the firm’s portfolio managers. BlackRock was fined $12 million, and Battista was personally fined $60,000.

Gallagher states that Rule 206(4)-7 itself is to blame for the recent violations because it offers no guidance as to the distinction between the role of CCOs and management in carrying out the compliance function, and the SEC has never issued any guidance about how to comply with the rule. He noted that he is especially worried about the potential impact of this trend on small advisers.

“One thing is certain: we should not be resolving this uncertainty through enforcement actions,” said Gallagher. “The psychological impact, and in many cases reputational damage, that can come with months or years of testimony, the Wells process, and settlement negotiations can be just as chilling as the scarlet letter of an enforcement violation.”

The commissioner suggested that the SEC “take a hard look” at Rule 206(4)-7 and consider whether amendments or guidance are needed to clarify the roles and responsibilities of compliance personnel under the rule so that these individuals are not “improperly held accountable for the misconduct of others.”

“To put it bluntly, for the vast majority of advisers, CCOs are all we have. They are not only the first line of defense, they are the only line of defense,” said Gallagher. “As it stands, the commission seems to be cutting off the noses of CCOs to spite its face.”