On June 30, 2022, the SEC filed a settled action against Hamilton Investment Counsel, LLC (the “Firm”) and its chief compliance officer (“HIC CCO”). Notably, the SEC charged the HIC CCO with willfully aiding and abetting the Firm’s violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder – or more simply stated, the SEC charged the HIC CCO with aiding and abetting the Firm’s compliance rule violations. The primary underlying conduct involved compliance failures related to an investment advisory representative (“IAR”) not disclosing outside business activities to the Firm.
Other key aspects of the order instituting proceedings include:
While cases against chief compliance officers are historically rare, past cases have involved individuals who serve in various roles at firms or “wear multiple hats.” That is consistent with the facts here. What is novel about this case, however, are the charges only focus on aiding and abetting, and the violations only involve the compliance rule itself, as opposed to more egregious conduct involving client harm.
Commissioner Hester M. Peirce issued a statement with the release of this settled action. While Commissioner Peirce opened her statement by supporting the settlement, she then repeated concerns that she had previously raised publicly regarding the “importance of thinking carefully about when to impose liability against a [chief compliance officer].” In her statement, Commissioner Peirce referenced the framework proposal of the Compliance Committee of the New York Bar Association (“NY Bar Framework”), which, in summary, focuses on the following factors:
Applying the NY Bar Framework to her view of the facts, Commissioner Peirce concluded that this settled action “lays out a sound basis for concluding that the [HIC CCO’s] conduct here fell materially short.” She closed by encouraging engagement “on designing a properly calibrated CCO liability framework….”
Commissioner Peirce’s call to action is the latest in a line of efforts to clarify this controversial area that dates back for years:
With the HIC CCO only being charged with aiding and abetting a compliance rule violation based on facts and circumstances that did not involve fraud or customer harm, the need for a better framework and more certainty continues to increase in importance for the compliance industry.