What would it look like if the Securities and Exchange Commission (SEC) adopted a chief compliance officer liability framework? Commissioner Hester Peirce offered a preview in a recent statement regarding an enforcement action against the CCO of a formerly registered investment adviser.
Jeffrey Kirkpatrick reached a settlement with the SEC published June 30 in which he agreed to pay a $15,000 penalty, cease and desist from future violations of securities laws, and be limited from acting in a supervisory or compliance capacity for a period of five years. Kirkpatrick served as principal and CCO at Georgia-based Hamilton Investment Counsel (HIC), which was fined $150,000 for failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act.
The case was connected to SEC charges filed against Eric Hollifield, co-owner and investment adviser representative of HIC. Hollifield was charged with misappropriating at least $1.7 million from advisory clients that he used to purchase a home. The SEC is seeking permanent injunctions and monetary relief in its litigation.
Kirkpatrick, as CCO, was “responsible for administering HIC’s compliance program and, as provided in HIC’s compliance manual, for implementing the firm’s compliance policies and procedures,” the SEC explained. He was faulted for inadequately responding to numerous red flags surrounding Hollifield’s outside business activities and not making sufficient changes to the design and implementation of HIC’s compliance program.
The alleged failings spanned from at least December 2019 through June 2021, when Kirkpatrick ultimately informed a broker-dealer with whom Hollifield also was associated of the outside business activities after more than a year of warnings, the SEC contended. The broker-dealer subsequently terminated its relationship with HIC.
Kirkpatrick neither admitted nor denied the agency’s findings, though Peirce used the case as an opportunity to explain her reasoning why he deserved the discipline.
Testing the framework
In June 2021, the New York City Bar Association proposed a framework for regulators, namely the SEC, that provides a series of nonbinding factors for the agency to consider as it weighs whether to lay charges against a CCO at the conclusion of an investigation into securities law violations.
Though the SEC has not adopted the framework—or any others proposed addressing CCO liability—Peirce’s statement published Friday puts the NYC Bar’s offering to the test. She acknowledged the agency’s determinations about whether to charge a compliance officer are “consequential not only for the particular compliance officer, but more generally for the profession” and thus must be considered carefully.
Key to the NYC Bar framework is the notion charging a CCO should be considered against whether doing so helps fulfill the SEC’s regulatory goals. By serving as principal in addition to CCO, Kirkpatrick is subject to additional scrutiny as he “clearly had authority to exercise substantial control over his firm’s compliance,” Peirce wrote. As a result, he did not make a good-faith effort to fulfill his responsibilities.
Peirce continued that Kirkpatrick’s alleged failures persisted for more than a year, and he had multiple opportunities to address the alleged misconduct. She noted his case could not be attributed to a lack of guidance from the SEC and was based on “well-established” legal principles.
“In this instance … the CCO had the opportunity to improve the compliance program but did not do so despite frequently recurring reminders that the program was not working effectively to cover outside business activities,” she wrote. “… I believe the order lays out a sound basis for concluding that this CCO’s conduct here fell materially short.”
Peirce discussed CCO liability as part of a joint discussion with outgoing Commissioner Allison Herren Lee at Compliance Week’s National Conference in Washington, D.C. in May. “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 statement regarding the Kirkpatrick case is a step in that direction, though more work remains.
“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.
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