A NY Investment Fraud Lawyer Explains SEC Actions on Failure to Supervise
The Securities Exchange Act of 1934 authorizes the Securities and Exchange Commission to initiate enforcement actions against a legal or compliance professional who fails to provide adequate supervision of stock broker-dealer personnel.
Determining whether someone constitutes a “supervisor” is a “facts and circumstances” determination, which means it is a subjective determination. Determining whether a sufficient degree of supervision was provided is also subjective. Because there is no single objective standard, there are myriad opportunities to defend yourself if you have been accused of violating supervision obligations mandated by the Securities Exchange Act.
At Bukh Law Firm, PLLC, our experienced New York City investment fraud lawyers know Exchange Act provisions inside and out, and we can use our knowledge to help you defend against SEC actions and other legal proceedings against you. Call today to learn more.
When Does Failure to Supervise Result in Legal Action?
One of the most important SEC actions addressing the legal liability of a legal or compliance officer arose out of a case against the chief legal officer (CLO) at Salomon Brothers.
A Solomon Brothers’ broker was head of the Government Trading Desk and made unauthorized purchases in the names of clients in order to circumvent limits on the number of government bond auctions a single entity was permitted to buy. Steps were taken to conceal the transactions from clients. The broker’s actions were brought to the attention of the CLO, as well as the CEO and other executives who discussed reporting the broker; however, no one reported the broker to the Federal Reserve Bank.
Among other legal proceedings, the SEC issued a 21(a) report against the chief legal compliance officer, Donald Feuerstein. In determining if the CLO was responsible for failure to report the broker, over whom Feuerstein had no actual direct line authority, the SEC set forth a standard that came to be known as the Feuerstein Standard.
The Feuerstein Standard stipulates that the determination of whether someone is a supervisor should be made after consideration of the individual’s “responsibility, ability, or authority to affect the consult of the employee whose behavior is at issue.” Based on this standard, Feuerstein had a duty to act in this particular case.
Concerns about the Feuerstein standard were expressed immediately and exacerbated when the SEC brought a case against Ted Urban. Urban served as a former general counselor of Ferris, Baker Watts, Inc., where a market manipulation scheme was being perpetrated by a broker. Urban, concerned about the brokers actions, expressed his worries in writing, recommending the termination of the broker, and even halting trading of the manipulated stock at one point. The former CEO, who had a troubled reputation with the compliance department, stepped in and recommended “special supervision” for the broker instead of termination.
When the SEC launched an investigation into the market manipulation, the SEC also focused on Urban. The Administrative Law Judge ruled that Urban was a supervisor of the broker engaged in the troubled trades. The Judge found that Urban had acted reasonably and had few other options. However, the SEC appealed the initial decision. The case against Urban was ultimately dismissed, but not before inciting fears among compliance officers and legal departments at broker-dealers everywhere. In response to the confusion, the SEC released FAQs providing further information on what failure to supervise means.
Failure to Supervise Definition
A Chief Compliance Officer at a broker-dealer has a legal duty to supervise broker-dealers under the Securities Exchange Act. Other compliance and legal personnel may also have a legal obligation to provide supervision. When a professional in a supervisory role fails to provide adequate supervision as required, the Securities and Exchange Commission can take legal action under Sections 15(b)(4) and 15(b)(6) of the Securities Exchange Act.
The Exchange Act does not presume that an individual with a compliance role or a legal function at a broker-dealer has a supervisory obligation. The key factor is whether the individual has supervisory authority over personnel or business units outside of the compliance and legal departments. Considerations in determining whether someone has supervisory status include:
- Whether the individual has clearly been given supervisory authority or responsibility over a person or situation.
- Whether the individual has clearly assumed responsibility for a business activity or situation.
- Whether the firms’ policies, procedure,s or other documents, identify who is responsible for supervisory activities.
- Whether the individual has the power to impact someone else’s conduct.
- Whether the individual could have stopped the violation from continuing, even without the power to reduce pay, fire, or demote the violator.
- Whether the individual was aware of responsibility for another’s actions and the steps that could be taken to fulfill the responsibility.
There are myriad possible ways to argue that you had no legal duty to supervise, and you should be sure to speak with an experienced investment fraud lawyer if you are facing legal actions.
Contact an Investment Fraud Lawyer About Failure to Supervise
At Bukh Law Firm PLLC, we can help you to fight SEC actions. We also have experience representing supervisors at broker-dealers who face failure to supervise FINRA fines imposed under Rule 2010 of the Financial Industry Regulatory authority.
If you are accused of having failed to fulfill your obligations to stop a securities violation, give us a call for help with your case as soon as possible.
