By Yin Wilczek
May 20 — The Securities and Exchange Commission missed an important opportunity to reassure compliance and legal officers of their vital roles during its action against the former general counsel of Ferris Baker Watts Inc., Commissioner Daniel Gallagher said May 20.
In a 2010 administrative proceeding, the SEC alleged that Theodore Urban failed to reasonably supervise a broker engaged in a market manipulation scheme.
Given the SEC's resource constraints, “the last thing we want is not being able to rely on the compliance community to take an active role in the affairs and institutions they work in,” Gallagher told an industry gathering. The SEC can “facilitate” that by taking a “strong default position that we don't think you are a supervisor unless there is some crazy policy, procedure or practice in your institution that makes you a de facto supervisor.”
The SEC staff should enter into investigations and examinations “with that mindset,” Gallagher added. He later told reporters that the staff is working with the Securities Industry and Financial Markets Association on more guidance pertaining to supervisory liability.
Gallagher spoke during a wide-ranging question-and-answer session at the Financial Industry Regulatory Authority's annual conference in Washington. He said his remarks were his own and did not reflect the SEC or the staff's views.
SEC spokesman John Nester declined to comment on Gallagher's remarks about the staff's discussions with SIFMA.
Although Urban was absolved by the administrative law judge, commenters were concerned that the standard used by the ALJ to conclude that Urban was a supervisor set a problematic precedent that would make it more difficult for inhouse counsel and compliance officers to do their jobs.
On review, the SEC dismissed its allegations against Urban because the two commissioners participating in the decision could not agree on its outcome.
In October 2013, the SEC Division of Trading and Markets issued guidance—in the form of “frequently-asked questions”—clarifying that under SEC practice rules, the commission tie rendered the ALJ's initial decision “of no effect”.
Gallagher told the audience that the commission lost its opportunity to write an opinion in the Urbancase to reassure legal and compliance officers that the SEC is not gunning for them. That opinion “would have lasted decades,” he said. “We lost” that chance.
Gallagher also commended the FAQs, noting that they “went a long way” to Trading and Markets asserting its expertise rather than allowing the Enforcement Division to drive policy on the matter.
Speaking to reporters after his remarks, Gallagher noted that what was in the FAQs should have been in the SEC opinion. The commission could have been a little stronger “in outlining what exactly the roles of compliance and legal are and should be, what we expect from you as a commission and making folks more confident that they should be jumping into the fire of issues, not worrying about supervisory liability,” he said.
In other remarks during the Q&A, Gallagher said he anticipates that the commission will deal with a “few lower lying pieces of fruit” before it gets “going in earnest on market structure review.”
“Hopefully, we're expecting” SEC Chairman Mary Jo White to “speak soon on the market structure initiative and provide some guidance going forward,” he said.
Gallagher also noted that he anticipates some initiatives—whether by the commission or others, such as FINRA and the Municipal Securities Rulemaking Board—this year on the fixed income markets. Given the dramatic changes in those markets—including the increased trading by retail investors—the commission “needs to take steps critical for investors,” he said.
Meanwhile, Gallagher warned the audience that he has heard that rulemaking to impose a uniform fiduciary standard for broker-dealers and investment advisers has been identified by special interest groups as a “great election year issue.”
There apparently is “some initiative underway to roll this out” between now and November in connection with the SEC and the Department of Labor rulemaking Gallagher said. “I worry, and all of you should worry too” about this.
DOL is aiming by August to repropose a definition of “fiduciary” for purposes of the Employee Retirement Income Security Act.
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