Legal Personnel

Legal Personnel in the United States

Liability of Compliance and Legal Personnel at Broker-Dealers under Sections 15(b)(4) and 15(b)(6) of the Exchange Act

In relation to the liability that may arise under Sections 15(b)(4) and 15(b)(6) of the Securities Exchange Act of 1934 in connection with the role and duties of Chief Compliance Officers and other compliance and legal personnel at broker-dealers, the fact is that broker-dealers may choose to structure their supervisory and compliance systems in different ways. No matter which particular structure is employed, compliance and legal personnel play a critical role in efforts by broker-dealers to comply with legal and regulatory requirements through the implementation of effective systems.

Liability for failure to supervise is a facts and circumstances determination. Regardless of their status as supervisors, compliance and legal personnel who otherwise violate the federal securities laws or aid and abet or cause a violation may independently be held liable for the violation.

The Exchange Act does not presume that a broker-dealer’s compliance or legal personnel are supervisors solely by virtue of their compliance or legal functions (compliance and legal personnel may, of course, have supervisory responsibility for personnel within their departments). Rather, the question is whether compliance or legal personnel have supervisory authority over business units or other personnel outside the compliance and legal departments as could be the case, for example, if a chief executive or operating officer also is the firm’s chief compliance officer. Supervisory authority also can be implicitly delegated to, or assumed by, compliance or legal personnel.

Section 15(b)(6) of the Exchange Act authorizes the U.S. Securities and Exchange Commission (SEC) to institute proceedings against a natural person associated with a broker-dealer if someone under that person’s supervision violates the provisions of the federal securities laws, the Commodity Exchange Act, the rules or regulations under those statutes, or the rules of the Municipal Securities Rulemaking Board, and the supervisor failed reasonably to supervise that person with a view to preventing the particular violation. Most enforcement actions against individuals for failure to supervise have involved business line personnel. The Securities and Exchange Commission has brought failure to supervise actions against broker-dealer legal or compliance personnel only in limited circumstances in which these individuals have been delegated, or have assumed, supervisory responsibility for particular activities or situations, and therefore have “the requisite degree of responsibility, ability or authority to affect the conduct of the employee whose behavior is at issue.”3

The SEC has stated that ultimately the responsibility for a broker-dealer’s compliance resides with its chief executive officer and senior management. In Sheldon v. SEC, 45 F.3d 1515, 1517 (11th Cir. 1995) (“The president of a corporate broker-dealer is responsible for compliance with all of the requirements imposed on his firm unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person’s performance is deficient.”), quoting Universal Heritage Investments Corp., 47 S.E.C. 839, 845 (1982) (finding securities firm’s president had properly delegated duties).

When the Securities and Exchange Commission staff seeks to bring legal actions for failure to supervise, our focus is on the roles and responsibilities of the respective parties. As a general matter, the staff does not single out compliance or legal personnel. Rather we encourage compliance officers and other compliance and legal personnel to take strong and vigorous action regarding indications of misconduct.

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See Also

• Legal Profession
• Brokerage
• Short Sale
• Prison Personnel
• Personnel
• Personnel Register
• Futures Commission Merchant
• Securities and Exchange Commission