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Chief&Compliance&Of/icers&in&the&Crosshairs:&&Addressing&Escalating&Risk&
NAVEX"Global"Advisory"Council"–"February"26,"2015"
Event&Number:&&570&629&656&
"
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P"R"E"S"E"N"T"E"D""B"Y"
Chief"Compliance"Officer"and"Senior"Vice"President,"Advisory"Services"
NAVEX"Global"
"
Susanna&McDonald& Carrie&Penman&
Associate"General"Counsel"&"Senior"Director"of"Compliance"&"Resources"
AssociaUon"of"Corporate"Counsel"
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I. Compliance"Officer"liability"II. Shared"worries:"General"Counsel/
Gatekeeper"liability"
III. Top"five"behaviors"that"create"CCO"risk"
IV. Defenses/protecUons"in"the"face"of"growing"regulatory"challenges"
V. Shared"responsibiliUes:"gaining"increased"authority"influence"with"the"Board"of"Directors"and"C[suite"execuUves"
VI. Seven"habits"to"reduce"risk"
VII. QuesUons"
Agenda&
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• Chief"Compliance"Officers"have"secretly"worried"about"personal"liability"since"the"role"was"first"created."
• Recent"regulatory"acUons"have"brought"this"to"a"fuller"and"more"open"discussion."
The&Secret&is&Out…&
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Chief&Compliance&Of/icer&Liability&
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Survey&Question&Do"you"believe"that"liability"risk"for"CCO’s"is:"
1. Less"than"previous"years"
2. About"the"same""
3. Increasing"somewhat"
4. Increasing"significantly"
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Chief&Compliance&Of/icer&Liability&&
Source:"Thomson"Accelus"Cost"of"Compliance"Survey"2014"
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CondiUons"for"Aiding&&&Abe8ng"! A"viola<on;"
! Provision"of"substan<al&assistance&with"violaUon;""
! Knowledge"by"offending"party"that"the"violaUng"ac<on&is&wrong;"and""
! Recklessness&
CondiUons"for"Causing&a&Viola<on"! A"viola<on;"
! An"act&or&omission&that&causes&a&viola<on&and"associated"liability;"and""
! (In"some"cases)"negligence&
"
Liability&Conditions&
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Total&Wealth&Management:"CCO"along"with"investment"advisor"charged"with"failing&to&disclose&COIs&and"concealing"kickbacks"for"investment"recommendaUons"to"clients"(ongoing)"GunnAllen&Financial:""Former"CCO"fined"$15K"in"2011"for"failure&to&set&policies"“reasonably"designed”"to"protect"customer"financial"informaUon"Brown&Brothers&Harriman:"Former"AnU[money"Laundering"CO"fined"$25K"for"company’s"an<Imoney&laundering&compliance&failures&"
Recent&Actions&Against&Compliance&Of/icers&
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US&Dept.&of&Treasury&v.&Thomas&E.&Haider&&(14LcvL09977&SDNY)&
• FinCEN"direct"charge"against"the"former"Chief"Compliance"Officer"
• $1"million"fine"and"bar"from"parUcipaUng"in"the"affairs"of"a"financial"insUtuUon"
• No"allegaUons"of"acUve"parUcipaUon"in"AML"violaUons"
• Charges"are"failure"to"implement"and"maintain"a"compliance"program"designed"to"protect"against"money[laundering"and"to"report"suspicious"acUvity"
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Survey&Question&Do"you"think"CCO’s"outside"the"financial"industry"will"be"targeted?"
1. Yes"and"soon"
2. Yes,"but"not"in"the"next"year"
3. No"
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SecuriUes"Exchange"Commission"(SEC)"
Financial"Industry"Regulatory"Authority"(FINRA)"
Treasury"Department"Financial"Crimes"Enforcement"Network"(FinCEN)"
"
Government&Agencies&Taking&an&Interest&(So&Far)&
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Shared&Worries:&General&Counsel/Gatekeeper&Liability&
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• Where"were"all"the"lawyers?"
• Sarbanes[Oxley"and"subsequent"regulaUons,"have"put"in[house"counsel"in"the"crosshairs"in"a"very"aggressive"manner."""
• GCs"should"not"be"liable"for"the"acUons"of"their"clients."""
• Invoking"privilege"is"not"evidence"of"lack"of"cooperaUon"(Thompson"Memo)."
Shared&Worries:&ACC&Position&on&General&Counsel&Liability&
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The"Ongoing"Debate:""! Should&the&general&counsel&also&be&the&compliance&officer?&
A"New"QuesUon"for"this"Topic:""
! Is&there&more&liability&protec<on&if&the&CCO&is&also&inIhouse&counsel?&
"
Opinions"vary"widely"on"this"issue"and"one"government"agency"has"taken"a"longstanding"strong"posiUon"here."
"
CCOs&and&GCs—Roles&and&Risks&&
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“It&doesn’t&take&a&pig&farmer&from&Iowa&to&smell&the&stench&of&con/lict&in&that&arrangement.”&
!"Sen."Charles"Grassley,"in"letter"to"Tenet"CEO"2003,"opining"on"Tenet’s"combined"GC/CCO"role"
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• The"government"should"not"mandate"how"a"company"structures"its"compliance"program."
ACC&Position&on&Separation&of&Duties&
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Top&5&Behaviors&that&Create&CCO&Risk&• Not"understanding"supervisory"liability"
• Not"ensuring"reported"issues"are"appropriately"addressed,"escalated"or"documented"
• Not"maintaining"a"robust"compliance"program"
• AccepUng"full"responsibility"for"organizaUonal"compliance"
• And,"of"course,"contribuUng"to"a"violaUon"
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Supervisory&Liability&• CCOs,"by"giving&advice&and&making&rules,"may"be"seen"as"supervisory."
• SEC"has"clarified"that"Legal"and"CCOs"are"NOT&supervisors&due&to&the&advice&giving&and&rule&se8ng"they"do"as"part"of"their"job.&
• HOWEVER,"there"are"a"few"steps"to"take"to"protect"yourself"from"this"and"other"liabiliUes…"
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Ensure"supervisory"policies"are"wriQen.&
When"misconduct"occurs,"make"sure"the"company"documents"which&supervisor&is&responsible"for"handling"it."
Commioees"on"which"a"CCO"serves"should"have"documented&in&their&charters"that"the"CCO’s"role"is"only&advisory.&&
CCOs"should"escalate&serious&concerns&about"legal"violaUons"to"designated"senior"management"[per&escala:on&policy]."
"
Defense:&Supervisory&Liability&
Source:&While&You&Were&Complying:&SEC&and&FINRA&Disciplinary&Actions&Taken&Against&Chief&Compliance&Of/icers&(Again)&Rubin,&BL,&Kelly,&AL,&Practical&Compliance&&&Risk&Management&for&the&Securities&Industry,&JanLFeb&2011,&pages&35L41&
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Ensure"you"have"a"board[approved"escalaUon"policy:"
! Content"of"policy"determined"with"Board"and"CEO"based"on"what"they"want"to"know"and"when.""
! Development"beoer"done"in"“the"abstract.”"
! EscalaUon"should"occur"within"24[48"hours"and"should"not"wait"for"the"compleUon"of"an"invesUgaUon."
"
Defense:&Escalation&Policies&
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• CEO,"board"member"or"senior"exec"(including"CCO)"is"named"in"an"allegaUon—escalate"to"board"(or"designated"commioee"member)."
• Anything"with"potenUal"to"cause"reputaUonal"harm."
• Any"significant"financial"or"accounUng"issue;"these"must"be"defined"(and"generally"escalated"to"chair"of"the"Audit"Commioee)."
• Remedial"acUon"commioed"to,"but"not"executed,""by"an"execuUve"or"director."
What&Should&be&Escalated?&
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Repor<ng&Structure&! Codifies"high"level"nature"of"posiUon."
Du<es&and&Responsibili<es&! Addresses"duUes"related"to"eight"elements"of"an"effecUve"compliance"program."
! Includes"cross[funcUonal"responsibiliUes,"for"example"giving"input"into"hiring"and"promoUon"decisions;"performance"review"tools;"exit"interview"quesUons."
! Language"to"limit"supervisory"liability."
Defense:&Formal&Charters&
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AuthoriUes—may"include:"
! DelegaUon"of"maoers"for"invesUgaUon."
! Ability"to"raise"issues"directly"with"CEO,"chair"of"board"commioee"or"full"board"commioee."
! Ability"to"conduct"internal"invesUgaUon"of"maoers."
! Ability"to"access"any"company"document"when"invesUgaUng"a"relevant"compliance"maoer."
! Ability"to"retain"outside"counsel"on"maoers"of"personal"professional"risk,"in"collaboraUon"with"GC."
What’s&in&a&Compliance&Of/icer&Charter?&
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Survey&Question&Do"you"follow[up"and"have"input"on"the"outcomes"of"reported"issues"referred"to"HR"or"other"departments"for"invesUgaUon?"
1. Yes,"informally"
2. Yes,"and"we"don’t"close"a"case"in"the"system"unUl"we"have"reviewed"and"concurred"with"the"findings"and"any"acUons"taken."
3. No,"once"we"make"a"referral,"we"close"the"case"in"our"system."
"
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• Ensure"all"maoers"raised"to"you"are"tracked"to"compleUon"including"documentaUon"of"any"appropriate"discipline."
• SEC"FAQ:"Inform"direct"supervisors"of"business"line"employees"about"conduct"that"raises"red"flags"and"conUnue"to"follow"up"in"situaUons"where"misconduct"may"have"occurred."
• Be"prepared"to"go"to"the"CEO"or"board"if"maoers"are"not"adequately"addressed."
• Beware"of"execuUng"disciplinary"acUon"against"those"not"reporUng"to"you—may"be"considered"a"“supervisory"responsibility.”"
Defense:&Ensure&Issues&are&Appropriately&Addressed&
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Survey&Question&How"do"you"document"your"compliance"decisions"or"advice?"
1. I"document"everything"and"have"a"formal"process"
2. I"document"most"things""
3. I"document"only"the"key"decisions"
4. I"document"only"case"outcomes"
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• Document"important"decisions,"outcomes"of"reports,"formal"advice,"escalaUons,"commioee"minutes,"and"policy"reviews."
• Ask"commioee"or"other"party"to""review"decisions,"where"appropriate."
• Create"and"follow"a"documentaUon"retenUon"plan"for"all"compliance"program"documents."
• Cite"major"decisions"in"board"reports."
Defense:&Documentation&&
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• Risk"assessment"• Structure"and"leadership"• Standards"and"procedures"• Training"and"communicaUons"• IntegraUon"with"HR"PracUces"• Monitoring"and"audiUng"• ReporUng"systems"and"fear"of"retaliaUon"
• InvesUgaUons"and"appropriate"response"to"issues"found"
"Organiza<onal&Culture&
Defense:&Maintain&a&Robust&Compliance&Program&
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Survey&Question&Is"your"CCO"covered"by"your"company’s"directors"and"officers"liability"insurance,"or"equivalent?"
1. Yes"
2. No"
3. I"don’t"know"
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Survey&Question&If"covered,"do"you"know"what"the"coverage"is"and"what"any"exclusions"are?"
1. Yes"
2. No"
"
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Defense:&D&O&Insurance&Covering&Personal&Liability&
• Don’t"be"afraid"to"ask"if"you"are"covered"
• Understand"the"scope"of"coverage"
• Get"the"answer"in"wriUng"
• For"addiUonal"informaUon"see"arUcle"in"September"2014"Compliance"&"Ethics"Professional"Magazine:"Compliance&Officers’&Roles&in&Corporate&Compliance&Programs:&Are&you&at&Risk&for&Personal&Liability&by"Janice"Anderson,"Esq."and"Ryan"McAteer,"Esq.&
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• A"good"lawyer"
Defense:&Contributing&to&a&Violation&
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Shared&Responsibilities:&Gaining&Increased&Authority&&&In/luence&
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Defense:&Shared&Responsibilities&–&Don’t&Limit&Ownership&to&Just&You&• ExecuUve"Compliance"Commioees"
! Deepen"understanding"of"risks"through"execuUve"level"responsibility""
! Further"embed"risk"management"into"decision"making"process"
• Strong"network"of"Regional"Ethics"and"Compliance"Officers"
• Risk"management"assigned"to"key"Subject"Maoer"Experts"
! CFO,"CTO,"GC,"HR,"E&C"
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LIABILITY&ENVIRONMENT&GLOBALLY&
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How&Do&You&Feel&About&Your&Liability&Now?&
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Reality&• Liability"risk"for"CCOs"outside"the"financial"industry"is"relaUvely"low"
• Some"acUons"were"for"clearly"intenUonal"violaUons"
• If"you"do"your"job"and"raise"issues"appropriately"you"are"at"lower"risk"
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1. Do"not"help"others"do"what"you"know"is"wrong."
2. Do"what"you"say"you"will"do—especially"if"you"say"it"in"wriUng."
3. Have"a"formal"escalaUon"policy"and"escalate"when"appropriate."
4. Check"your"D&O"insurance."5. Document,"document,"
document."6. Don’t"limit"compliance"
responsibility"to"only"you."7. Follow"CCO"advocacy"iniUaUves.""JUST&DO&YOUR&JOB&TO&THE&BEST&OF&YOUR&ABILITY!&
7&Habits&to&Reduce&CCO&Liability&Risk&
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