For hedge fund manager general counsels (GCs) or chief compliance officers (CCOs) – or persons serving in both roles simultaneously
– the prospect of liability for supervisory failures is real and frightening. Two factors in particular make this a perilous area for GCs and CCOs: ambiguities in the caselaw mixed with the limited decision-making authority typically associated with the roles – a state of affairs that some view as overweight on downside and underweight on upside. One of the more productive prophylactic measures that professionals can take in the area of GC and CCO supervisory liability is developing a real command of the handful of cases addressing the topic – understanding the facts, and how regulators and courts have applied relevant law and regulation to the facts. A recent SEC settlement is instructive in this regard, taking its place among the narrow but important group of matters focused on CCO supervisory liability. In the matter, the SEC alleged that the CCO of an investment advisory firm failed reasonably to supervise a rogue employee – and thereby violated the Investment Advisers Act of 1940 – by failing reasonably to implement the firm’s policies relating to custody, transaction reviews, books and records, e-mail and annual office audits. This article provides a deeper discussion of the facts of the matter, the SEC’s legal claims and the terms of the settlement. For articles discussing other matters in this genre, see “Scope of Supervisory Liability of Senior Legal and Compliance Professionals at Hedge Fund Managers Remains Uncertain after SEC Dismissal of Urban Action
,” Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012); “FSA Imposes Fine and Statutory Ban on Compliance Officer of Investment Advisory Firm for Failure to Safeguard Client Assets
,” Hedge Fund Law Report, Vol. 5, No. 20 (May 17, 2012); and “SEC Administrative Law Judge Holds that a Broker-Dealer’s General Counsel Could Be Held Liable as a Supervisor of a Financial Adviser Over Whom He Had No Actual Supervisory Authority
,” Hedge Fund Law Report, Vol. 3, No. 42 (Oct. 29, 2010).