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SEC Commissioner Draws Some Clean Enforcement Lines

Posted in Enforcement, FINRA Enforcement, SEC Enforcement

The SEC should put more of its efforts into pursuing regulatory violations, such as failure to supervise, instead of trying to pursue fraud theories on weak facts, according to an SEC Commissioner.

In his November 7, 2013 remarks to the FINRA Enforcement Conference, SEC Commissioner Daniel Gallagher observed that, in some cases, the Commission chooses to pursue weaker, non-scienter fraud charges against an entity rather than pursuing a cleaner regulatory violation against both the entity and the culpable individuals. Gallagher opined that such cases would make “excellent failure-to-supervise cases” that he would much prefer to shoehorning bad facts into a weak fraud theory. In Gallagher’s view, a failure-to-supervise theory may often provide an elegant solution to factual and legal difficulties posed by questionable fraud charges, such as non-scienter fraud charges based on “some ethereal notion of ‘collective negligence.’”

At the same time, Gallagher warned both the Commission and FINRA to use caution in bringing failure-to-supervise cases against chief compliance officers, general counsels or their subordinates, who should be encouraged to run “towards problems, not away from them,” and should not be threatened with liability for “trying to be part of the solution.” Gallagher was pleased with the SEC’s Division of Trading and Markets’ issuance of FAQs on the issue of compliance personnel liability, and recommended that FINRA also provide similar guidance in the form of FAQs or a formal guidance document.