David Lourie has a new paper out considering what standard the SEC should use when deciding whether to impose personal liability on Chief Compliance Officers (CCOs) for compliance failures at their firms.

The SEC now requires financial services firms to have CCOs. Exactly when they do or should face personal liability appears unclear. One SEC Staff member told CCOs that they would face personal liability in three circumstances: (1) when the CCO is affirmatively involved in misconduct; (2)
when the CCO engages in efforts to obstruct or mislead the SEC; or (3) when
the CCO exhibits “a wholesale failure to carry out his or her responsibilities.” What does “wholesale failure” mean here? It’s not totally clear. In the past, the SEC has sought to impose personal liability on CCOs for compliance failures and proceeded under a negligence standard–exposing a CCO to liability if they negligently performed their duties.

Figuring out when you should and shouldn’t hold CCOs personally liable is challenging. I’ll confess that my initial instinct is to lean toward personal liability so that someone at these financial services firms will take compliance seriously. Lourie makes a compelling case that putting too much liability on CCOs may turn them into self-protective box checkers and deter people from taking the role. It could also drive up the costs associated with having a CCO. How much insurance will you need to buy to manage the risk that someone at Wells Fargo will do something illegal? I don’t know, but it’s probably a large number.

Lourie argues for a clear shift to a recklessness standard for personal liability for CCOs. He also details a number of enforcement actions where the CCO’s conduct rose to that level. Reserving personal liability for these more egregious violations may be a better fit. Of course, narrowing CCO personal liability doesn’t mean that the SEC cannot still drop the hammer on misbehaving firms. Some subset of the CCOs getting dragged in personally now may be the ones had the bad luck to accept a job with a firm full of scofflaws.