This is a question that many compliance and ethics (C&E) officers have asked themselves when faced with management’s refusal to implement compliance program recommendations. And over the years, quite a few have answered the question in the affirmative (although, for obvious reasons, they are rarely eager to advertise the fact).
It is also a question for which there is little legal guidance. However, in a recent case described in this story in Investment News, the issue of when a compliance officer should quit was placed squarely before the Securities and Exchange Commission:
After numerous instances of misconduct by broker Stephen Glantz came to light, [Theodore] Urban [General Counsel at Ferris Baker Watts Inc., and direct supervisor of its compliance department], wrote a memo in December 2004 to Louis Akers, vice chairman of the board and head of retail sales, and Patrick Vaughn, assistant head of retail sales, recommending that [Mr. Glantz] be fired. Mr. Akers did not dismiss Mr. Glantz, a top revenue producer, but rather put him under special supervision. In 2007, Mr. Glantz, who admitted to a drug problem, pleaded guilty to securities fraud… Mr. Urban maintained that he was not Mr. Glantz’s supervisor and could not terminate him without Mr. Akers’ concurrence. In its case against Mr. Urban, the SEC staff argued that Mr. Urban was required to take the situation to the company board — and if they did not act, Mr. Urban should resign. Brenda Murray, the SEC’s chief administrative law judge, ruled in September 2010 that Mr. Glantz violated securities laws but dismissed proceedings against Mr. Urban, finding that he had done all that could reasonably be expected to prevent Mr. Glantz’ behavior.
The SEC staff appealed this ruling and last Thursday, the Commission split one-to-one (three Commissioners had recused themselves), which had the effect of affirming the administrative law judge’s dismissal. (Download the Commission’s decision in pdf here.) As noted in the article, while the result may help some compliance officers breathe easier, the split decision leaves unresolved the SEC’s position regarding compliance officer duties in situations of this kind.
I should emphasize that the SEC does not have jurisdiction to regulate all companies the way that it does investment-related ones, and the case is clearly most relevant to compliance officers at the latter. Still, given how little guidance other C&E officers have on what could be highly consequential – indeed, potentially existential, at least from a career perspective – decisions of this kind, it may be worth their consideration, too.
Also, it should be noted that the administrative law judge’s decision (download in pdf here) was based in part upon the fact that it would have been futile for the General Counsel to have tried to escalate the matter. That circumstance presumably is not present in all cases of this sort.
Finally, in considering the question “Do I need to quit my job?” C&E officers should be careful not to take part in “half-measure” compliance programs that could be seen by the government as covering up for ongoing wrongdoing – as described in an earlier post in the FCPA Blog. In other words, there may be situations were a C&E program is actually doing more harm than good – and no C&E officer should be part of that.
Jeffrey M. Kaplan writes the widely read Conflict of Interest Blog. He’s a partner in the Princeton, New Jersey office of Kaplan & Walker LLP and has practiced in the compliance law field since the early 1990’s. He serves as Adjunct Professor of Business Ethics at NYU’s Stern School of Business. He can be contacted here.
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