The purpose of this article is to highlight a recent settlement by the United States Securities and Exchange Commission (the “SEC”) in which it alleged that a regulated entity failed to supervise a representative principally because the entity did not establish clear guidance as to how its personnel should investigate red flags of a representative’s potential misconduct (e.g., how to follow up on the red flags and define the scope of any inquiry).
This article provides an overview of failure-to-supervise liability for broker-dealers and investment advisers, and highlights key takeaways from the SEC’s recent enforcement resolution that may be applied in establishing compliance procedures relating to internal investigations going forward.
The article concludes that the SEC appears to expect regulated entities to implement procedures guiding employees on “how to investigate” suspicious activity. Companies, however, should define such procedures in general terms to allow for flexibility in investigations, which can present unique or unforeseen situations. Internal procedures must also account for and preserve attorney-client privilege and attorney work product protections.
This article provides expert analysis and practical guidance from experienced lawyers in the Investigations and White Collar Defense and Securities Enforcement practices
Nowak, J.P., Zaccaro, T.A. and Solomon, K.K. (2019), "A failure to supervise: the SEC casts a shadow over internal investigations", Journal of Investment Compliance, Vol. 20 No. 2, pp. 9-12. https://doi.org/10.1108/JOIC-04-2019-0023
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