The actions of EY in responding to the SEC cannot be fully understood, however, without also reading SEC Commissioner Peirce’s dissenting statement. Although she supported the enforcement action against EY for the cheating, she was concerned about some of the remedial measures imposed on EY for its failure to correct a response to an SEC voluntary information request, especially when the response appeared to be correct when given. According to Commissioner Peirce’s statement, following a June 19, 2019, settlement with KPMG relating to cheating on CPA exams using information improperly shared by former Public Company Accounting Oversight Board (“PCAOB”) personnel, the SEC launched a general industry inquiry, with EY receiving a voluntary request for information about any ethics or whistleblower complaints regarding testing. In accordance with the SEC’s aggressive deadline, EY responded the next day, June 20, disclosing five past incidents but no current issue. On the same day as receipt of the SEC request (June 19), an EY employee reported to a manager that an EY professional had emailed that employee answers to a CPA ethics exam. The report was escalated to EY’s human resources group, but the senior EY attorneys who reviewed EY’s June 20 response to the SEC were apprised of the report “no later than June 21,” which was after the June 20 response. EY commenced an internal investigation that uncovered the cheating and significant misconduct and, nine months later, when it completed the internal investigation and developed a plan to address the problem, informed the PCAOB, which in turn notified the SEC.
The issue identified by Commissioner Peirce is the responsibility of lawyers responding to an SEC voluntary request for information to correct previously provided information based on later-learned information while an internal investigation is underway to determine the extent of the problem and develop solutions. She also was troubled by the settlement’s remedy that EY conduct an independent review, overseen by an independent consultant, of EY’s disclosure failures relating to the SEC’s June 19 information request, including whether any member of EY’s executive team, General Counsel’s Office, compliance staff, or other employees contributed to EY’s failure to correct its misleading submission, with the independent consultant to have full access to EY’s privileged information. The independent consultant also is to have final authority as to any employment actions (i.e., disciplining or firing) or other remedial steps. Commissioner Peirce characterizes this remedial provision as an “implicit directive to find attorneys and compliance personnel to blame for not complying with a non-existent obligation to correct the June 20 submission.”
There obviously are lessons in the EY order on how to respond to and deal with the SEC during the course of an investigation, especially when the response is voluntary. The order also highlights the challenge of dealing with information while the nature and scope of that information is evolving, for example because an internal investigation initiated as a result of a whistleblower complaint is ongoing. This is a similar situation to the one faced when responding to auditors about government investigations, such as one initiated by a whistleblower qui tam complaint under the False Claims Act, which was the situation involved in the RPM enforcement matter.
Hamilton Investment Counsel and Its Chief Compliance Officer
On June 30, 2022, the SEC announced a settled enforcement action against Hamilton Investment Counsel, LLC, a registered investment advisor, and its principal and chief compliance officer (“CCO”) for failure to adequately implement its compliance program in connection with one of Hamilton’s investment advisor representatives engaging to the detriment of customers in undisclosed outside business activities that were required to be reported under Hamilton’s compliance policy.
In supporting the settled enforcement action, Commissioner Peirce took the opportunity to outline the considerations relevant, in her view, to charge a CCO with responsibility for compliance violations by the CCO’s firm, which is the party with the compliance obligation. In doing so, she referenced that New York City Bar Association Compliance Committee’s proposed Framework that focused on whether the CCO’s conduct was not just “debatably inappropriate” but rather was “wildly inappropriate” or demonstrated a “wholesale failure” to carry out compliance responsibilities. Commissioner Peirce analyzed the Hamilton CCO’s conduct against the following questions identified in the Framework:
- Did the CCO not make a good faith effort to fulfill his or her responsibilities?
- Did the wholesale failure relate to a fundamental or central aspect of a well-run compliance program at the registrant?
- Did the wholesale failure persist over time and/or did the CCO have multiple opportunities to cure the lapse?
- Did the wholesale failure relate to a discrete specified obligation under the securities law or the compliance program at the registrant?
- Did the SEC issue rules or guidance on point to the substantive area of compliance to which the wholesale failure relates?
- Did an aggravating factor add to the seriousness of the CCO’s conduct?
It is not the purpose of this article to assess whether the particular facts in this SEC enforcement action justified the charges against the Hamilton CCO as measured under the Framework. Rather, the enforcement order and Framework should be helpful in considering the professional responsibility of lawyers and their exposure to SEC enforcement actions, especially by having in mind the questions included in the Framework. This is both because CCOs often are lawyers and because those questions can be relevant in assessing more generally the professional conduct of lawyers in connection with a client’s compliance with legal requirements. That assessment relates to the concerns noted above raised by SEC Commissioner Lee in questioning whether lawyers are adequately fulfilling their professional responsibilities when they engage in “goal-directed” lawyering as illustrated, according to Commissioner Lee, by the conduct of the lawyers who gave the opinion described in the Bandera decision.