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Expanded Supervisory Liability for In-House Lawyers

By James Q. Walker, Daniel C. Zinman and Grant Mogan
March 29, 2011

In-house lawyers, beware ' your exposure to potential supervisory liability may extend far beyond the confines of the legal department. In In the Matter of Theodore W. Urban, 2010 WL 3500928 (SEC Release No. 3-13655, Sept. 8, 2010), an SEC Administrative Law Judge held that an in-house lawyer at a broker-dealer with no direct supervisory authority over a retail financial adviser was, nonetheless, that financial adviser's “supervisor” under the federal securities laws.

Although the ALJ ultimately found that the in-house lawyer's supervision was “reasonable,” the fact that the ALJ concluded that the lawyer was a financial adviser's supervisor is a disquieting development for all in-house lawyers at broker-dealers. Moreover, because failure to supervise liability can be asserted against investment advisers under Sections 203(e)(6) and 203(f) of the Investment Advisers Act of 1940, in-house lawyers at registered and unregistered investment funds could also be subject to this expansion of supervisory liability under the Urban holding.

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