## Facts

- Arthur James Huff was a vice president and Senior Registered Options Principal in a broker-dealer’s New York compliance department, responsible for developing and overseeing firm-wide options procedures.
- A broker in the firm’s Miami office, Dennis E. Greenman, committed fraud through unauthorized options trading and fictitious customer statements during July 1979–May 1980, causing customer losses exceeding $7 million.
- The firm’s written supervisory structure assigned day-to-day supervision of Greenman to the Miami branch manager (Philip Huber) and the regional manager, not to Huff.
- When Huff joined the compliance department, he was given Greenman’s compliance file and was told to “keep on top” of Greenman and follow up if questions arose.
- Before Huff’s employment, compliance and legal personnel had reviewed Greenman’s account documentation, approved it, and treated prior concerns as resolved.
- Huff reviewed Greenman’s file and monitored Greenman’s accounts to a limited extent consistent with his firm-wide compliance role; he did not treat Greenman as a special supervisory problem requiring branch-level intervention.
- The SEC instituted administrative proceedings alleging Huff failed reasonably to supervise Greenman and also failed reasonably to supervise Huber.
- After a hearing, an administrative law judge found Huff liable for failure to supervise and recommended sanctions; Huff sought Commission review.

## Issues

1. Whether Greenman was “subject to” Huff’s supervision, and if so, whether Huff failed reasonably to supervise Greenman with a view to preventing violations of the antifraud provisions.
2. Whether the Exchange Act permits “second-order” failure-to-supervise liability—sanctioning Huff for failing to supervise Huber where Huber’s alleged misconduct was a failure to supervise Greenman.

## Decision

- The Commission reversed the administrative law judge’s findings and dismissed the proceeding against Huff.
- As to Greenman, the Commission found Huff reasonably discharged any supervisory duties associated with his compliance position and did not fail reasonably to supervise Greenman.
- As to Huber, the Commission held that a subordinate’s “failure to supervise” is not itself a securities-law “violation” that can serve as the predicate for another person’s failure-to-supervise liability.
- No suspension, bar, or other sanction was imposed on Huff.

## Legal Principles

- Failure-to-supervise liability under Exchange Act § 15(b) requires that the wrongdoer be “subject to” the respondent’s supervision and that the respondent failed reasonably to supervise with a view to preventing securities-law violations.
- Compliance and legal personnel are not necessarily “supervisors” merely because they provide advice, review documentation, or monitor activity; supervisory status turns on actual authority and responsibility to direct, control, or discipline the actor.
- Reasonable supervision is assessed in light of the respondent’s role and the firm’s supervisory structure; the statute does not impose a guarantee that misconduct will be prevented.
- Exchange Act § 15(b) does not authorize “supervising the supervisor” liability where the only alleged predicate conduct by the subordinate manager is a failure to supervise.

## Conclusion

The Commission dismissed the charges against Huff, holding that his firm-wide compliance role did not support failure-to-supervise liability on the record presented and that the Exchange Act does not permit stacking supervisory liability based solely on another manager’s failure to supervise.


In re Arthur James Huff, Exchange Act Release No. 29017, 1991 WL 296561 (S.E.C. Apr. 18, 1991)