## Facts

- John B. Hoffmann served as Director of Global Equity Research at Salomon Smith Barney Inc. (SSB); Kevin J. McCaffrey served as Director of U.S. Equity Research.
- Equity research analysts at SSB, including telecommunications analyst Jack B. Grubman, reported to McCaffrey, who reported to Hoffmann.
- Hoffmann and McCaffrey participated in Grubman’s performance reviews and compensation decisions and were aware of his importance to SSB’s telecommunications investment-banking business.
- Grubman published research on telecommunications companies that were investment-banking clients of SSB.
- The SEC found Grubman’s research contained misleading statements or exaggerations, minimized investment risks, predicted substantial growth, and omitted material facts, in violation of federal securities laws and NASD/NYSE advertising-related standards.
- The SEC alleged Hoffmann and McCaffrey were aware of conflicts of interest arising from Grubman’s involvement in investment-banking activities and related pressures on research objectivity.
- The SEC instituted an administrative proceeding and accepted settlement offers from both respondents, who consented to findings and sanctions without admitting or denying the findings (except jurisdiction).

## Issues

1. Whether Hoffmann and McCaffrey failed reasonably to supervise Grubman, with a view to preventing violations of the federal securities laws and applicable SRO rules, within the meaning of Exchange Act § 15(b)(6) and Advisers Act § 203(f).
2. Whether known conflicts of interest and related warning signs required heightened supervisory controls over research content and compliance review.
3. What remedial sanctions were appropriate, in the public interest, for supervisory failures by senior research management.

## Decision

- The SEC found Hoffmann and McCaffrey were subject to sanctions under Exchange Act § 15(b)(6) and Advisers Act § 203(f) for failure reasonably to supervise Grubman with a view to preventing violations.
- The SEC imposed administrative remedial sanctions through a settled order, including limitations on association in supervisory or related capacities and monetary penalties, as specified in the order.
- The proceeding concluded at the administrative level upon acceptance of the respondents’ settlement offers.

## Legal Principles

- Exchange Act § 15(b)(6) and Advisers Act § 203(f) authorize SEC sanctions against associated persons who fail reasonably to supervise others subject to their supervision, where supervision is required “with a view to preventing” violations.
- A supervisor’s obligations include establishing and enforcing supervisory and compliance systems reasonably designed to prevent violations; paper procedures are insufficient if not implemented and enforced.
- Reasonable supervision is assessed in light of foreseeable risks, including known conflicts of interest, business incentives that may bias research, and other warning signs that call for active oversight.
- Failure-to-supervise liability does not require direct participation in the underlying misconduct; it can rest on unreasonable supervisory omissions in design, execution, or follow-through.
- SEC sanctions in administrative proceedings are imposed based on public-interest considerations, including deterrence and protection of market integrity.

## Conclusion

The SEC sanctioned two senior research managers after finding they failed reasonably to supervise a prominent research analyst amid known investment-banking conflicts and warning signs, emphasizing that supervisors must implement and enforce effective controls to prevent research-related securities-law and SRO-rule violations.


In re John B. Hoffmann & Kevin J. McCaffrey, Exchange Act Release No. 51713, Advisers Act Release No. 2386 (SEC May 19, 2005)