Jan 27 (Reuters)(Corrected) - While compliance professionals cheer the end of a case that threatened to redefine their roles, future regulatory actions remain a source of anxiety.

The U.S. Securities and Exchange Commission on Thursday dismissed a controversial enforcement case against Theodore Urban, once general counsel of the former Ferris Baker Watts LLC, a Washington-based brokerage and investment bank, now part of RBC Wealth Management.

Urban, who made suggestions to his firm about dealing with a rogue broker - including firing him - was then accused in an SEC civil action of failing to supervise that broker.

But the abrupt dismissal, which occurred after three commissioners recused themselves and two others could not agree, leaves a key legal question unanswered: should compliance professionals and legal staff that make recommendations about employee conduct be deemed "supervisors"?

Applying that label to those professionals would put them at greater risk of liability, simply for doing their jobs properly, the Securities Industry and Financial Markets Association argued to the SEC in a 2010 brief. That could discourage them from getting involved in certain problem situations, the brief said.

Even Urban, 61, whose 23-year career was turned upside down by the case, hoped for some clarity on the point. "The outcome of all of this leaves the industry in a precarious position," he told Reuters. "That's an issue the Commission ought to tackle from a regulatory standpoint," Urban said.

The three-year-old case raised hackles among compliance professionals, who argued it could redefine the SEC's view of those it considers a "supervisor."

Urban's difficulties date back to 2003 when Ferris Baker Watts hired Stephen Glantz, a top-producing broker who became involved in a stock manipulation scheme. Glantz later pleaded guilty to securities fraud charges and served time in prison.

But Urban had informed his firm's compliance department and management about his concerns long before that point. He even suggested firing Glantz -- a move that was "vehemently opposed" by an influential board member, according to a 2010 opinion by a SEC administrative law judge Brenda Murray.

Judge Murray found that Urban's actions were reasonable and dismissed the case. The SEC enforcement division, however, appealed Murray's ruling in late 2010.

SIFMA is now disappointed that the SEC "didn't take this important opportunity to clarify this apparently murky area of the securities laws consistent with the points raised in SIFMA's amicus brief," Kevin Carroll, managing director and associate general counsel, said in a statement to Reuters.

"The thinking of the Commission remains unknown," said Joan Hinchman, executive director of the National Society of Compliance Professionals, which also filed a brief in the case.

Those concerns may be far from over.

"I think the compliance community will now probably be waiting for the next shoe to drop," said Brian Rubin, a securities lawyer for Sutherland Asbill & Brennan LLP in Washington who advises brokerages. "It won't be surprising when we see similar cases in the future."

Recent enforcement cases by the SEC and Financial Industry Regulatory Authority demonstrate a ramped-up interest in pursuing compliance officers and in-house lawyers, Rubin said. Not all of those situations involve egregious neglect, but rather some finer points related to supervision, or alleged lapses in following certain policies and procedures, he said.

FINRA does not plan to back down. "When a compliance officer is operating in a supervisory capacity, the CCO title is not a shield," said Susan Schroeder, deputy chief of enforcement, in a statement to Reuters. The regulator "will look to impose supervisory liability in those situations where there are supervisory failures," she said.

The trend could ultimately shrink the talent pool for certain compliance and legal roles.

"It's concerning," said John Cataldo, chief compliance officer for Investors Capital Corp, a brokerage and investment advisory unit of Capital Holdings. "It also calls to question whether folks should be compelled or enticed to take on those supervisory roles now that they have enhanced liability," Cataldo said.

Those stakes can be high. Urban, who has worked in various consulting roles since leaving Ferris Baker in 2007, said his experience has been "surreal."

"I never could have dreamed that I would have found myself being the subject of a failure to supervise case," he said.

(The twelfth paragraph corrects the organization's name to National Society of Compliance Professionals from National Association of Compliance Professionals.)

(Reporting By Suzanne Barlyn)

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