Basic Training for a New Chief Compliance Officer of a Registered Investment Adviser

May 14, 2010

SEC Rule 206(4)-7 under the Investment Advisers Act of 1940 (Investment Advisers Act) requires an investment adviser registered with U.S. Securities and Exchange Commission (“SEC”) to appoint an individual to serve as the Chief Compliance Officer (CCO).  The CCO must be an individual who is competent and knowledgeable regarding the Investment Advisers Act, should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the investment adviser, and should have a sufficient position of seniority and authority within the organization to compel others to adhere to the investment adviser’s policies and procedures.  It is important to note that if the firm is a state registered investment adviser, the primary compliance principal may not necessarily have the exact title of CCO as it may not be required by the applicable state securities regulations; however, if an individual is required to be appointed as the person responsible for supervision and compliance in Form ADV, Part 1B, Item 2A, this individual is acting in a capacity similar or equal to that of the CCO.

Once an individual has been given the title as CCO (or other similar supervisory role for state registered firms), the first question is what now?  Does the new CCO have a clear understanding of the regulatory expectations of this role and the related responsibilities within the investment adviser?  Understanding this role as the investment adviser’s CCO is a crucial element of implementing and enforcing the investment adviser’s written compliance program.  Having the title of CCO does not, in and of itself, carry supervisory responsibilities.  It should not be assumed that the burden of compliance is all carried on the shoulders of the CCO.  It is important that an investment adviser implement and enforce a culture of compliance throughout the firm and the CCO will be the primary leader and enforcer of this culture.  However, the CCO can alleviate himself/herself from some of the compliance burden, but to do so: (1) the investment adviser must have adopted procedures reasonably designed to prevent and detect violations; (2) the investment adviser must have a system in place for applying the procedures; and (3) the supervisory responsibilities must have been discharged in accordance with the investment advisor’s written procedures and the CCO must have no reason to believe that the person(s) to whom the responsibilities have been discharged are not complying with the procedures.  Therefore, it is extremely important that a CCO know the regulatory requirements as they relate to the investment advisor, assign responsibilities for those requirements, develop strong written procedures clearly defining the responsibilities and the individual responsible, and develop procedures for implementing, testing, and monitoring the procedures.

If you are interested in learning more about the role of the CCO and the related responsibilities, we would encourage you to purchase for $59.95 our previously recorded webinar, “Basic Training for a CCO of an Investment Adviser” by clicking here.

Posted by Bryan Hill
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