One of the requirements of Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Investment Advisers Act”) is that each investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) is required to designate a chief compliance officer (“CCO”) to administer the investment adviser’s compliance policies and procedures. While the CCO has the primary responsibility for developing and enforcing appropriate policies and procedures for the investment adviser, this does not mean that the CCO has to be the sole party responsible for making sure that all compliance functions within the firm are carried out. The CCO can delegate duties and supervisory responsibilities related to the investment adviser’s ongoing compliance responsibilities.
Many times the CCO feels the whole burden of compliance for the investment adviser is resting on his/her shoulders. The SEC’s final rule release for Rule 206(4)-7 indicates, “Having the title of chief compliance officer does not, in and of itself, carry supervisory responsibilities. Thus, a chief compliance officer appointed in accordance with rule 206(4)-7… would not necessarily be subject to a sanction by us for failure to supervise other advisory personnel. A compliance officer who does have supervisory responsibilities can continue to rely on the defense provided for in section 203(e)(6) of the Advisers Act [15 USC 80b-3(e)(6)]. Section 203(e)(6) provides that a person shall not be deemed to have failed to reasonably supervise another person if: (i) the adviser had adopted procedures reasonably designed to prevent and detect violations of the federal securities laws; (ii) the adviser had a system in place for applying the procedures; and (iii) the supervising person had reasonably discharged his supervisory responsibilities in accordance with the procedures and had no reason to believe the supervised person was not complying with the procedures.”
A CCO can only limit his/her supervisory responsibilities if the CCO makes sure that specific supervisory responsibility is assigned to a supervised person of the investment adviser for each compliance function. The CCO then needs to make sure that a system is developed for ongoing monitoring and testing in order to make sure that the ongoing compliance policies and procedures are being implemented as required. An investment adviser is only required to review it policies and procedures annually to determine the adequacy and effectiveness of the implementation of the policies and procedures. However, reviewing and evaluating the effectiveness of the investment adviser’s compliance program should be more of a continuous process through surveillance, exception reports, checklists, and periodic, transactional and forensic testing. The CCO should be responsible for conducting or supervising the annual and ongoing compliance review process in order to make sure that corrective actions are taken when necessary.
An investment adviser must have a strong culture of compliance throughout the firm. The first step in helping to create a culture of compliance is to develop strong internal compliance policies and procedures reasonably designed to prevent violations of the Investment Advisers Act by the investment adviser or any of its supervised persons; to detect violations that have occurred; and to correct promptly any violations that have occurred. While the CCO is responsible for administering these policies and procedures, the investment adviser must make sure everyone is aware, understands, and agrees to comply with the investment adviser’s compliance policies and procedures. Ongoing compliance training within the investment adviser can be a key element in making sure that everyone is aware of the investment adviser’s compliance policies and procedures. Compliance is not something that should just be a concern of the CCO and those individuals acting in a compliance role. Compliance is something that should be a concern from the highest executive of the investment adviser to the most entry level position of the investment adviser.
For more information on what it means to serve in the role of an investment adviser’s CCO and the ongoing responsibilities of the CCO, register to attend our webinar, “Understanding the Role of the Chief Compliance Officer (CCO).” RIA Compliance Consultants will host this webinar on February 21, 2013 at 12:00 p.m. CST. To register for this event, click here.