Category Archives: CCO
 

THE CHIEF COMPLIANCE OFFICER’S ROLE & THE RISKS OF OUTSOURCING

May 10, 2017

The Chief Compliance Officer serves an important role in an investment adviser firm’s business. A role that requires expertise, independent judgment, and dedication, an increasing number of investment adviser firms are choosing to outsource the Chief Compliance Officer position to third party compliance professionals. Despite the potential cost-savings, outsourcing this vital role is generally not a wise business strategy and will likely increase the firm’s risk of exam by the U.S. Securities and Exchange Commission (“SEC”) or affect the depth of inquiry an investment adviser firm is subject to once an exam has begun.

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SEC Risk Alert-Outsourcing CCO

December 14, 2015

The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) recently issued a risk alert regarding outsourcing compliance activities to third parties. The SEC’s OCIE conducted nearly 20 examinations focusing on SEC-registered investment adviser firms that outsource the position of the Chief Compliance Officer (CCO) to third parties. The risk alert shares SEC staff’s observations and identifies areas of risk associated with an investment adviser firm outsourcing the role of CCO. This SEC Risk Alert comes on the heels of a new rule the SEC proposed in May of 2015, which would require investment advisers to disclose if they outsource the role of CCO. These two actions indicate that the SEC is seriously scrutinizing the effectiveness of an investment adviser firm’s outsourced CCO.

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A Refresher on the Requirements for Investment Advisers’ Written Policies and Procedures

September 25, 2013

Rule 206(4)–7 under the Investment Advisers Act of 1940 (“Investment Advisers Act”) became effective in February of 2004, yet for many investment advisers this continues to be a common area where regulatory deficiencies are found.  Under Rule 206(4)-7, investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) are required to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act. While Rule 206(4)-7 does not detail specific items that investment advisers must include in their policies and procedures, the final rule release indicates that investment advisers are required to “consider their fiduciary and regulatory obligations under the [Investment] Advisers Act and to formalize policies and procedures to address them.” Most state securities regulations have similar requirements for state registered investment advisers; however, every registered investment adviser must familiarize itself with the specific regulatory requirements of its governing regulatory authority.

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Tips to Help an Investment Adviser Create a Culture of Compliance

February 19, 2013

For several years now, investment advisers have been hearing that they must create a “culture of compliance” throughout their firms.  Understanding what a “culture of compliance” means is not always clear to many investment advisers.  In a speech presented in October 2007 by Lori Richards, former Director of the Office of Compliance Inspections and Examinations for the U.S. Securities and Exchange Commission (“SEC”), she explained this concept in greater detail:

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Qualifications of a Chief Compliance Officer

February 12, 2013

Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Investment Advisers Act”) requires each investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) to designate a chief compliance officer (“CCO”) to administer its compliance policies and procedures.  There are no specific exam, continuing education, or industry experience requirements outlined under Rule 206(4)-7 for an SEC registered investment adviser’s CCO.  However, the SEC’s final rule release for Rule 206(4)-7 states, “An [investment] adviser’s chief compliance officer should be competent and knowledgeable regarding the [Investment] Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm.  Thus, the compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.”

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Compliance Is Not Just the Responsibility of the Investment Adviser’s Chief Compliance Officer

February 06, 2013

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.

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Registered Investment Advisers Required to Appoint a Chief Compliance Officer

January 29, 2013

According to Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), each investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) must adopt and implement written policies and procedures reasonably designed to prevent violation of the Investment Advisers Act and the rules that the SEC has adopted under the Investment Advisers Act. Rule 206(4)-7 also requires an SEC registered investment adviser to designate an individual to serve in the role as chief compliance officer (“CCO”). The investment adviser’s designated CCO will be responsible for administering the investment adviser’s compliance policies and procedures adopted pursuant to the requirements of Rule 206(4)-7.

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Is an Individual Serving as the Chief Compliance Officer (“CCO”) of an Investment Advisor Firm Registered with the U.S. Securities and Exchange Commission (“SEC”) Required to be Registered with a State Securities Regulator as an Investment Adviser Representative?

November 30, 2012

Assuming an individual serving as the chief compliance officer of an SEC registered investment advisor firm does not regularly solicit, meet or otherwise communicate with investment advisory clients, the Investment Advisers Act of 1940 (“Investment Advisers Act”) and SEC do not specifically require such an individual to be registered as an investment adviser representative.  (Please see SEC Rule 203A-3 for additional details.)  However, the individual serving as the CCO of an SEC registered investment advisor must be a supervised person of the investment advisor firm. Under the Investment Advisers Act, an SEC registered investment advisor firm is required to appointment a CCO to administer the investment advisor firm’s required compliance policies and procedures. The CCO is typically responsible for overseeing ongoing compliance and provides a resource for giving guidance and answering questions of its supervised persons. The individual serving as the CCO should have a good understanding of applicable investment advisory rules and regulations, and the investment advisor firm should grant the CCO with sufficient authority to enforce the investment advisor firm’s compliance policies and procedures.  Although the SEC may not specifically require the CCO of a federally registered investment advisor firm to register as an investment adviser representative, certain state securities regulators may take a contrary interpretation.  Consequently, it is recommended that an SEC registered investment advisor firm also review the investment advisory rules of the state securities regulator where the CCO is located.  Likewise, a state registered investment advisor firm should consult its state’s investment advisory rules for more information whether an individual serving as the CCO of a state registered investment advisor is required to register with the state securities regulator as an investment adviser representative.

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