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.
The final rule release for Rule 206(4)-7, indicates that the investment adviser’s CCO “…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 (investment adviser) 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.” An investment adviser’s CCO must be a supervised person of the firm. Generally speaking, the CCO is responsible for developing and overseeing the adoption and implementation of the investment adviser’s compliance program. This does not mean that the CCO has to be the sole party responsible for performing all compliance functions related to implementing the investment adviser’s compliance policies and procedures. The CCO must administer the policies and procedures, which means at a minimum the CCO must ensure that proper policies and procedures are developed to prevent and detect violations of the Investment Advisers Act and related rules by the investment adviser or its supervised persons; that someone is assigned to supervise the implementation of each policy and procedure; and that there are internal controls, testing, and monitoring in place to ensure that policies and procedures are being implemented as adopted and are addressing all areas of risk.
Rule 206(4)-7 also requires an SEC registered investment adviser to review, no less frequently than annually, the adequacy of the investment adviser’s policies and procedures as well as the effectiveness of their implementation. Again, the investment adviser’s CCO does not have to be the sole party responsible for performing the annual compliance review. However, the CCO should oversee the process to make sure that a comprehensive review is performed; that someone is assigned to take any corrective actions needed; and that someone is assigned to follow-up and ensure completion of any corrective actions. The CCO must also determine if the investment adviser’s policies and procedures need to be updated as a result of any findings during the annual compliance review process.
It is important to note that while Rule 206(4)-7 only applies to SEC registered investment advisers, most state securities regulations have similar requirements. Investment advisers registered with a state securities regulator may not be required to appoint someone with the exact title of CCO. However, Form ADV Part 1B, Item 2A requires a state registered investment adviser to indicate the person responsible for supervision and compliance of the investment adviser. This person is acting in a capacity similar or equal to that of the CCO of an SEC registered investment adviser. Most state registered investment advisers are also required under the states’ securities regulations to adopt and implement written compliance policies and procedures.
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.
Posted by Bryan Hill
Labels: CCO, Chief Compliance Officer, Compliance Program, Compliance Training, Webinar