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Chief compliance officers (CCOs) are vital to an advisory firm’s efforts to ensure that the firm remains in compliance with applicable laws and to avoid regulatory sanctions that can cripple a firm financially and reputationally. This important responsibility, along with the individual personal liability that attaches to serving as a CCO, is why advisors must choose the right person to assume such a role. In this article, I will discuss what compliance officers do and the various factors advisors should consider in determining who should serve as their CCO.
Filling a key role
At the outset, before discussing who advisors should choose as their CCO, it’s important to understand what functions CCOs perform on behalf of advisors. In short, CCOs are responsible for developing, implementing, and administering an advisor’s compliance program. Among other things, CCOs typically perform the following duties on behalf of advisory firms:
- Conducting assessments to evaluate operational and compliance issues that pose the most risk for the firm;
- Drafting and updating the firm’s compliance policies and procedures to address risks and conflicts of interest;
- Training employees to ensure they understand the firm’s compliance policies and procedures and their individual compliance responsibilities;
- Reviewing and testing the firm’s compliance policies and procedures;
- Identifying if any compliance violations have occurred;
- Taking corrective actions when compliance violations occur including enforcing any disciplinary actions;
- Drafting and submitting the firm’s regulatory filings;
- Keeping abreast of business and regulatory developments that warrant update to the firm’s compliance program;
- Documenting and maintaining books and records pertaining to the administration of the firm’s compliance program; and
- Interfacing with regulators responsible for overseeing the advisor’s compliance program.
For a more in-depth discussion of what components make up an advisor’s compliance program, please click here.
What to consider when selecting a CCO
Turning to the question of who should serve as a firm’s CCO, there are several important variables to consider. For starters, regulators, particularly the SEC, expect that anyone who an advisor appoints as CCO will possess sufficient training, knowledge, and experience to perform the functions of a CCO. This means having sufficient knowledge with respect to the regulations that govern an advisor’s business, the knowledge and experience as to how to administer the firm’s compliance program, and the experience to identify if any compliance violations have occurred. There are no specific educational requirements or professional designations required, but CCOs are expected to possess sufficient training or experience to carry out the functions described above. The SEC has sanctioned advisors for failing to install a CCO that possesses sufficient training, experience and/or knowledge to carry out the functions required.
Second, anyone selected to serve as CCO should have a good grasp of the investment advisory business in general and, more specifically, the firm’s business and operations, including its service offerings; fee structure; investment strategies and methodologies; and operating infrastructure. A person who lacks such understanding is not likely to effectively serve as CCO as they would not be able to identify compliance risks or violations as effectively as someone more familiar with the firm’s business and operations.
Third, CCOs should possess certain character traits that will help them more effectively perform the role of a CCO. CCOs should be organized, as administration of a compliance program entails keeping track of large volumes of information and documents. CCOs should also be detail-oriented, as small details matter when it comes to trying to identify if compliance violations have occurred. CCOs should be adept at communicating with others, as it’s vital that firm personnel clearly understand firm expectations when it comes to compliance and the consequences of noncompliance. CCOs must also possess the willingness to have difficult conversations with employees, particularly where compliance violations have occurred. The failure to enforce the compliance policies of a firm can lead to liability, not only for the advisory firm, but also potentially for the CCO personally.
Fourth, anyone tasked with serving as CCO must have sufficient time to carry out the functions required of a CCO. We are often asked how much time is required for CCO functions to be effectively carried out for an advisory firm. Unfortunately, the answer is that it depends on a variety of factors including how many employees the advisor has; how many clients the advisor serves; how many and what kinds of services the advisor provides; how much operational and compliance technology the advisory firm employs; and other factors. Generally, to be performed effectively, compliance functions are likely going to take a minimum of 10 hours of work per week for small advisory firms. For larger firms, one individual working full time may not be enough to effectively perform the compliance functions on behalf of the firm.
Fifth, advisors should be prepared to install only those persons that are willing to assume personal liability for performing the CCO function. This means that the person who serves as CCO can be subject individually to regulatory sanctions – including potential fines and suspensions or disqualifications from the advisory industry – for failing to perform the functions expected of a CCO. The SEC has, over the years, sanctioned numerous individual CCOs. To be clear, the SEC typically only sanctions individuals serving as CCO for substantial failures to perform the expected duties, but advisors and CCOs should nonetheless be cognizant of the fact that such personal liability is a real and significant risk for those who are ill-equipped or unprepared to take on such functions.
Fortunately, advisors that either do not have personnel in-house that have enough experience and/or time to carry out the functions of a CCO can appoint an external third party to serve as the firm’s CCO.
Richard Chen is a managing partner with Brightstar Law Group, a law firm that serves investment advisory firms by providing proactive business-minded solutions pertaining to corporate and securities-law-related matters. Among other things, our firm provides counsel with respect to securities and compliance matters (including representation in SEC examinations), private fund formation, corporate formation and structuring, business transactions (including M&A and joint ventures), contract drafting and negotiation, employment law matters, operational due diligence, and succession planning. For more information, please visit our website at www.brightstarlawgroup.com or call us at 917-838-7398.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.