Your registered investment adviser ("RIA") firm’s chief compliance officer ("CCO") sets the tone, direction and overall strategy of your compliance program. A task, which in recent months, has become even more critical given the significant number of regulatory changes and rule proposals that have occurred.
Simply put, the importance of your firm’s CCO cannot be overstated.
The Securities and Exchange Commission ("SEC") Rule 206(4)-7 under the Investment Advisers Act of 1940 requires all RIA firms to appoint a CCO. Your firm and its clients face substantial risk in today’s market, with cybersecurity representing one of the most talked about examples within today’s evolving financial landscape. In addition, there have been countless new SEC rulings and heightened regulatory requirements, which are requiring firms to take a critical look at their compliance programs.
As such, the responsibilities of a CCO are growing and are no longer something that can be juggled with other company priorities. In other words, without a duly appointed CCO, your firm not only directly violates an SEC ruling, but is also opening itself up to multiple points of risk and conflict.
Specifically, your CCO should be responsible for:
- Defining your compliance program by creating a policy and procedures manual and Code of Ethics to act as the backbone for your ongoing regulatory requirements.
- Providing your firm with the continued training and education necessary to stay knowledgeable on all relevant compliance topics.
- Assessing and mitigating risk and implementing new policies and procedures to reflect the evolving regulatory and financial landscape.
- Acting as the point person for all compliance-related questions, issues and challenges, and working with employees across the firm to ensure no violations occur.
- Keeping your compliance program on track and managing the day-to-day and big picture strategy ensuring you comply with all SEC requirements.
- Tracking and documenting all compliance processes and ensuring firm-wide preparation for any and all examinations.
Important qualities of a CCO
To successfully meet the needs and requirements of the position, an RIA’s CCO should have:
- A strong fluency related to the Investment Advisor’s Act of 1940.
- The authority, within the firm, to adopt and implement policies and procedures compliant with the act.
- A continuous development of knowledge as compliance rules evolve, market conditions fluctuate and technology advances.
- A full grasp on all risk points for the firm, as well as tracking and analyzing potential compliance challenges for the firm.
- An understanding of the due diligence activities involved in employee trading, third-party vendor selection and more.
- An awareness of any tools and technology necessary to perform the requirements of the CCO role.
Compliance is a critical function to your firm’s operations affecting every part of the business from marketing to client relations and even how you archive your communications. In the same way, a CCO is non-negotiable. In fact, under the SEC’s Rule 206(4)-7, every registered investment adviser is required to appoint an individual with working knowledge of compliance regulations and the authority to implement these rules within your firm.
The vast majority of CCOs hold more than one position within a firm, adopting the CCO hat in addition to key other responsibilities.
Who Can Be Your CCO?
Firms less inclined to hire a full-time CCO can legally appoint any employee at the firm to take on the title of CCO. Often, the chief executive officer or COO are an obvious option in they have a robust understanding of the company culture and industry, as well as the authority to make and follow through with decisions.
There is also no general standard for experience a CCO needs to have — some will have an extensive background in compliance, while others will have none. For those on the latter end of the spectrum, hiring a compliance consultant can often act as a preventative measure which provides human expertise and technology platforms to keep a RIA compliant.
Although a CCO can also hold a different position in the company, it doesn’t mean compliance practices can take a back seat. Your CCO must make compliance a top priority.
Regardless of their background, good CCOs will need to have excellent analytical and communication skills and a strong sense of ethics and integrity.
These skills, along with the tools and knowledge your firm provides, create a positive environment for your CCO to be an effective leader in ensuring compliance.
How Can You Ensure Your CCO is Effective?
As Director of the SEC’s Office of Compliance Inspections and Examinations Peter Driscoll said in recent remarks, “three words that should encapsulate every CCO are empowerment, seniority and authority.”
These three words form the foundation a CCO needs to be effective in their position.
- Empowerment: The CCO should be integrated into all aspects of your firm — this means transparent access to how your firm operates at every level. A strong understanding of your current policies and procedures is essential to the CCO’s success and your firm’s compliance.
- Seniority: As a senior member of your firm, the CCO has first-hand experience within your organization and a solid understanding of company culture. Without knowing how your firm operates, someone could miss essential steps in the process which need to be reviewed for compliance.
- Authority: Perhaps most importantly, your CCO needs to have the authority to suggest and implement changes without fear of backlash. Driscoll emphasized the need for CCOs to have the confidence to say “no” and be supported.
How Can You Get Started?
The requirements and responsibilities placed on a CCO is a tall order for any one individual. Firms can partner with a reliable RIA compliance consultant to ensure nothing ever falls through the cracks.