Compliance Solutions for Investment Advisers

FAQs — Chief Compliance Officer

 

Are all SEC- registered investment advisers required to designate a chief compliance officer (CCO)?

Rule 206(4)-7 under the Advisers Act (commonly known as the Compliance Rule) requires all investment advisers registered with the SEC to designate a CCO to administer its compliance policies and procedures.

Are all SEC- registered investment advisers required to designate a CCO?

Some states have incorporated the Compliance Rule into their own regulations and therefore, may also require investment advisers registered with their state regulatory authority to designate a CCO.

How does an investment adviser actually “designate” their firm’s CCO?

The CCO is designated on Schedule A of Form ADV. Advisers are also required to disclose the name and contact information of their CCO in Item 1.J. of Form ADV Part 1A. State-registered advisers are required to disclose the name and contact information of the person responsible for supervision and compliance in Part 1B of Form ADV.

Are there any pre-requisites to taking the CCO position?

There are no official requirements such as a legal degree or requisite number of years in the financial industry. However, the Compliance Rule requires that an adviser’s CCO should be competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the advisory firm.

Can the CCO have more than one position in the advisory firm?

In many smaller advisory firms the CCO by necessity often has multiple roles. While there is nothing in rules that prevent this, advisers should be aware that this can create conflicts of interest (e.g., when the CCO is also a portfolio manager). Larger advisory firms are expected to have a dedicated CCO or at least a CCO that is on the operations side of the advisory firm and therefore, is not involved in providing investment advisory services.

What are some core competencies that a CCO should have?

In order to properly administer an investment advisory firm’s compliance program, the CCO should:

  • Be fully aware of the adviser’s operations;
  • Run the compliance program and verify that its provisions are being enforced;
  • Seek out information concerning ongoing regulatory changes under the Advisers Act; and
  • Propose and seek the adoption of changes in the program from time to time in order to assure that the program will continue to provide reasonable assurance of compliance with the rules and regulations under the Advisers Act.

What are some typical responsibilities of the CCO position?

The following is a non-exhaustive list of some typical CCO responsibilities:

  • Ensure that all new supervised persons are provided with a copy of the advisory firm’s compliance policies and procedures manual;
  • Familiarize supervised persons with the advisory firm’s policies and procedures manual and help them understand the contents of the policies and procedures manual so that they can use it in their day‑to‑day activities;
  • Undertake steps in the advisory firm’s compliance process – risk identification, establishing policies and procedures and implementing those policies and procedures – in a timely fashion;
  • Develop compliance policies and procedures that are comprehensive, robust, current, and reflect the investment adviser’s business processes and conflicts of interest;
  • Promote a culture of compliance within the advisory firm by ensuring an overall environment exists that fosters ethical behavior and decision making;
  • Help the investment adviser and its supervised persons observe appropriate principles of management and control in the implementation of policies and procedures;
  • Establish a compliance calendar that identifies all important dates by which regulatory, client reporting and compliance matters must be completed to ensure that these important deadlines are not missed;
  • Undertake performance of the required annual and, if necessary, interim review of the advisory firm’s compliance program.
  • Distribute supplements to the compliance policies and procedures manual to supervised persons with proper instructions for use;
  • Undertake periodic analyses and evaluation of compliance issues found in the regular course together with the results of forensic testing as a means for obtaining additional or corroborative evidence regarding both the effective functions of the advisory firm’s compliance program and the possible existence of disguised or undetected compliance issues;
  • Promote a process for regularly mapping the advisory firm’s compliance policies and procedures and conflicts of interest to disclosures made to clients so that disclosures are current, complete and informative; and
  • Engage in the timely and appropriate review of material and repetitive compliance issues.

Does the CCO have liability for failure to supervise the advisory firm’s compliance program?

The title of CCO 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 the SEC for failure to supervise other advisory personnel.

 

Important Information

The information contained in this Frequently Asked Questions is only a summary and is not intended to be a comprehensive analysis of the rules and regulations applicable to registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. For more information, please see our Terms of Use.

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