Enhancing CCO Effectiveness: Seven Things CCO’s Should Remember

Prior to delving into the actual work, skills and knowledge required of a Chief Compliance Officers to an investment adviser, the very first step a CCO should take is to make sure she understands the framework and principles that guide the kind of work CCOs perform. Not surprisingly, given the demands of their position, even experienced CCOs ignore or forget some of these clearly written admonitions about the CCO functions, even though they routinely show up in canned written compliance policies and procedures that are passed out to adviser personnel.

As a reminder, periodically, we’ll post rules CCOs should never forget even as they comply with all the other rules that apply to investment advisers. We start with the first two below:

Rule Number One: Your Job is to “Administer” the Compliance Program: The CCO’s job function as mandated by Rule 206(4)-7 (the “rule”) is limited to “administering” the investment adviser’s compliance policies and procedures. While the rule contains no explicit definition for what the term administering means, the rule makes one thing clear, it is the adviser who is legally required to “adopt and implement written policies and procedures reasonably designed to prevent violation” of the Investment Advisers Act of 1940. What this means is that you are not the guarantor that your adviser will not experience a compliance failure. Nor is it necessarily true, from a supervisory perspective, that you are responsible for the compliance failures of others in the firm. To the contrary, the failure of a compliance program to find and remedy compliance problems can just as easily be viewed as evidence that the adviser’s compliance program, including its policies and procedures, are not effective.

This doesn’t mean that compliance personnel of an adviser can’t be sanctioned for not properly supervising employees. Of course, they can be and are sanctioned. However, the fact that you are a CCO does not, in and of itself, give you supervisory responsibility over your adviser’s personnel. In short, if you’re not supervising other advisory personnel, and you limit supervisory responsibility to persons who are part of the compliance staff, the Adopting Release to the rule makes clear that you aren’t necessarily liable for the supervisory lapses of your adviser. This leads to our second rule.

Rule Number Two: Consider avoiding taking on roles that give the appearance that you supervise personnel outside of administering the compliance function: Such advice may be particularly hard to follow with smaller advisers or in other instances where the adviser’s overall management structure is fairly narrow (e.g. the president and CCO are one and the same). However, for most others, taking on management responsibilities outside the compliance program can be a recipe for trouble. One such problem is that it places you in a supervisory role, when the very title of chief compliance officer does not carry with it supervisory responsibility. The SEC made this clear when it adopted the rule. In short, if you do supervise others outside the compliance staff, remember using, among other rules and Investment Advisers Act §203(f), the SEC has brought cases showing you can be sanctioned for not properly supervising investment adviser representatives and others.

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.