SEC Rule 206(4)-7 under the Investment Advisers Act of 1940, more commonly referred to as the “Compliance Rule,” requires a registered investment adviser (RIA) firm to designate an individual with working knowledge of compliance regulations as the firm’s Chief Compliance Officer (CCO).
Below, we will discuss some considerations when selecting a CCO for your RIA firm.
Given the diverse array of types and the sizes of RIA firms, there is generally no standard for knowledge of compliance or previous experience performing compliance duties among the advisory firms. The CCO at many firms does not have any compliance background. While at other firms, the CCO may have a strong investment adviser compliance background and was hired to focus exclusively on helping the RIA firm meet its regulatory compliance obligations.
So, who should be your firm’s CCO and what are their responsibilities?
Let us look at how to choose a CCO from your existing team, what is required of them, and how you can equip and empower them to be an effective CCO – and keep your firm compliant.
What Does a CCO Look Like?
Passing someone the CCO hat to wear, especially on small teams, can seem like a tall order until you break down the responsibilities and look at the multiple supports in place to make the job possible. Your candidate should demonstrate the following qualities:
- Investment Advisers Act Knowledge: To be specific, the SEC is looking for the CCO to be “competent and knowledgeable regarding the Investment Advisers Act of 1940” – Your CCO should at least have a functional fluency in the Act and be able to navigate to the right internal or external sources with questions.
- Hold Reasonable Authority: Part of the CCO job means getting the rest of the team to abide by compliance rules and procedures, so appointing a person of sufficient authority and seniority is important. CCO needs to not only have deep knowledge of your firm’s culture and values, but also the authority to enforce the rules.
What is the CCO Responsible For?
CCOs are responsible for adopting and implementing written policies and procedures designed to prevent violations of the Advisers Act.
Your CCO should also review the policies and procedures at least annually for adequacy and effectiveness of implementation as part of the firm’s annual compliance program review. If you have been in the profession for any length of time, you know that compliance rules change with technology, market conditions, and any number of other issues. The CCO needs to stay on top of these compliance developments as they arise.
Who on Your Team Could be Your CCO?
The CCO needs to be someone with sufficient authority to make sure compliance rules and procedures get carried out. Remember, compliance is not a suggestion! It’s in your firm’s best interest, and that of your clients, to make sure compliance is squared away so you can get on to the work of thoughtful financial advising.
Often, the Chief Compliance Officer ends up being the firm’s CEO or COO. This gives them the intrinsic authority for follow-through and familiarity with the industry and the culture of their own firm. For example, if your firm starts to utilize social media for marketing, certain compliance tasks will need to be checked off. An executive will have authority to make sure the content is compliant, and the posts are properly archived.
How Can Your Firm’s CCO Leverage Technology?
One of the ways to equip and support your CCO is to leverage a holistic compliance software platform.
RIA compliance software is rapidly evolving to help CCOs become more efficient through automation while also helping to ensure that no new regulatory rule changes slip through the cracks. When properly utilized, a robust compliance software platform can assist firms of all sizes with:
- Automated development and management of a tailored compliance calendar of activities
- Just-in-time education on pertinent compliance topics, along with corresponding checklists
- Centralized storage and archiving of critical firm compliance documents
- Proper supervision of firm employees with digital attestation collection
- Notification when registration or notice filing is required in new jurisdictions
- Onboarding and registering new individual investment adviser representatives
- Requesting and tracking Form ADV changes
- Completing the firm’s annual Form ADV renewal amendment
- Recording all the firm’s compliance activities in one centralized, digital compliance log
- Automatically monitor employee trades
How Can Your CCO Partner with a Compliance Consultant?
Every investment advisory firm must designate someone on its staff to be the Chief Compliance Officer. However, it is not required that this individual only serve as the CCO, and far more commonly, the individual designated as the Chief Compliance Officer will also hold many other titles. Often, the principal or one of the principals of the firm will serve in this role.
Regardless of the level of expertise or experience of a firm’s CCO, often an RIA firm will choose to hire an outside consultant to help assist with the firm’s ongoing compliance responsibilities. This is a bit more common for investment advisory firms that have a CCO with a more limited compliance background (e.g. a principal wearing multiple hats). However, we do still see a significant number of RIA firms with a very experienced CCO that still wish to engage a RIA compliance consultant to improve operational efficiency by helping with some of the basic functions and to have additional expertise to tap into.
Ultimately, the responsibility to fulfill the firm’s compliance responsibilities is still in the hands of the firm and its designated CCO. The good news is that the right compliance consultant can greatly simplify a firm’s compliance responsibilities by improving efficiency. The right compliance consultant will also help an investment adviser firm properly prepare for a state or SEC audit. However, it is important to note that the regulator conducting the examination expects the firm’s CCO or other designated team members to answer any questions and take them through the required compliance files, client documents, filings, etc. In short, the CCO of an RIA firm must always know what is going on and be on top of the firm’s compliance responsibilities. However, a qualified RIA compliance consultant can give an investment advisory firm the tools and guidance to build and document the proper culture of compliance that can make the firm’s audit process a much less stressful endeavor.
How Do You Get Started?
Equip your CCO with support from a comprehensive software platform and compliance consultant to help build and document a culture of compliance.
Schedule a demo of our RIA in a Box platform today to get you started, and free you up to do the important work of delivering great financial advice.