According to Securities and Exchange Commission (SEC) Rule 206(4)-7, registered investment advisers (RIA) must, “designate a chief compliance officer (CCO) to be responsible for administering the policies and procedures.”
However, choosing the individual to be your next CCO is often easier said than done.
Selecting the right individual to lead and administer your regulatory compliance program can be the difference between a successful program, which adds value and trust with your customers, and one which puts your firm at risk of regulatory failure and fines.
In this blog, we’ll review some commons dos and don’ts to help you select the right CCO for your RIA firm.
The dos and don’ts when choosing your RIA chief compliance officer
When choosing you new CCO, it is critical for your firm to consider a few key factors which the SEC has defined as essential to fulfillment of the role.
Do: Find an individual with extensive knowledge of the Investment Advisers Act of 1940.
In order to act in accordance with the regulations, an individual must have active knowledge of the Investment Advisers Act of 1940, as well as any other regulations which govern your RIA firm. The CCO should take it upon themselves to remain educated in the critical areas of compliance which apply to your firm’s business functionalities in order to continue to remain in compliance with the SEC.
Don’t: Simply outsource the role.
For many firms, a lack of resources can often push a firm to assess external or third-party resources to act as their CCO. However, this is often inadvisable and can create red flags within your program. While outsourcing certain functionalities of your compliance program can create efficiencies for your firm at large, the function of CCO should remain in-house.
Do: Ensure the individual selected holds reasonable authority within the firm.
In addition to being well-versed in the Investment Adviser’s Act, the CCO must also hold “reasonable authority” to implement the policies and procedures which are the backbone of your RIA regulatory compliance program. Without the ability to implement and enforce these policies, the CCO’s function is essentially mute.
Don’t: Think this role will be a set it and forget it.
Compliance isn’t a check-the-box type of role, and whoever is put in charge of your regulatory program must take an active approach to assessing the program and implementing best practices. Should you simply set-it-and-forget-it, you will likely face regulatory penalties and fines.
Do: Lean into your resources – both internal and external.
While you should not outsource your CCO functionality, you should equip your CCO with the internal and external resources to effectively navigate the complexities of the regulatory landscape. This means training your staff – after all, compliance is a firm-wide requirement – and bringing in the right tools and solutions to manage both day-to-day and strategic, big-picture compliance tasks.
Your CCO will lead your entire compliance organization, ensuring you mitigate risk and maintain compliance with all relevant regulatory bodies. Make sure when you’re selecting the person to come into this role, you are selecting an individual who can effectively fulfill these duties and protect your firm against potential red flags and risk points.
COMPLYTM is not a law firm, investment advisory firm, or CPA firm. COMPLY does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.