Official Newsletter of Gordian Compliance Solutions, LLC.

INVESTMENT ADVISER NEWS UPDATES

SEC EXAMS YIELD GUDIENCE FOR EFFECTIVE
OUTSOURCED CHIEF COMPLIANCE OFFICERS

 

On November 9, 2015, the Securities and Exchange Commission (“SEC”) Office of Compliance Inspection and Examinations (“OCIE”) released their exam findings from the Outsourced CCO Initiative.[1]  The OCIE examined 20 SEC-registered investment advisers and their affiliates as part of this exam initiative, focusing on investment advisers that outsourced their chief compliance officers (“CCOs”) to unaffiliated third parties.[2]  The SEC’s news alert provides guidance on how a third party, outsourced CCO can effectively address the compliance issues that arise for investment advisers.[3]
 
Ability to Develop and Enforce Firm Policies & Procedures
 
The OCIE’s initiative focused on measures and practices that an outsourced CCO would need to fulfill an investment adviser’s obligations under the Investment Adviser’s Act of 1940.
 
Firms must designate a CCO under the Adviser’s Act, one responsible for carrying out the requirements of Rule 206(4)-7, which include 1) the adoption of written policies and procedures reasonably designed to prevent violations of the Adviser’s Act and applicable securities laws, 2) an annual review of those policies and procedures for their adequacy and effectiveness, and 3) a written report of a CCO’s review of the policies and procedures for the fund’s board of directors.[4]
 
The OCIE found that outsourced CCOs that successfully fulfilled these Adviser Act obligations exhibited good communication with the firm’s employees and management and possessed the authority to carry out a firm’s policies and procedures.
  • Communication: The most effective outsourced CCOs frequently, and often personally, interacted with registrants and fund employees.[5]  Outsourced CCOs exhibiting frequent communication with their firm employees appeared more in tune with an investment adviser’s business operations, and better suited to “effectuate compliance changes that they deem necessary.”[6]
  • Authority:  The OCIE found that effective outsourced CCO programs delegated to third party CCOs “sufficient seniority and authority to compel others to adhere to the compliance policies and procedures.”[7]  Such authority creates an independent level of oversight in administering a firm’s compliance program, particularly where the CCOs were “able to independently obtain the records they deemed necessary for conducting [compliance] reviews.”[8]  Independent oversight allows the outsourced CCO to see “the registrant’s actual practices” and evaluate consistency with a firm’s policies and procedures, in contrast with reviews conducted by CCOs who “relied wholly on a firm to select the records subject to [compliance] review.”
 
Annual Review and Risk Assessment
 
Outsourced CCOs, like in-house CCOs, are tasked with the responsibility of conducting an annual review of the firm’s policies and procedures.  The OCIE found that effective outsourced CCO programs were in a position to evaluate and address the following issues with their annual reviews:
  • Evaluation of firm’s actual practices for consistence with their policies and procedures;
  • Identification of risk areas unique to a firm’s business model;
  • Use of policies and procedures that foster open communication between service providers and those with compliance oversight responsibilities;
  • Administration of control procedures, particularly with respect to:
    • Policies designed to prevent, detect and address violations of the Adviser’s Act; and other applicable securities laws;
    • Oversight of private fund fee allocations;
    • Reviews of solicitation and marketing activities;
    • Trade allocation for side-by-side fund management;
    • Review of personal trade activity for employees and access persons[9]
 
Effective outsourced CCOs were able to demonstrate their ability to monitor these items, and assess their continued viability to a firm’s operations.
 
Specialized Knowledge of Firm’s Business
 
Finally, the OCIE noted that “an effective compliance program generally relies upon, among other things, the correct identification of a registrant’s risks in light of its business, operations, conflicts and other compliance factors.”[10]  Outsourced CCOs should be able to accurately describe a firm’s unique business risks during an SEC examination, and set the tone for a proactive compliance culture at the firm.  Examiners found that outsourced CCOs possessing firm-specific knowledge administered effective compliance programs, ones individually tailored to a registrant’s business operations.
 
Designing an outsourced CCO-led compliance program is a unique process for every firm.  Gordian provides outsourced CCO services that address the OCIE’s areas of focus: expertise regarding the Adviser’s Act, strong and frequent communication with employees, customized risk assessments, regulatory exam support, and proven experience implementing firm-wide compliance programs.  Gordian’s consultants will work with you to develop a compliance program that is tailored to your individual business model, eschewing the typical “out-of-the-box” approach of other third party firms.  The result is a compliance program that efficiently carries out the requirements of the Adviser’s Act, and other applicable securities laws.
 
To find out if an outsourced CCO would work for your advisory business, please contact your Gordian consultant.  We welcome the opportunity to help you decide if an outsourced CCO is right for you.
 
 
[1] National Exam Program Risk Alert: Examinations of Advisers and Funds that Outsource Their Chief Compliance Officers, United States Securities and Exchange Commission Office of Compliance Inspection and Examinations (November 9, 2015)
[2] Id.
[3] Id.
[4] Id.
[5] National Exam Program Risk Alert: Examinations of Advisers and Funds that Outsource Their Chief Compliance Officers, United States Securities and Exchange Commission Office of Compliance Inspection and Examinations (November 9, 2015)
[6] Id.
[7] Id.
[8] Id.
[9] National Exam Program Risk Alert: Examinations of Advisers and Funds that Outsource Their Chief Compliance Officers, United States Securities and Exchange Commission Office of Compliance Inspection and Examinations (November 9, 2015)
[10] Id.
 
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