Rule 206(4)-7 of the Investment Advisers Act (“the Act”) sets forth the general categories of compliance requirements for investment advisers. Among these requirements is the designation of a Chief Compliance Officer (“CCO”), a supervised person responsible for administering the policies and procedures outlined in Rule 206(4)-7.
Eligibility under the SEC
To be eligible for the position of named CCO, the individual must:
- Be competent and knowledgeable regarding the Act;
- Be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the investment adviser firm; and
- Have sufficient seniority and authority within the investment adviser firm to compel management and staff to adhere to the compliance policies and procedures.
The requirement that the CCO be a “supervised person” means that s/he must be a partner, officer, director, or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser. Accordingly, the CCO need not be an employee of the investment adviser firm; in fact, there is a distinct trend in the industry towards outsourcing compliance.
Neither does the SEC require the CCO to register as an investment adviser representative (“IAR”) as long as the CCO does not regularly solicit, meet or communicate with investment advisory clients. Some state securities regulators, however, may differ, and firms are urged to review their state’s investment advisory rules as well as the rules of the state securities regulator where the CCO is located.
A tendency to overlook the important responsibilities associated with the role of CCO is particularly prevalent among small firms and state-registered firms. Regulators often cite failure to comply with these requirements as one of the most common deficiencies.
A CCO is responsible for administering the investment adviser firm’s required compliance policies and procedures. This typically entails overseeing ongoing compliance and providing compliance guidance to the firm’s supervised persons. Specifically, this includes the following duties:
- Develop, monitor, and oversee the proper policies and procedures to prevent and detect violations of the Act and related rules;
- Develop, monitor, and oversee internal controls, testing, and monitoring to implement the policies and procedures and address all areas of risk;
- Conduct or oversee the annual comprehensive review of compliance policies and procedures, as required by Rule 206(4)-7(b);
- Determine if the firm’s policies and procedures need to be updated;
- Ensure the completion of any necessary corrective action.
However, the CCO need not bear the burden of compliance alone. The CCO may delegate supervisory responsibilities, with the following prerequisites:
- The CCO must understand the regulatory requirements under the Act and related rules;
- The investment adviser firm must have adopted policies and procedures reasonably designed to prevent and detect violations;
- The firm must have set up an implementation system for the policies and procedures;
- The delegation must have been in accordance with the firm’s written policies and procedures;
- The person(s) to whom the duties are delegated must be clearly indicated;
- The delegated duties must be clearly defined;
- The CCO must have no reason to believe that said person(s) are not complying with the policies and procedures;
- The CCO must develop procedures for implementing, testing, and monitoring said policies and procedures.
While states vary in their CCO requirements, states typically have something similar to Rule 206(4)-7. For example, some states do not require registered investment adviser firms to designate a “CCO.” However, Form ADV Part 1B, Item 2A requires a state-registered investment adviser to indicate the principal responsible for supervision and compliance—much like a CCO. Additionally, most registered investment advisers are required to adopt and implement written compliance policies and procedures.