Compliance and Regulatory Services (“CARS”) Hot Topics for November 2015
For this month, we are highlighting two areas that we have been writing about; the importance of which is growing each day as they climb their way up the SEC’s list of hot areas of focus.
We have mentioned that under the SEC’s compliance program rule a federally registered investment adviser is required to appoint a chief compliance officer (“CCO”) to be responsible for that program. The SEC, in numerous speeches and other pronouncements, has indicated that the CCO must be a seasoned compliance person with many years of industry and regulatory experience. Now Andrew Donohue, the SEC’s Chief of Staff, has outlined in a speech 8 attributes that a qualified CCO should have. To mention just a few, those areas include: i) first-hand knowledge of the various laws and regulations that apply to their firm and its activities, as well as any particular conditions or requirements of exemption orders and other compliance requirements; ii) a “deep understanding” of the firm, its structure, and internal operations (knowledge of the supervisory structure would also be helpful); iii) a clear understanding of how the firm identifies conflicts that might exist, how frequently the conflicts are reviewed and how they are resolved and by whom; iv) detailed understanding of clients and products and services being provided, as well as reviewing advertising materials. (You can read the balance of Donohue’s remarks here.) He also mentioned the importance of a firm having the right culture with sufficient resources at the disposal of the CCO or having the firm empower the CCO to provide the structure to compliance and its mission. Further comments were made regarding how the SEC has brought, and will continue to bring, enforcement actions against compliance officers when appropriate.
The investment advisory community has long known that the SEC does not have enough staff to examine all registered advisers, so they tend to run thin on compliance resources as the risk of a routine inspection has been low. However, that may be changing soon. David Grimm, SEC Director of the Division of Investment Management, in his testimony on the “Oversight of the SEC’s Division of Investment Management,” recently said that the use of third parties to conduct regulatory exams is being considered. In fact, his department is working with the Office of Compliance Inspections and Examination to develop a recommendation as a means of improving compliance.
Our Take: When one considers Donohue’s comments and recent SEC developments, it appears as though the focus on CCOs as the gatekeeper to the compliance program and other pressures constantly being exerted on the CCO are not going to go away anytime soon. The bar has been raised for CCOs to be more than a ‘CCO in name only.’ This, combined with the SEC’s efforts to closing the examination period gap, will have a material impact on registered investment advisers who are not up-to-speed.
(Complete Listing: http://www.finra.org/Industry/Regulation/Notices/2014/index.htm)
FINRA Rule Filings List:
(Complete Listing: http://www.finra.org/Industry/Regulation/RuleFilings/2014/index.htm)