You are the UDP, president, CCO, or all of these, for a portfolio management firm with fewer than 5 advisors. You have concluded that you can’t do all these jobs, especially since all you really want to do is manage investment portfolios. How do you proceed?
Your options are to hire a CCO or hire a compliance consultant. What are the differences, and which is your best option?
CCO
Proficiency requirements for CCOs for portfolio management firms make it very difficult to find a suitable CCO. Some available compliance managers may have limited experience such as serving as registration administrators at a commission or delivering compliance training as part of a team at a large bank. In addition, a small firm typically cannot afford a full-time compliance professional.
This is why so many PM firms end up with a “CCO in name only,” that is, a practicing registered PM who takes on the CCO job without having the time or specialized compliance knowledge to do the job properly, and who has delegated most of their compliance duties to an unqualified and un-registerable individual. Regulators have explicitly warned against the “CCO in name only” and will take action in cases where they consider the CCO to be inadequate.
Regulators permit firms to hire a “part-time CCO.” This is an individual who fulfills the proficiency requirements and is registered as CCO for your firm, but who may not work for you full-time. The individual may be CCO for more than one firm or may simply work - and be paid - less than full-time.
A part-time CCO is “embedded” with your firm and is intimately familiar with all aspects of your business, fully integrated in terms of your systems and is in a position to supervise and monitor all your operations. This person will establish and maintain your compliance framework, will respond to ever-evolving requirements and will be able to anticipate and remedy compliance issues. This CCO will be statutorily responsible for policies and procedures, for monitoring and supervising the firm’s and its individuals’ compliance, for reporting compliance breaches to the UDP and/or the firm’s board of directors and for submitting the annual compliance report to the board.
Compliance Consultants
Compliance consultants provide support to your CCO and to your firm. Depending on the specific terms of the engagement, the support can include:
- Supplying draft policies, procedures, disclosures and client documents, and assisting the firm in tailoring and finalizing these items;
- Monitoring regulatory amendments, communicating with the firm about changes and updating policies, procedures and documents accordingly;
- Making registration filings;
- Staff training;
- Preparing the annual CCO report;
- Performing AML audits and other ad hoc reviews;
- Responding to regulatory requests;
- Assisting during a regulatory audit.
Whereas a CCO is expected to be “on the inside,” the compliance consultant relies on the information the firm gives them, much as an auditor or bookkeeper might, in order to advise the firm. The consultant is not in a position to know or monitor everything the firm does, nor does the consultant have all the information that a CCO or the firm’s president/CEO would have. When the consultant has given the firm the information, the advice, the drafts and the training, it is up to the firm to accept or modify these things and put them into action. The compliance consultant does not replace the CCO but lightens the load and supplies compliance expertise. It is a partnership between the firm and the consultant, but the firm’s UDP and CCO remain responsible for ensuring that the firm applies the policies and procedures.
Your Choice
Your final decision on hiring a part-time CCO or a compliance consultant will depend on cost, availability, your confidence in the individuals and your assessment of needs. SGD Compliance is ready to support you in your choice.
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This article was prepared for informational purposes only and is not intended to provide, and should not be relied on for specific advice. You should not act upon the information in this article without an independent assessment of the law or regulations applied to the facts of your situation. Although we have endeavored to ensure that the information contained in this article has been obtained from reliable and up-to-date sources, the changing nature of laws, rules, and regulations may result in different applications, omissions, or dated information contained in this article.
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