An SEC Risk Alert published on November 9, 2015, by the Office of Compliance Inspections and Examinations (OCIE) highlighted the risks associated with using an outsourced chief compliance officer (CCO), based on the findings of nearly 20 examinations that OCIE conducted as part of its “Outsourced CCO Initiative.” The Risk Alert noted several outsourced CCO arrangements which did not pass muster, such as where an outsourced CCO could not identify their investment adviser client’s specific business or compliance risks or, if such risks were identified, the CCO either failed to tailor the policies and procedures to address those risks or failed to verify that actual practices matched the required procedures. However, the OCIE did not wholly condemn the outsourced CCO model and discussed instances where outsourced CCOs were “generally effective.” Factors noted as contributing to the failure or success of an outsourced CCO arrangement are discussed here.

The Risk Alert follows SEC Enforcement Director Andrew Ceresney’s remarks at an industry conference on November 4, 2015, where Director Ceresney assured investment advisers that the SEC will not scrutinize a CCO’s choices in the carrying out of its compliance function, but is concerned with the wholesale failure of a CCO to establish or implement policies and procedures required under the Investment Advisers Act and Investment Company Act. In his speech, Director Ceresney noted questions that firms should ask themselves to assess whether they are at risk for an enforcement action. These include whether compliance personnel are included in important meetings, whether the input of compliance personnel is frequently sought and followed, whether compliance officers report to the CEO and have visibility with the board, and whether the compliance department is provided with the staff, resource, and other support needed to succeed. The Risk Alert noted similar factors considered by OCIE in evaluating the effectiveness of an investment advisory firm’s compliance program and outsourced CCO, and stressed that “[a] CCO, either as a direct employee of a registrant or as a contractor or consultant, must be empowered with sufficient knowledge and authority to be effective.”

Taken together, the Risk Alert and Director Ceresney’s remarks serve as a reminder to investment advisers that they should conduct periodic, meaningful risk assessments of their businesses, including the risks associated with using an outsourced CCO and ensure their policies and practices address those risks. 

Investment Management Partners Jay Gould and Michael Wu will speak at the first Hedge Fund Startup Forum West Coast in San Francisco on November 18.  As a Gold Sponsor of the event, we are pleased to be able to offer our valued contacts a 30% discount off the registration fee – simply quote VIP Code FKW52978WSEM when registering to claim your discount. Register here.

West Coast Private Equity Chair Eva Davis will speak at the Institute for Corporate Counsel(ICC) on December 2 in Los Angeles. ICC is a collaboration of the USC Gould School of Law and the Los Angeles County Bar Association Corporate Law Departments Section. Speaking Engagement.

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