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CCO Questions Loom as Fall Deadline Approaches


WASHINGTON -- Fund firms will be required to sport a chief compliance officer come October, but many gathered here at the Investment Company Institute's General Membership Meeting had unanswered questions and not a lot of time to find solutions.

The Securities and Exchange Commission is requiring firms to maintain a CCO, who will be responsible for compliance with federal securities laws, starting this fall, as a response to the rampant abuses that apparently went unchecked at several high-profile firms in the industry over the last several years.

Michael Downer, senior vice president in the fund business management group of Capital Research and Management Co., and Thomas Mistele, general counsel at Dodge and Cox, both speaking on a panel titled "Implementing Compliance Programs to Protect Shareholders," said their firms have not yet hired a CCO.

Downer said his organization tends to work in groups, and since the rule requires a single person responsible for compliance, the firm needs to reexamine its structure. He also said his firm needs to figure out what the CCO job entails, and whether the person should have a legal, accounting or regulatory background, or a combination of all three. Downer also said the firm is trying to figure out how senior level the candidate should be, and whether or not they should be an outsider. If a firm chooses an insider, can that person serve in dual roles, or do they have to give up their previous position and remain solely as the CCO? Outsourcing the job is also something to be considered. And each decision and wrinkle has further consequences. "This raises independence issues and compensation issues," he said.

Panelist Barry Barbash, partner at law firm Shearman & Sterling, said that most of the companies his firm has dealt with plan on hiring someone for the CCO role from within their own ranks. However, others say they are looking elsewhere.

"We have not hired a chief compliance officer, but we have an existing compliance staff of five," Mistele said, adding that the firm is looking outside its own walls for a CCO and would prefer someone with a board presence.

Of particular concern to smaller fund shops is the cost of hiring a full-time, high-level, chief compliance officer. Some worry the financial impact on small fund shops will be prohibitive and cause further advantages to the heavy hitters with seemingly unlimited financial resources.

This then leads to further debate of whether or not firms should outsource compliance, including the CCO role. Barbash said his reading of the SEC's rule allows for the role to be outsourced. Outsourcing the function could provide firms with a potentially less expensive alternative to an executive search and putting the compliance structure in place.

And it could also provide a solution for smaller shops with limited IT resources to update the compliance structure with each new regulation that comes out. But some in the industry wonder whether placing such an important function in the hands of an outsider is a wise move. And there is always the question of how well it will work.

"The notion of a rented CCO coming in like a swat team is too simplistic and has a number of challenges," Mistele said. Creating an environment where individuals feel comfortable collaborating on compliance may prove difficult for some. "It's a tough mechanical balance to strike," Downer said.

The panelists said the industry needs to reinvent the way compliance is viewed. "Compliance area people are not just responsible for compliance, they're in charge of coordinating compliance," according to Downer. He said that it is paramount to incorporate compliance into the core of how his firm conducts business.

"All of us on this panel do a lot of worrying about what can go wrong," he said. "I've been at this firm for 25 years. When I started, I thought the degree of compliance was enormous. Now it seems quaint [in retrospect]."

Compliance should be all about "protecting, detecting and correcting," Barbash said, adding that "compliance is a part of good business." Mistele, who said the pace of regulatory developments, rule proposals and the adoption process is what keeps him up at night, added that one can make a strong case that better compliance leads to better results and more efficient businesses.

Barbash, the former director of the SEC's division of investment management, said a red flag for him is when he goes into a firm and asks the top-tier executives about compliance and their response is, "You have to ask the compliance people." He said it shows the mindset that compliance is its own department and not part of the underlying foundation of a business. "There almost always is a problem" in those situations, he said.

"I don't think the board involvement was as structured in the past," Barbash said. However, he added, "boards of the better-run fund groups have always been concerned with compliance." The new rules now formalize the board's oversight of compliance and will not put firms that are already compliance-minded, in a position to do something they haven't done before, he said.

However, despite all the questions that still don't have concrete answers for many of these firms, one of the highest hurdles to naming a CCO is finding someone who wants to take on the task. Several at the conference expressed concern about finding someone willing to take on the responsibility. Then there is the other side of the coin. Once you find a prime candidate, how much will it cost to lure them in? "If I were a CCO, I would look for big bucks, and not just in a bonus," Barbash said.

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