SEC Checklist Gives CCOs First Job Roadmap
January 24, 2005
As recently as last month, the Securities and Exchange Commission advised mutual fund chief compliance officers to, essentially, talk among themselves to figure out their demanding new roles. While that hardly provides executives in these critical, newly created jobs with the guidance they've been seeking, a new examination checklist may provide some of the keys.
The SEC recently released what amounts to a CCO checklist, detailing what information SEC examiners will require of CCOs and their staffs. Most notably, the SEC is seeking more information than ever before on trading records and errors, soft dollars and directed brokerage, sales commissions, risk committees and controls, internal audits and how regulatory breaches are handled.
Certainly, since the smoking guns in the fund scandal turned out to be fund executives' candid e-mail discussions acknowledging trading infractions - e-mails which regulators had to dig for - the fact that the SEC is now asking for such information up front means CCOs must be completely informed and forthcoming about any and all red flags.
The checklist also reveals many other duties expected from a firm's chief compliance officer, such as being proactive about requesting resources and thoroughly scrutinizing the compliance procedures of service providers.
"The [new] regulations, in many ways, haven't really changed the need for asset managers and players in the industry to be compliant," explained Virginia Meany, global fund services product executive with JP Morgan Compliance Solutions in New York. "However, the appointment of the CCO has certainly alerted the industry that the SEC is very interested in all of us being able to affirm, in a very transparent way, compliance with the regulations."
Among the specific information SEC examiners are seeking on CCOs, is their educational and professional background, their compensation, an organizational chart showing their position within the company, their budget and all requests they have made for resources and responses to those requests. It also asks for a copy of the firm's code of ethics and how the firm obtains information on their service providers' own compliance programs. The SEC expects CCOs to ask about any compliance problems at their service providers and to describe their interaction with those companies' compliance staff.
Perhaps most interestingly, the SEC also asks for the CCO's opinion regarding the adequacy of resources to establish and implement an effective compliance program within the firm. The SEC asks CCOs to be candid about all of the work they would like to do but have not been given the resources for, along with their opinion regarding their authority to administer the firm's compliance program fully and competently.
"The opinion questions are very interesting," said Ted Eichenlaub, a partner with Adviser Compliance Associates of Washington. "When the SEC starts asking questions of CCOs [as to whether] they have adequate support and resources, I can't imagine what the responses would be. We all know the CCO is employed by the advisor."
Nonetheless, chief compliance officers might be prompted to be forthcoming since they report to the fund company's board of directors, added Mike Rosella, chairman of the investment management practice at Paul, Hastings, Janofsky & Walker in New York.
"That's an obvious conflict, [but] good CCOs know to err on the safe side in their reporting to the board and to execute their job properly," he said, adding that "many people are still trying to get their arms around what the level and format of the reporting should be. That's evolutionary in some senses."
Certainly, as proof of that, Paul Roye, director of the SEC's division of investment management, said last month that the SEC will be undertaking a CCO "outreach" program in the coming months, and that in the meanwhile, CCOs should undertake an outreach of their own to figure out their jobs. Roye's remarks underscored fears by many in the industry that the role of the CCO has not yet been clearly defined (see MME 12/6/04).
Although the SEC has yet to clarify the CCO's role, Rosella continued, the Commission has warned the industry, "We're going to come looking around, and things better be up to snuff.'"
With such a premium placed on the CCOs' proper execution of their responsibilities, the question arises whether smaller fund companies, where perhaps the chief operating officer or chief executive officer is also the resident CCO, will be able to devote the necessary resources to the new compliance office.
"The SEC's expectations for a $100 million firm are much different than they are for a $100 billion firm," Eichenlaub added. "They do try to scale the rules, but compliance is certainly costing more these days."