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CCOs Still Grappling With New Role: Upcoming Annual Reviews Among Biggest Concerns


One year after assuming their new roles, chief compliance officers at mutual fund advisory firms shouldn't expect to be off the hot seat anytime soon. There are still policies and procedures to review, update and expand upon where gaps are found; reports to generate; compliance checks and balances to assess; and a myriad of other unforeseen issues.

Moreover, the first rush of annual reviews, which the Securities and Exchange Commission mandated that CCOs and their staff formally conduct each year, is expected to occur this coming March and April. This is because the SEC required advisory firms to undertake their first annual reviews no later than 18 months after adopting compliance policies and procedures. For many investment companies whose boards formally approved their funds' new compliance policies just over one year ago, that review window is quickly approaching.

"We are still seeing firms struggling with their compliance policies," said Jeff Squires, a principal with Vista 360, a compliance consulting firm in Milwaukee. That's particularly true where fund firms created a template compliance manual or where firms opted to put a very generic set of policies and procedures into place. Since then, firms have realized they must go back and customize those policies and procedures to their own firm's structure and operations, he said.

In addition, the industry as a whole has been experiencing some real growing pains as the compliance burden has increased, Squires noted. In some cases, CCOs are finding there is still a nonchalant attitude about compliance at their firms and are grappling with how to get senior executives to understand the importance of a focused compliance effort.

Moreover, many CCOs are still determining what resources they require, including what to automate and what technology will provide the best solution. That resource review is occurring even at very large fund groups, Squires said.

While CCOs have had at least a year to figure out the best approach to take when it comes to building and administering compliance programs, the upcoming annual review seems to be causing the most concern, compliance experts agreed. Under the SEC's mandate, investment companies must "review, no less frequently than annually, the adequacy of the policies and procedures of the fund and of each investment advisor, principal underwriter, administrator and transfer agent and the effectiveness of their implementation."

But because the SEC has provided very little formal guidance as to how to structure these annual reviews or what specific information or level of detail needs to be included, many CCOs are "winging" the annual review to the best of their abilities.

"That's a nerve-racking thing for people," said Janaya Moscony, a principal with SEC Compliance Consultants in Philadelphia. "Most of the worry comes from the fact that this is the first time folks are doing this," she added. Nobody is absolutely sure exactly what the SEC wants, and as a result, compliance officers are trying to figure out just how much time they need to dedicate to the annual review process.

Further, she said, "there's a fear of documenting too much or not enough." If absolutely everything is written down, that might provide a road map to the SEC for things that an advisor might not want to otherwise reveal to regulators. CCOs are also debating the best course of action when a problem is identified; whether or not they can fix a problem themselves or whether to bring it to the SEC's attention. That is especially true where the fix for a problem will obviously take some time, Moscony said.

As part of the annual review, fund CCOs need to do due diligence on service providers, explained Timothy Simons, a partner with Ashland Partners of Medford, Ore. But many small investment advisory shops are suddenly getting calls from the mutual fund companies they provide investment sub-advisory services to asking for all kinds of special compliance-related reports. A small shop with a single compliance person may not be readily able to provide these, he said. "What I am hearing is that funds are being demanding," Simons noted. In addition, it's much more complex for a fund company where there are multiple sub-advisers in tow.

"Fund boards are expecting their funds' CCO to do things that are very complex, and CCOs are trying to be conscientious and are trying to satisfy their boards and the SEC," Simons noted. "But it is not clear exactly what that entails," noted Simons, who spent 12 years as a chief compliance examiner with the SEC's Philadelphia office. "Everybody is kind of stressed right now," he added.

Nonetheless, some annual review tips that experts offered include working off quarterly reviews as a starting point, and identifying and documenting any and all potential conflicts of interest that a sophisticated investor would want to know about. As to where to focus compliance initiatives, they suggested following the SEC's risk-based approach by taking the time to identify high-risk areas or practices.

The SEC has had representatives speaking at various industry conferences, and will be holding a one-day national CCO outreach seminar at its Washington headquarters on Nov. 8.

Still, the reality is that the SEC's true expectations will likely be clarified once deficiency letters start to flow, Moscony said.

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