Three words keep cropping up in the financial reform package passed by the Senate on May 20: Chief Compliance Officer.
A case in point is Title IV, which requires that all hedge fund advisers with assets of $100 million or more register with the Securities and Exchange Commission. Among other things, registration requires the designation of a Chief Compliance Officer (CCO), a C-suite level position that makes sure the advisers have the systems in place to collect and report information as needed to the commission on their activities.
Title VII of the bill, which pertains to derivatives, also requires Swap Data Repositories to register with the CFTC and appoint a CCO who reports directly to the board or a senior officer of the repository (Section 728). Plus, Title IX would broaden the role of compliance officers at credit rating agencies.
Since 2004, when the SEC amended the Investment Advisers Act of 1940, each investment adviser registered with the Commission must designate a CCO to be responsible for administering policies and procedures. In the case of an investment company, the chief compliance officer reports directly to the fund board.
In an April report in Corporate Compliance Insights, an online news source, author Chris DePippo, a compliance and risk management expert, noted that in heavily regulated industries such as financial services, “the Chief Compliance Officer may be the most important figure aside from the CEO.”
The CCO “will collaborate closely with the business to recommend new [risk] mitigation strategies,” he said. Among them, he added, could be new or enhanced controls that include review and authorization protocols, policies, procedures and standards, reengineered workflow, employee training, management training, and system controls.
When it comes to the CCO’s impact on a hedge fund adviser’s systems and technology, Ron Suber, senior partner and head of global sales and marketing at Merlin Securities, says it is considerable: “The CCO is going to be integral to a fund’s ability to articulate its edge, its compliance, its risk and much more than alpha, going forward,” he says. “The need to aggregate your assets at all your custodians for your flagship fund and all your managed accounts and then to articulate full compliance with your policies to the CCO will require no more spreadsheets.”
Instead, he says, a hedge fund will need to seek out sophisticated, open-architecture systems with instant access to data. “You need live, real-time access to all your information,” he says. “Each firm now has to move away from a closed architecture solution they use with just one prime broker toward something that is able to communicate with all of their trading counterparties, custodians and investors.”
Recent research from Boston-based Aite Group backs him up. In a soon-to-be released report on sell-side compliance, “Warriors Defend the Gates,” Aite says that “the compliance officer’s role today is so entrenched in the business that it has become one of operational risk mitigation rather than simply regulatory filing.”
- The “impact note,” which is based on interviews with senior compliance staff at broker-dealers, found that a number of key compliance initiatives going forward will involve technology upgrades. Aite asked CCOs, senior compliance staff and COOs overseeing compliance executives which compliance initiatives will be a priority over the next 12 to 18 months. Among the top priorities:
- Modifications to firm technology to accommodate rule changes;
- Development of an in-house, centralized system for managing relationships with clients;
- Development of an in-house system to attest that the right executives or staff have signed off on documents;
- Development of a proprietary trade surveillance system; and
- Purchase of a new trade surveillance system.
While report author and senior Aite analyst Denise Valentine noted that “the technology is still relatively expensive to the vast majority of firms,” she said this must change because of the growing visibility and importance of the compliance role: “Compliance officers are personally on the line for their company’s adherence to rules and regulations,” she said. “If the current market crisis is not enough to turn the tide for more compliance resources, what else would it take?”
Despite the difficulties they face, Suber foresees a large increase in the demand for these newly-empowered executives. “The CCO is a dramatically growing business,” he says. “Recruiters are scrambling to line up a deep supply of qualified candidates.”
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