What makes a compliance officer effective at their role? Is an understanding of regulatory requirements enough? As a stakeholder in an independent wealth management firm, what do you look for in a CCO?
A Starting Point from the SEC
The “principle-based” guidance of the SEC offers a few broad expectations for compliance officers, though it is light on actionable guidance when it comes to the characteristics of an effective CCO:
“An adviser's chief compliance officer should be competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm.”
So in other words, an RIA’s CCO should be knowledgeable of all relevant regulations and they should be in a position of authority--one that allows them to stop non-compliant activity and affect positive change.
Consistent with their well-known “rules-based” approach to regulation, FINRA provides some additional detail on the specific expertise that they expect to see in a CCO. Specifically, FINRARule3130 delves into skills like:
● Understanding of the BD’s products or services
● Knowledge of applicable rules
● Developing other individuals charged with developing policies and procedures
● Ability to develop compliance testing programs
As former advisory personnel and consultant to hundreds of CCOs, we have found a number of characteristics that are shared among effective CCOs. While all firms approach CCO selection differently (including the popular “short straw” method) a few crucial similarities exist among the most effective CCOs.
Ability to Foster a “Culture of Compliance”
Through their interactions with team members, effective CCOs foster a culture with an appreciation for compliance not only as a business requirement but as a potential source of sound business practices across all functions. Their attitude and actions demonstrate a sense of importance for compliance obligations. They also take it one step further by demonstrating the broader benefits of compliance-related protocols. (To see more on this topic, click here.)
Ability to Play the Dual Role of “Authority Figure” and “Business Partner”
Effective CCOs are equally adept at playing two key roles: “authority figure” and “business partner”. As the authority figure, CCOs must be able to affect change in people’s behavior (e.g. promoting best practices or halting non-compliant activity). As a business partner, CCOs should be viewed as “pro-business”, rather than an obstacle to growth.
Effective CCOs demonstrate an understanding of the entire value chain of a firm. They understand (and appreciate) the needs and expectations of clients; they have a basic comprehension of the investment process; and they possess a solid understanding of how information and data flow through the organization.
There are going to be instances when regulatory requirements, operational capabilities and client expectations appear to be in conflict. Effective CCOs enjoy seeking solutions for these cases. While sometimes the answer must be “no”, in many cases there will be a solution that meets everyone’s needs.
At its core, compliance oversight requires routine monitoring of activities, much of which is captured in the form of data. Examples include email, social media interactions and client/personal trading. Technology solutions allow the compliance officer to efficiently monitor the firm as it grows in size and complexity.
One additional point is worth mentioning. For smaller firms that may not require a full-time (dedicated) CCO, both the SEC and FINRA allow for delegation of many compliance activities (including external delegation). Be mindful though, that while advisory firms may delegate responsibilities, they may not delegate accountability.
As the wealth management industry continues to mature, we see more firms approach their compliance function as it has always been intended:
● A vital component of their operating model
● A central element of their risk management responsibilities
● An increasingly important component of their client value proposition
Selecting an appropriately-skilled CCO will go a long way to elevating your compliance program, achieving these objectives, and meeting the heightened expectations of your regulators and your clients.