Over the past month or so, the blog has focused on regulatory issues and technology solutions. This week we’re circling back to our Management Tips for CCOs series. In this post we’ll take a look at meeting the role of the 21st Century CCO as outlined in SEC updates to the Investment Company Act of 1940 (Rule 38a-1) and the Investment Advisers Act of 1940 (Rule 206(4)-7), both adopted in 2003 and effective in 2004.
Foremost, the two rules mandate the appointment of a CCO at regulated companies. Both similarly define the CCO role as follows:
The chief compliance officer should be competent and knowledgeable regarding the regulations and rules that govern his/her entity type and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm. Thus, the compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.
Specifics of what the CCO’s role should entail are outlined, but not detailed – although there are more conditions set forth for how the CCO will function at investment companies (funds) than at investment advisers.
At investment companies, CCOs report to the board of directors, have their compensation established by the board, must meet in executive session with independent directors at least annually to assure they cannot be coerced by management, and other measures that enable them to remain above the fray and carry out their duties effectively.
While the CCO role at advisers is not spelled out beyond the above definition, the statement that it is a senior management role makes it easy to read the tea leaves that these CCOs should be c-suite capable.
Keyword Clues to Important CCO Skills: Knowledgeable and Competent
Back in 2005, shortly after the new rules went into effect, Glen Gohlke, then-Associate Director of the SEC’s Office of Compliance Inspection and Examinations, addressed an educational seminar of the Managed Funds Association on the topic, “A Job Description for CCOs of Advisers to Private Investment Funds.”
While the SEC routinely disclaims responsibility for the private addresses of its employees, Mr. Gohlke obviously had first-hand exposure to the new rules process. He provided insight about desirable CCO qualities and made connection to essential management skills that today’s CCOs must master if they are to be effective. In our experience, his ideas more than hold up in the present.
He contrasted the primary capabilities required of CCOs by the SEC rules – that they be knowledgeable and competent. Knowledgeable is the easier part of the equation to understand. It pertains to awareness and understanding of applicable laws and regulatory requirements.
Competence, he said, is more difficult to discern. It pertains to the skills needed to create, implement, manage and assess an effective compliance program.
We’ve chosen five core CCO competencies that we believe are de facto to meet the intent of the SEC rules. There are many others tied to the tactical aspects of the job. The ones that follow are tied more to mission and vision.
- Ethics and Values – The executive charged with keeping the entire organization on the straight and narrow must be ethical to a fault and have well-defined values. Elevating this intrinsic quality to a leadership/management skill centers on consistency. You must be able to help define the ethics and values of the company and believe in them to the point where you can communicate and advocate for them consistently without ambivalence.
- Interpersonal Savvy – Think about the tightrope that the investment company CCO must walk – and that the adviser CCO must be capable of walking. You serve at the pleasure of the board and you have their ear in a way that not even the CEO does. You must also engage people at all levels of the organization and get buy-in to the compliance program – even though you’re the watch dog. It’s a no-brainer that interpersonal skills are crucial to succeeding at this unique position in the firm. However, you can’t stop at being a good ‘schmoozer’. We discussed the next deepest level of this skill in a recent post that addresses how to build good relations with your reports, your peers and the c-suite/board. This part of the job takes insight, empathy and authenticity.
- Organizational Agility and Positioning Skills – These skills are about maintaining fairness in your relationships, having the communications skills to keep people informed and to communicate critical issues where you need buy-in. It’s where you have to develop your inner politician while maintaining your reputation for trust based on ethics and values. Glen Gohlke explained that there is another requirement for the CCO – empowerment. However, this one is the responsibility of the organization, rather than the CCO. Ironically to assure that you have the empowerment you need to meet regulatory standards and get the required compliance budget, you may have to influence management to establish and maintain that empowerment. These skills can provide the key to success in getting what you need.
- Learning – This is a self-explanatory skill. You must have or develop the curiosity and interest in keeping up with the evolving regulatory environment and tools/services to help manage the complex demands of your role.
- Managing and Measuring Work – This skill is related to planning skills and adds some refinement and nuances that really help you nail down and prove performance. Managing and Measuring calls for you to clearly assign responsibility for tasks and decisions, set clear objectives and measures, monitor your process, progress, and results via well-designed feedback loops. This is essential to fulfilling your obligation to identify and report compliance issues and recommended improvements to the board – at least annually.
The SEC is clear that, for the qualified CCO, job one is risk assessment. If you’re a new CCO or a veteran you’re always assessing the risk you must mitigate through compliance policies, procedures and program implementation. It is our intent that our DIY Risk Assessment Calculator will help you in that foundational effort. Please download with our compliments.