SEC Rejects Dual-Hat Chief Compliance Officer Model and Urges More Compliance Spending
The SEC’s Office of Compliance Inspections and Examinations (OCIE) has warned investment advisers to remediate widespread compliance failures including dual-hat Chief Compliance Officers, inadequate compliance resources, deficient annual reviews, and weak policies and procedures. In its Risk Alert, OCIE faults firms that employ the dual-hat CCO model whereby a C-suite executive with other primary responsibilities assumes the compliance role because such execs do not have sufficient time or knowledge to adequately perform the compliance responsibilities. The staff also criticizes firms for devoting inadequate resources to the compliance function including failures to spend more money as a firm grows and changes. Firms often failed to conduct annual reviews or conduct them properly or often enough. OCIE also outlines dozens of areas where advisers fail to adopt and implement adequate policies and procedures, including portfolio management, marketing, trading, disclosures, and fees.
We have warned advisers that the dual-hat model doesn’t work. We have also advised firms to spend at least 5% of resources on compliance activities and reassess those resources as the firm grows. Take the hint. It’s time to hire a full-time CCO or retain an outsourcing firm like CCS, who can provide all required compliance services including a designated CCO.