How a Chief Compliance Officer (CCO) Can Help Your RIA Firm

A chief compliance officer (CCO) is a member of your firm’s team who can help protect your business from potential legal or regulatory issues. Registered investment advisors must have a CCO serving at the firm, but hiring an experienced one could make a huge difference and avoid potential penalties, fees or lawsuits that could cost your firm everything. Let’s take a closer look at the role of a CCO and why you should consider bringing an experienced one on.

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What Is a Chief Compliance Officer?

Registered investment advisors (RIA) are financial firms that advise or manage the assets of investors. And the U.S. Securities and Exchange Commission (SEC) requires each RIA “to designate a chief compliance officer to administer its compliance policies and procedures.” This means that the CCO “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.”

According to the SEC, the CCO “should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.” So this position can serve both as an enforcer of regulatory compliance and a protector of the firm’s reputation, and play an important role in risk management .

Pros and Cons of Hiring a CCO

A CCO’s expertise can transform a firm’s relationship with regulatory bodies, helping them to anticipate potential changes and manage audit processes effectively. Therefore, the decision to hire a CCO must carefully balance potential benefits and challenges. Let’s take a look at the pros and cons of hiring:

Pros of Hiring a CCO

Hiring a CCO brings several significant advantages. These can include:

• Improved regulatory compliance
• Enhanced firm reputation
• Increased investor confidence
• Improved relationships with regulators

Additionally, the presence of a dedicated compliance professional can foster a culture of compliance within the firm, empowering employees to understand and adhere to regulatory requirements. This commitment to ethical practices can build trust with clients who value transparency and integrity, strengthening the firm’s client relationships and reputation in the long run.

Cons of Hiring a CCO

Despite these advantages, there can be potential disadvantages or challenges in hiring a CCO. The high costs associated with hiring a CCO and providing the necessary supporting resources can be a significant challenge. The average cost of hiring a CCO can range from $100,000 to $200,000 annually, or more for larger firms. These costs encompass the CCO’s salary and additional costs for supporting resources, such as compliance software or additional staff, which firms need to factor into their financial planning .

Internal resistance can also pose a challenge. Changes in compliance procedures can disrupt established business processes, leading to resistance from some employees. However, this resistance can be mitigated by carefully communicating the benefits of these changes and fostering a culture of compliance within the firm.

When It’s Time to Hire a CCO

The strategic decision to hire a CCO should be made after considering various factors. First and foremost, if you plan on registering your firm as an investment advisor with the SEC, you will be required to hire a CCO.

Generally, one of the primary reasons to bring a CCO on board is to help navigate through new markets with unfamiliar regulatory landscapes. A CCO’s expertise can prove instrumental in helping the firm adhere to new regulations.

Additionally, if a firm is under regulatory scrutiny or facing penalties due to non-compliance, a proficient CCO can help resolve these issues and prevent future instances. Strategically, your firm may want to hire a CCO who aligns with different factors, including the size of the firm, the complexity of compliance management, the firm’s expansion into new markets and the frequency of regulatory scrutiny or penalties.

Firms grappling with any or all of these issues would need a dedicated CCO to resolve current issues and stave off future compliance problems . Incorporating more data or statistics around the effect of a CCO on a firm’s compliance record or reputation could further enhance the understanding of the role and potential impact of a CCO.

What to Look for in a Chief Compliance Officer

A successful CCO will likely embody a unique combination of traits, which can be categorized into:

• Technical skills : A CCO must possess a strong knowledge of regulatory compliance , critical thinking ability, and analytical abilities that help them detect potential areas of non-compliance. Adaptability is also crucial, allowing them to keep up with the ever-changing regulatory environment.
• Interpersonal skills : These skills include excellent leadership skills and communication skills, enabling them to effectively explain complex regulations.
• Experience : The experience and credentials of a CCO are vital. They should have relevant experience and skills in the financial industry , including knowledge of RIA operations and regulations, and a track record of successful compliance management.

Ultimately, you need to find someone that doesn’t just meet the requirement but is a good fit for you and the rest of your team.

Bottom Line

Compliance is the cornerstone of any RIA firm, ensuring that the firm operates within regulatory boundaries and maintains a high level of trust with its clients. At the helm of this requirement, you’ll find a CCO who is tasked with adhering strictly to regulatory standards, effectively managing risk and fostering a culture of compliance.

Tips for Growing Your Firm

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