Setting the Tone as Chief Compliance Officer

One of the more challenging aspects of being the Chief Compliance Officer of an RIA is establishing authority without sacrificing relationships. Some personality types are apt to challenge authority in general, while others blindly yield to others by nature. For most people, the response to authority falls somewhere in between.

In many ways, being CCO in charge of supervision for a firm is much like being a parent. The CCO will need to maintain a stern and consistent hand as it pertains to policies and procedures, yet remain approachable enough for supervised persons to feel comfortable coming to them with questions and concerns. The CCO will need to be able to show respect for other authorities (such as regulators and the firm CEO), while being willing to challenge their ideas whenever it serves the best interest for their supervised advisors.

Perhaps the most challenging aspect of this relationship is for the CCO to know when to say “no” versus trying to find a way for the supervised person to operate according to their wishes. The only way for this process to be completed successfully is for the CCO to set the tone for the compliance environment as early as possible after assuming the role. By “setting the tone”, we are referring to establishing the mood, method, and manner in which the compliance program will be administered and conducted. Here are a few tips for properly setting the tone for your compliance program.

Establish a shared understanding of terminology and concepts

Regulatory compliance can be confusing, partly due to the language and terminology. In fact, the firm’s compliance manual, or written supervisory procedures manual, is often seen as the most daunting of all compliance documents due to the extensive and unfamiliar terminology that is used. This can be problematic for compliance officers if their supervised persons have a different understanding of a term. Perhaps they have referred to the concept by a different name at a previous employer, or have simply read a couple of articles online that have shaped their understanding of the term.

Therefore, part of setting the tone as the CCO is establishing a shared understanding of basic compliance terminology. For example, what does “Assets Under Management” mean for your firm? One way to run afoul of regulatory guidelines is to have a supervised person misrepresent their AUM, based on preconceived notions of what constitutes AUM. For example, if an investment adviser were to count non-securities assets held by clients for which financial planning advice is being provided, then it’s reasonable to suggest the compliance officer may have failed to educate that adviser on the definition of AUM. The CCO may receive a response like “that’s how we used to do it at my old firm”. In short, communication is key to all relationships, including those existing between compliance officers and their supervised persons. It’s impossible to have effective communication without a shared understanding of terminology and concepts.

Evaluating Firm Technology

Technology is a compliance officer’s best friend. Can you imagine having to comb through and review paper tickets for every trade that is executed for your firm’s portfolio management clients? Or worse, imagine manually checking each client’s account activity on a daily basis to detect wire transfers, ACH transfers, or check requests. It’d be impossible.

From performance reporting, trading systems, asset movement processes, trade supervision, and document storage, technology is an integral part of the business for any RIA. As such, the systems the firm uses can provide a tremendous amount of insight into the workflows that must be created to conduct ongoing supervision. The tools that are offered through those systems can streamline supervisory processes, and allow the compliance officer to detect and prevent regulatory violations and deficiencies.

On the other side of this equation is the idea that a compliance officer who is unfamiliar with the firm’s tech systems is completely unable to leverage these systems to create policies and procedures that correspond with supervisory practices. This means the compliance officer loses credibility with each instance in which a supervised person has to educate them on the firm’s technology. To be the authority on a particular subject requires subject matter expertise, after all. Without understanding of the firm’s tech systems, the compliance officer cannot establish the credibility to properly set the tone.

Interdepartmental Involvement

The CCO of the firm needs to be aware of all firm operations, including, but not limited to, Human Resources, Accounting, Marketing and Sales. However, the heads of each of these teams is generally considered to be the authority as it pertains to their business segment. So, the challenge is to foster a relationship with these departments to allow for access to the information needed, while not impeding upon their “territory”. This can be accomplished by hosting a small luncheon to create an informal atmosphere to talk shop, leveraging the annual compliance meeting to dig into some of the operational details of other departments, and communicating timeline expectations early. Perhaps an afterwork after-hours can be seen as a light atmosphere to ask a few non-invasive questions about the history of the team and department.

At times, it may be necessary to access systems managed by other departments. As CCO, you may want to send a polite note to the head of that department prior to gaining access to the system. It’s not required to do so, but it’s a courtesy that will disarm your firm’s leaders.

Being a CCO is difficult. People generally want to be liked. It can be hard to maintain that status while constantly nagging colleagues to complete tasks like signing off on personal securities transactions. Employee trade supervision is invasive. Attestations do not provide the benefit of the doubt that the adviser is acting in an ethical manner. Still, more important than being popular, is ensuring the firm’s compliance program is adequately prepared for regulatory examinations. This can be accomplished by setting the tone from the beginning, as Chief Compliance Officer.

About the Author

Scott is a formerly licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC. Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting in Charlotte, NC. He’s a graduate of The University of North Carolina at Chapel Hill and formerly held FINRA Series 7, 63, 65, 24, 4 and 53 Licenses. Scott lives in Charlotte, NC with his wife Meredith, and their two sons Tyson and Jackson and daughter Eva. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.