Compliance is one of the most important aspects of a registered investment advisor (RIA) firm’s responsibilities. At the heart of ensuring that a business keeps up with the industry's constantly changing rules and regulations is the chief compliance officer (CCO).
The Securities and Exchange Commission (SEC) has laid down specific criteria on who qualifies as a CCO in an RIA firm. This begs the question, “should you outsource your CCO?”
In this article, we will delve deeper into the topic of CCO outsourcing. We will give you an overview of how the process works and discuss the advantages and disadvantages. We will also touch on how the SEC views the use of external compliance providers.
If you’re working out whether outsourcing your chief compliance officer is the right move for your firm, this guide can help you make an informed decision. Read on and find the answers to the most pressing questions about outsourced CCOs.
Outsourcing is a business practice of hiring a third-party to perform specific tasks within an organization. Based on the SEC’s guidelines, RIA firms cannot outsource their CCOs. The CCO is considered a vital role and must be held by a highly qualified person within your company. This means that you cannot hire external consultants to be your chief compliance officer.
Firms, however, can outsource certain compliance-related tasks from external service providers. A good illustration of how CCO outsourcing works are the RIA compliance platforms that have emerged in recent years. These tools, offered by third-party providers, can make a CCO’s job more efficient by automating traditional manual procedures and streamlining workflows.
Some CCO tasks your firm can outsource include:
The SEC Rule 206(4)-7 lists the qualifications of those who can be designated as chief compliance officer in an RIA firm. Here are the criteria based on the commission’s guidelines:
Given these criteria, anyone in your firm’s leadership can be appointed CCO. Many small RIA firms have company executives – including the CEO and COO – serving double-duty as chief compliance officer.
The main benefit of this arrangement is that apart from having strong industry knowledge, these leaders have a good grasp of the company culture. Their imposing presence within the firm also plays a key role in getting staff to prioritize compliance.
You can learn more about how your firm can take advantage of RIA compliance software in this guide.
As the SEC constantly updates its guidelines and regulations to address emerging risks, compliance has become a primary focus for RIA firms. This makes a CCO’s job more important and challenging, especially for leaders who are juggling multiple roles. This is where CCO outsourcing can help.
Here are some of the benefits of outsourcing CCO functions:
Listen to the goRIA team as they unpack the dos and don’ts of RIA compliance in this podcast.
While cost-effective, outsourcing compliance-related tasks comes with certain drawbacks that RIA firms can avoid by appointing an in-house CCO. Here are some of the cons of CCO outsourcing:
RIA firms have a variety of options when it comes to CCO outsourcing. That’s why it’s important to practice due diligence when choosing an external provider. This is to ensure that you maintain control of your program and any actions are consistent with your firm’s culture and values.
In today’s rapidly changing regulatory environment, CCOs play an essential role in ensuring RIA firms walk the straight path to compliance. Appointing an in-house chief compliance officer, however, may not be the best option for some companies. Here are some of the top reasons why some RIA firms turn to CCO outsourcing.
With the SEC constantly updating rules and regulations to address emerging risks, some firms find it difficult to keep up with the changes. Compliance requires the ability to understand the impact of these changes and translate it into an actionable program. Firms that lack sufficient legal and industry know-how often turn to experts for guidance.
Establishing and maintaining an in-house compliance team often entails heavy financing, which smaller RIA firms can’t afford. Outsourcing CCO functions gives firms access to experienced compliance specialists, without the burden of full-time salaries and benefits. This allows them to allocate capital and resources to other business initiatives.
In-house CCOs are often deeply invested in company culture. This can make them vulnerable to internal pressures and conflicts of interest. Through CCO outsourcing, RIA firms can inject an independent and objective perspective into their compliance programs.
Compliance covers a broad range of areas – from portfolio management and custodial operations to marketing rules and anti-money laundering. External providers can offer specialists in various aspects of compliance to safeguard firms against blind spots.
For firms that feel that CCO outsourcing is the right move, these are some of the factors to consider when choosing a provider:
How much should RIA firms spend on compliance? Find the answer in this article.
Just like with any business decision, there are several factors to consider before deciding on whether to outsource compliance-related tasks or hire an in-house CCO.
“Outsourcing the Chief Compliance Officer (CCO) function can be a strategic choice for RIA firms, but it's not a one-size-fits-all decision,” explained Conor I. Anderson, executive partner and head of advisor services at AdvisorAssist. “The decision to bring on an outsourced CCO (OCCO) should depend on the firm’s size, specific needs, and overall risk profile.”
Well-established RIA firms often have the resources to build and maintain a full-time compliance team. Smaller businesses, meanwhile, may find CCO outsourcing more cost-effective. When choosing to go the outsourcing route, it is important for firms to practice due diligence.
“While an OCCO can provide specialized expertise and a level of objectivity, there are potential drawbacks,” Anderson said. “OCCOs may lack the time and attention required to fully address an RIA’s unique conflicts and risks. Therefore, it’s important that OCCOs be fully entrenched in the RIA’s operations and closely aligned in vision with other key stakeholders to ensure commitment in meeting regulatory standards.”
Regardless of whether they are outsourced or in-house, strong management support is crucial for CCOs to perform their roles effectively. Having a supportive environment empowers CCOs to drive the firm’s compliance program to success. A successful compliance program, in turn, enables companies to gain the trust of clients, investors, and key stakeholders.
Visit our goRIA section for the latest updates on SEC compliance rules and regulations. Don’t forget to bookmark this page for easy access to breaking news and the latest industry developments.
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