Apparently, the Securities and Exchange Commission was running a sweep of firms with outsourced CCOs. The Office of Compliance Inspections and Examinations “stopped by” 20 registered firms that outsourced their CCOs to third parties. The SEC published a new risk alert to let us know what they found.
Surprisingly, the SEC did not paint a big sad face on the use of outsourced CCOs. They were found to be “generally effective.”
In reading the outsourced CCOs risk alert, it sounds like the issues that the SEC are concerned about are the same issues that the SEC is concerned about with in-house CCOs.
- Are there enough resources? The SEC was concerned that outsourced CCOs were spread too thin across multiple clients. The SEC is as focused on the resources in-house.
- Empowerment. The SEC was concerned that outsourced CCOs had enough power to enforce the policies and procedures.
- Risks. Does the CCO understand the risks at the firm? This issue is perhaps accentuated by outsourcing, but there are plenty of instances of in-house CCOs being isolated from business operations.
Clearly, the risk alert does not advocate using out-sourced CCOs. It does provide a plan for using that structure.
Sources:
- Examinations of Advisers and Funds That Outsource Their Chief Compliance Officers by the Office of Compliance Inspections and Examinations
- Latest OCIE risk alert looks at use of outsourced CCOs in IA Watch
- Compliance Outsourcing By Investment Advisors Drawing Fire From SEC by Ted Knutson in Financial Advisor