Compliance & Regulation

Does outsourcing the CCO role make sense?

As the SEC registration deadline approaches, some firms are still deciding whether to outsource the chief compliance officer role. Size plays a role as mid-market firms may have more to gain by keeping the position in-house

-

With firms hustling to designate or hire a chief compliance officer to satisfy their duties as registered investment advisors with the US Securities and Exchange Commission, many private equity firms are still debating whether to keep the chief compliance officer (CCO) role in-house or outsource it.

The SEC is mandating registered firms designate a formal compliance officer with a consistent presence. This is in part because registered firms will need to start making periodic filings, such as forms ADV and PF. Private equity firms will also have to establish formal compliance policies to outline how they would deal with potential conflicts of interest. Registration also means firms will face regular inspections by the SEC.

So how important is it to have a CCO in-house? In short, size matters.

For larger firms, naming an in-house chief compliance officer can be seen as a bit redundant considering the safeguards they must already have in place. General partners are asking why they need a full-time in-house compliance officer when they can have outside attorneys review their legal documents or perform an account review of their valuation figures.

However, smaller private equity firms could benefit from formally identifying someone in-house to handle the books as many smaller firms may be less familiar with compliance procedures.

There are other advantages to hiring an in-house CCO for smaller firms including that of giving the impression taking compliance very seriously.

“From a regulators’ viewpoint, an in-house compliance officer is seen as someone living and breathing everything going on at the firm every day,” said a Boston-based lawyer. “It minimises the risk that when the cats away the mice will play.”

And a number of smaller firms could benefit from formally identifying someone to handle the books and ensure nothing improper is taking place.

But, whether the chief compliance role is outsourced or in-house, GPs are slowly coming to terms with compliance taking centrestage.