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Volume XI, Number 127

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SEC Issues a Risk Alert on the Current State of Outside Compliance Consultants

On November 9, 2015, the SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert, noting that some of the outside CCOs that were examined were not sufficiently competent, knowledgeable of the business of the company or the federal securities laws or empowered with full responsibility, resources and authority to develop and enforce appropriate policies and procedures for the company. Observations of the SEC’s staff include:

  • Outsourced CCOs should frequently and personally interact with the registered investment advisers (“RIA”) employees (in contrast with impersonal interaction, such as electronic communication or pre-defined checklists) to obtain a better understanding of the RIA’s businesses, operations, and risks.

  • Outsourced CCOs with a strong grasp of the RIA’s businesses, operations, and risks can better identify and remedy inconsistencies between the compliance policies and procedures and the RIA’s actual business practices.

  • Outsourced CCOs that served as the CCO for numerous unaffiliated firms, generally, lack sufficient resources to perform compliance duties.

  • Annual reviews performed by outsourced CCOs, who were able to independently obtain the records they deemed necessary for conducting such reviews, more accurately reflected the RIA’s actual practices than annual reviews conducted by CCOs, who relied wholly on the firm to select the records subject to their review.

  • It is a bad fact if the RIA’s employees have discretion to determine which documents were provided to the outsourced CCOs.

In light of these findings, the SEC recommends that advisers and funds with outsourced CCOs review their business practices to determine whether their practices comport with their responsibilities as set forth in the Investment Advisers Act and the Investment Company Act.

Please see here for the SEC’s Risk Alert on outside CCOs.

CCO Takeaways

– RIAs that are using or considering using an outside CCO should carefully consider the SEC staff’s observations about how outside CCOs should interact with the employees of the RIA, in order to emulate the best case cited by the SEC staff. Given the thoughtful guidance and the attention to outside CCOs that preceded the guidance, the use of an outside CCO will result in the SEC staff approaching an examination with these views in mind.

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Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume V, Number 322
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About this Author

Associate

Angela Kim is an associate in the Corporate Practice Group in the firm's Los Angeles office. Prior to joining the firm, Ms. Kim was a legal counsel at CJ E&M Corporation, the largest entertainment and media conglomerate in Korea.

Ms. Kim focuses her practice on mergers and acquisitions, private equity, venture capital and general corporate law matters. 

213.617.5453
Thomas M. Devaney, Corporate Attorney, Sheppard Mullin Law firm
Partner

Mr. Thomas Devaney is a partner in the Corporate Practice Group in the firm's New York office.

212-634-3042
Jung Son, corporate, investment, finance, attorney, Sheppard Mullin, law firm
Partner

Jung Yeon Son is a partner in the Corporate Practice Group in the firm's Palo Alto office. Ms. Son’s practice is focused on the formation and operation of private investment funds, including private equity, venture capital and hedge funds, as well as on advising companies and sponsors with respect to mergers & acquisitions, securities offerings, corporate governance, SEC reporting, and general corporate matters. 

650-815-2676
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