Ontra As you step into a new chief compliance officer (CCO) role, you know you have your work cut out for you. Regardless of your path to the role, whether through a promotion or by joining a new private equity firm, it’s crucial you start strong and hit the ground running.
What does that look like? Here are a few expert tips to help you address the first few weeks and months of your tenure:
1. Learn the firm’s business & investment strategy
You need a firm grasp of how your business fundraises, invests, and operates to truly understand and evaluate compliance risks. Attend investment committee meetings and absorb information like a sponge.
During the first 30 days, be inquisitive. Ask questions like:
- How does the firm source, market to, and onboard new LPs?
- Where does the firm source new portfolio investments from?
- What strategies and sectors does the firm focus on?
- How do investment professionals underwrite returns and perform diligence on new deals?
- Does the firm frequently offer co-investments or invest across multiple funds?
- How involved are investment professionals with the ongoing operations of portfolio companies?
- Do internal teams refer service providers to portfolio companies?
- Do internal teams provide advice on cybersecurity, environmental, social, and governance issues, or anti-bribery and Foreign Corrupt Practices Act compliance to portfolio companies?
- Do internal teams leverage senior advisors, and do deal professionals sit on boards?
- Who reviews expense allocations and manages the operations of your funds and management company?
Answers to these questions and others will help you understand the fundamentals of how your firm does business, better anticipate compliance risks, and adjust your compliance program accordingly.
2. Build relationships with key stakeholders
Establish a good partnership between your compliance team and your deal, investor relations, tax, accounting, and operations teams to ensure other professionals flag risks for you early and often.
This is where your soft skills come into play. Get to know your colleagues and set the tone that your compliance team is collaborative and solutions-oriented. Sometimes, you’ll have to make difficult or unpopular decisions to protect your firm from unnecessary risk, but this doesn’t have to damage your relationships. Demonstrating that you think practically and commercially encourages teams to seek out advice and counsel early.
If you’ve shown you protect the firm by offering measured and strategic advice, rather than reacting with alarm or always saying “no,” teams are likely to invite you into conversations earlier rather than later.
3. Evaluate the current compliance program
Within the first 60 days, assess your firm’s compliance program by reviewing:
- The most recent SEC examination priorities
- The firm’s Form ADV
- Recent marketing materials
- The code of ethics and compliance manual
During this time, also confirm you have the core policies and procedures to support your regulatory obligations in place, as well as policies and procedures tailored to your firm’s specific risk areas and the practical realities of how the firm does business.
If the SEC recently examined the firm: Determine whether your firm has addressed any deficiencies and taken action on any commitments offered in response letters.
4. Reinforce a proactive compliance program
In an October 2023 address, the Director of the SEC’s Enforcement Division (Division), Gurbir S. Grewal, laid out the concept of “proactive compliance.” Grewal intends to evaluate the proactivity of private fund advisers’ compliance programs across three segments: education, engagement, and execution.
Education: The Division will assess whether, as a CCO, you’ve educated yourself not only on relevant law and rules, but also on “external developments relevant to your business,” such as new SEC examination priorities or enforcement actions. You’re also expected to ensure the firm’s employees receive periodic training on these matters.
Engagement: The Division expects you to fully engage with stakeholders across your firm’s various business units. This is why learning your firm’s business strategy and building relationships are both critical. As the CCO, the SEC expects you to understand your business lines to accurately design and adopt compliance policies.
Execution: The Division will determine whether you’re fully implementing the compliance policies and procedures you’ve put to paper. Grewal noted that many firms had policies and procedures in place, but faced enforcement actions resulting from a lack of execution.
5. Bolster your program with a compliance tech stack
Your firm likely has compliance tech in place to monitor personal trading, gifts and entertainment, annual certifications, and other core code of ethics policies. Don’t be afraid to shop around to guarantee you’re using robust but cost-effective solutions that meet your firm’s needs.
There are other helpful legal technology options, as well:
- If your firm doesn’t have one already, find a user-friendly solution for monitoring email and other electronic communications.
- To address the SEC’s heightened scrutiny, implement purpose-built software to manage fund and investor obligations and improve side letter and MFN compliance.
- To manage your firm’s fund, management company, and portfolio investment entities, adopt a modernized entity management system purpose-built for private funds.
- To demonstrate your commitment to digital transformation, evaluate tools and systems that leverage AI to streamline inefficient manual processes.
6. Dig into fees & expenses
The SEC continues to scrutinize private fund advisers’ calculations and allocations of fees and expenses. This topic will need to be at the top of your priority list for years to come.
At the very least, review:
- Fees charged and expenses allocated to your firm’s private fund clients
- Policies and procedures for consistency with limited partnership agreements
- Disclosures on Form ADV and marketing materials
- Notice, consent, and reporting requirements and actions
You may also want to focus on specific areas such as non-pro rata allocations, management fee offsets, transaction and monitoring fees, consulting and advisory fees, regulatory expenses, allocations to co-investors, and post-commitment period management fees. You’ll also want to review the disclosure of fees and expenses to investors in marketing materials, investor communications, and quarterly and annual financial statements.
7. Schedule quarterly compliance audits & annual reviews
With the adoption of recent private fund adviser reforms, the SEC’s amended Compliance Rule now requires all SEC-registered advisers to document the annual review of their compliance policies and procedures in writing.
It’s likely the SEC will expect your firm to produce these records during an examination. While many firms have been conducting annual reviews since 2004 or earlier, you’ll want to plan ahead for the time and resources needed to conduct and document your annual review. Depending on your business operations and risks, you’ll likely want to implement quarterly audits, targeting specific risk areas to identify potential issues early and often.
