Evaluation of the Chief Compliance Officer

thompson hine logoThompson Hine put together a paper: Evaluation of the Chief Compliance Officer:

While Rule 38a-1 under the Investment Company Act requires a Board of Directors to approve the appointment, removal and compensation of a fund’s Chief Compliance Officer (“CCO”), the rule is silent as to any requirement to annually review the performance of the CCO. However, Rule 38a-1 does require that a fund annually review the adequacy and effectiveness of its written compliance policies and procedures (“Compliance Program”), as well as the Compliance Program of each investment adviser, principal underwriter, administrator and transfer agent of the fund (“Fund Service Providers”). Because the CCO is an integral part of any Compliance Program, it is reasonable to expect a board to evaluate the effectiveness of a CCO as part of, or in connection with, the annual review of the Compliance Programs.

The following statement by the Securities and Exchange Commission (“SEC”) serves as a useful starting point for evaluating the effectiveness of a CCO:

“A fund’s chief compliance officer should be competent and knowledgeable regarding the federal securities laws and empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the fund.”

Although this is a relatively vague standard, the SEC staff has informally articulated a number of specific qualities and capabilities that it believes a CCO should possess. In addition to analyzing these qualities and capabilities, a CCO’s effectiveness can be evaluated by reviewing the duties and functions actually performed by the CCO. This review should take into consideration the size, resources and business activities of the fund complex.

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