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Dodd-Frank Requires the need to hire a Chief Compliance Officer: Is the CCO Adequately Protected??

Jun 25, 2011 11:30:01 AM ,

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The Dodd–Frank Wall Street Reform and Consumer Protection Act, is a federal statute signed into law on July 21, 2010.  The Act offers many sweeping changes to the financial regulatory environment and affects almost every aspect of the nation’s financial services industry.  Under the Act, investment managers/advisers to private equity funds and all private investment funds will have to register as investment advisers with the SEC no later than July 21, 2011. There is a provision that exempts managers of private equity funds with less than $150 million in assets under management from registering.  If you do not fall within the exemption, then failing to register would constitute a willful violation of the act.

Registration brings about many record-keeping and reporting requirements.  If you are registered with the SEC, then you do not have to register with the state.  You can register with the SEC by filing a Form ADV.

Advisers need to adopt written policies and procedures reasonably designed to prevent violations of the securities law.  It would be sensible to have these policies and procedures in place as well as a person competent and knowledgeable on these policies and procedures staffed prior to the filing of the Form ADV.  The position of Chief Compliance Officer should be created and the CCO needs to annually review the firm’s polices and procedures and identify and address significant compliance problems and plans for emerging business areas.  The CCO needs to be fully empowered with full responsibility and authority to develop and enforce these policies and procedures.  An advisor can hire a CCO, outsource the duties and responsibilities to a compliance firm, or add duties to their in-house counsel or CFO.  Hiring a CCO may be the best way to stay on top of Compliance because you can train someone with an audit background who is familiar with the nuances of Hedge Fund operations.  Outsourcing to a compliance firm may be better if you are looking for the assurance of a bigger name and are looking for a firm that has knowledge of multi-jurisdictional regulations.  Don’t forget, there are individual state regulations to follow as well.  Adding additional compliance responsibilities to your in-house counsel or CFO may be the most cost effective way to establish and monitor a quality compliance program, however, this may create a large burden on a particular executive and be a red flag during future routine audits.

CCO's need to make sure that their newly created title is included for indemnity in the Investment Advisers Operating Agreement or structural documents. Additionally, any management and professional liability insurance policies would need to amend the definition of "Indvidual Insured" in order to include the position of CCO. Remember, the CCO needs to be a senior official that owes a duty of diligence, loyalty, and integrity to the firm.  Breaches of this duty could lead to potential litigation.  A CCO should be covered the same way any other officer is covered under a insurance policy.

This article is written by Gregory C. Sibilio, Esq. a Vice President in the Financial Services Division of Iron Cove Partners, LLC a Division of the Whitmore Group, Ltd. ("ICWG"). ICWG is a market leader in providing risk management and insurance solutions to companies engaged in the financial services arena. Should you have any questions or comments, please do not hesitate to contact Mr. Sibilio @ 516-267-6177 or via email @ gregs@ironcoveins.com.  To follow Iron Cove Partners, LLC on Twitter CLICK HERE.

The materials posted here are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site does not create an attorney-client relationship between.

Tags: accredited investor, Insurance, insurance, allocations, Iron Cove Posts, Chief Compliance Officer, Cyber & Privacy Liability, directors and officers, Directors & Officers Liability, Dodd-Frank, dodd-frank, Errors and Omissions, hedge fund, Management Liability, Professional Liability, Property & Casualty, Reform, Regulation, regulation, SEC, SEC Investigations

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