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Purpose--This paper aims to discuss some of the more significant conflicts that a chief compliance officer ("CCO") may face in implementing a compliance program and to offer suggestions intended to reduce the conflicts and strengthen the advisory firm's compliance program.
Design/methodology/approach--Discusses the CCO's degree of independence from the financial adviser, identifies the areas where conflicts of interest most frequently arise, and provides advice on managing potential conflicts.
Findings--Potential conflict-of-interest problem areas include security valuation, trade allocations, affiliated transactions between the firm and its clients or among the firm's clients, soft dollar transactions, investment performance reporting, and personal trading activities of investment personnel The CCO should work with the advisory firm's senior management to identify potential violations of the firm's compliance program and establish disciplinary actions as well as escalation procedures for compliance violations. Conflicts can be reduced if the CCO reports to the board of directors of the advisory firm or that firm's parent. The CCO review process should be handled by someone other than an officer whom the CCO monitors. The CCO should seek independent outside sources to help identify and resolve compliance issues.
Originality/value--Provides a guide to potential conflicts of interest from a lawyer who advises investment funds and investment advisers.
Keywords Investments, Financial services
Paper type Technical paper
It seems that everywhere a chief compliance officer turns he is presented with a potential conflict of interest. This article discusses some of the more significant conflicts that the CCO may face in implementing a compliance program and offers suggestions intended to reduce the conflicts and strengthen the advisory firm's compliance program.
Effective in February 2004, Rule 206(4)-7 of the Investment Advisers Act of 1940 (the "Advisers Act") requires all SEC registered investment advisers to have in place written policies and procedures reasonably designed to prevent violations of the Advisers Act [l]. In addition, registered investment advisers must designate a chief compliance officer ("CCO") who is responsible for administering these policies and procedures. In the case of a mutual fund registered with the SEC, Rule 38a-1 of the Investment Company Act of 1940 (the "Investment Company Act") requires the mutual fund to adopt written policies …