Hedge Fund Question of the Week – Summer Edition – No. 4

Can a firm outsource the CCO title?

Answer:  Likely not.

Intuitively, it seems the answer should be a straight up “no”. Someone at the firm should hold the Chief Compliance Officer title even if dual-hatted and even if certain compliance functions are outsourced. But the answer might be more nuanced. The SEC’s compliance rule states that an adviser is required to have a CCO “who is a supervised person,” suggesting that the title needs to remain in-house. Nevertheless, the SEC includes a question on Form ADV asking whether an adviser in effect uses an outsourced CCO. And the SEC staff issued a risk alert in 2015 highlighting some of the concerns with using an outsourced CCO, but still acknowledged the practice. 

At the same time, investor expectations may play a role. Investors might hesitate to use the services of a firm that outsources the title (as opposed to many of the CCO functions). This reluctance may ultimately resolve the question and, absent unusual circumstances, firms keep the title in-house.