Clients and fellow senior executives often ask for unique insights into where legal and compliance exposures might lie in wait. Here is the third of three examples.
The Organizational Chart
A wise manager once said, “If you want to create an employee morale problem, create an org chart.” It can create a sticky regulatory issue as well.
Regulators want to see the legal/compliance function reporting directly to the top of the firm. It’s even baked into the compliance rule for mutual funds that the CCO must report to the fund board. And being a direct report means the person who has the power to hire and fire, and to determine compensation.
The GC and/or CCO reporting directly to the Founder/PM can have some benefits for senior executives. The arrangement shifts supervisory responsibility (and liability) for the function. But it can also create a source of friction. Not only does the arrangement create another direct report for the Founder/PM to deal with, but it can enhance the ability of the GC/CCO to scrutinize other senior executives.
So the alternatives are to have the GC and/or CCO (1) report directly to the Founder/PM, or (2) report to an intermediary senior executive and accept the supervisory liability and be prepared to explain the rationale to regulators. And the worst alternative? Try to fudge the issue by creating an org chart with “dotted line” reporting. Total red flag.