Conflicts of interest chief compliance officers face in implementing compliance programs for investment funds and investment advisers

Abstract

PurposeThis 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/approachDiscusses 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.FindingsPotential 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/valueProvides a guide to potential conflicts of interest from a lawyer who advises investment funds and investment advisers.