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News September 19, 2005 Issue

Advisers Can Outsource Compliance, Says SEC Commissioner

SEC Commissioner Roel Campos, speaking at last weekís SIA hedge fund conference, provided additional comfort to advisers concerned about whether they can safely outsource compliance responsibilities.

Discussing the CCO requirement, Campos noted that hedge funds donít have to hire a separate compliance officer (apparently, this question keeps coming up at conferences he speaks at). "Many may choose to, and it may make business sense to do so," he said, "but an existing officer of an adviser can put on the hat of being the compliance officer."

Campos went on, however, to suggest another alternative: "Itís also possible to have a sub-contract, and have a supplier do a lot of technical things having to do with compliance," he said.

However, he cautioned, "you canít delegate it away." In the event of an SEC examination, "you need to be in a position where the particular people you are relying on have been to your place and understand where your books and records are and understand whatís going on." Added Campos: "Done carefully and done correctly, it will pass examination."

Schulte Roth partner Paul Roth, speaking earlier at the same conference, expressed similar views. Roth noted that the compliance rule does not require hedge fund managers to hire a new staffer to serve as CCO, and that an outside service provider could be tapped into service. "You could retain your accountant, someone who is knowledgeable about the way you conduct your business and . . . the rules and regulations of the SEC," said Roth.

Roth noted that the CCO does not need to be an attorney. In fact, he said, there are two reasons why most CCOs are not attorneys: First, if the CCO is an attorney, "it raises all sorts of attorney-client privilege issues that donít exist if the CCO is not an attorney." The second reason why most CCOs are not attorneys, said Roth, "is that a lot of the attorneys donít want to be the CCO" (a remark that garnered quite a chuckle).

There may be valid reasons for wanting to outsource the compliance function. Dawn Anckner of Five Mile Capital Partners said that her Stamford, Connecticut-based firm "went through a whole analysis of whether we wanted to get an in-house compliance person and an in-house attorney, or did we want to outsource some of it or all of it."

Her firm opted for the latter approach.

CCOs and lawyers are "going at such a premium right now that we canít really justify the cost to our investors," she said. Moreover, "even if we brought somebody in house, we felt that the rules are changing so quick . . . that we feel that we need somebody on the ground," somebody that is "closer to the SEC."

And, she added, even if the firm had an in-house CCO or lawyer, it still would need to rely on outside experts. "We need to be able to tap into the professionals and the experts in the market," she said. Anckner said her firm is currently trying to determine who are the "right people" to hire.