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News August 2, 2004 Issue

Gohlke on CCO Outsourcing

Can investment advisers outsource their CCOs?

Under the compliance program rule, an adviserís CCO must be a "supervised person" of the adviser. Supervised persons include an adviserís partners, officers, directors, and employees, as well as any non-employee "who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser." While an outsourced CCO may be under the adviserís supervision and control, he or she arguably would not be providing advice on the adviserís behalf. As a result, many in the investment management industry had interpreted the supervised person requirement as effectively requiring an adviserís CCO to be an actual employee of the adviser (in contrast, the SECís release made clear that a fundís designated CCO need not be an employee of the fund).

But OCIE associate director Gene Gohlke seems to think itís okay for advisers to outsource their CCOs. "I donít believe thereís any place in [the adviser compliance program rule] that says itís improper to outsource the CCO to an adviser," said Gohlke, speaking at a May 24 ICAA compliance workshop. He acknowledged the reference to supervised persons in the rule, saying "itís not crystal clear," but later added that "I donít think itís inappropriate."

He cautioned, however, that outsourcing a CCO raises other questions. The senior management of an adviser that chooses to outsource its CCO should be "very concerned" about whether an offsite CCO will be able to effectively carry out his responsibilities. Gohlke gave the example of an adviser in Tallahassee, Florida with an outsourced CCO in Spokane, Washington. "It seems like that adviser has a lot of oversight to do. And I think itís probably obvious [that] when we do an exam of that adviser, weíre going to look real close at what that CCO does and doesnít do." He predicted that OCIE would compare the types of compliance problems the CCO found to those that OCIE thinks the CCO would have found had he been onsite.