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News August 7, 2006 Issue

Advice for Young Compliance Officers

Ever wonder what type of career guidance a senior CCO might pass on to an up-and-coming compliance professional?

IM Insight recently spoke to a well-respected CCO. While she asked that we keep her name and her firmís name confidential, we can tell you that she works at a large firm and that when it comes to compliance, sheís been around the block.

"A few times," she agreed.

With that, letís hear some of her advice for junior compliance officers:

Aim to develop a broad base of knowledge. "People tend to let themselves get put inside silos," she said. "They do one thing. Maybe itís guideline monitoring, maybe itís monitoring marketing material. They get comfortable with their little area." She said that this is particularly true in "a lot of the bigger shops," where "they really do put people into silos." While compartmentalized compliance officers may end up becoming experts in their particular niche, she said, "they never see the big picture."

Her advice: compliance officers should "give themselves the opportunity to learn the whole thing." For example, if your employer sends you to a compliance conference, sit in on all the panels ó even the ones that have nothing to do with your current day-to-day job responsibilities. One day, said the CCO, you may find yourself working in another position or another employer where it may be helpful to know something about those topics. "Why wouldnít you want to learn about it?" she asked. "Get that extra knowledge." As much as you might like your current job, "youíre not going to stay here forever."

IM Insight asked her what sort of substantive areas compliance officers should be exposed to. "Trading," she replied, without hesitation. "They should learn all about trading, because that is going to tell them a tremendous amount about how the business actually works." A junior compliance officer, she said, should be able to do guideline monitoring, whether manual or automated. By doing so, she added, the compliance officer will learn about the firmís accounts. "You really donít do that unless you are doing the guideline monitoring." And, she added, if a compliance officer focuses on trading, they also will learn about soft dollars, trade allocation, and other "hot" compliance topics.

The CCO also said that compliance officers should develop expertise in marketing and advertisement compliance. And, she added, they should learn how to prepare a Form ADV. "You would really be amazed" at how many compliance people are not aware of what is in their Form ADV. At many firms, she said, the Form ADV is prepared by the firmís legal department or outside counsel. Consequently, the compliance people "have no idea whatís in the Form ADV."

Go back and read. One quality "missing from a lot of people" is that they "donít look things up," said the CCO. Often, she said, when junior compliance officers are told to do something, they do so, but "donít understand why they are doing it." Her advice: "Go back to the statutes, look at the rules." She also suggested that compliance officers learn how to use the SEC website to read releases and commentary. Not only will building that body of knowledge help day-to-day job performance, she said, it will help in career advancement, as well: "You are not going to move up unless you get that level of knowledge."

Try to get some exposure to different business lines. "My mantra is cross training," she said. While it is important to have depth in your particular area, "it doesnít hurt to understand how the other side works." She gave the example of a shop with mutual funds and wrap programs. In both business lines, unaffiliated sub-advisers and outside wrap managers may be candidates for the same type of due diligence. "The disciplines," she said, "are not that different."

Try to work in a small firm. It is difficult to learn about the various parts of the business if you are in a big shop, said the CCO, particularly if your firm has very different business lines. "Go to work in a small shop," she said. "Thatís where you learn. When you are in a small shop, you have to do everything. I think you get a much better background. As you move up, you can specialize a little more, if you want." But, she added, at some point, "getting your hands dirty in everything is very useful."

Donít be afraid to ask for help. "Sometimes junior people are embarrassed to ask for guidance," said the CCO. "They donít know where to go or what to do. Instead of going to their supervisor or even the CCO for guidance, she said, they "just kind of hide in their cubicle or they try to wing it because they think they can."

Donít try to cover up your mistakes. The CCO relayed the cautionary tale of a junior compliance officer who "didnít do what he was supposed to do" in a particular area and ended up missing "major violations." What sunk the compliance officer, explained the CCO, was not necessarily his failure to perform his functions. It was the fact that he later expressed regret at having surfaced the issue. Forthrightness, honesty, and integrity must be key components of a compliance officerís inner make-up.

Get to know the business side. One of the "fundamental problems" that "a lot of legal and compliance people have is that they donít understand the business," she added. "They donít get involved. They keep themselves divorced from it." To better understand the business side, consider taking some MBA courses. "Most employers have tuition reimbursement programs," she said. "Take advantage of it." And, she added, compliance officers should interact with their business colleagues on a day-to-day basis. "I love talking with the portfolio managers," she said. "They approach things differently." She added that that close contact with the business side is another benefit of a smaller shop. "You are elbow to elbow," she said. "People let you in more."

Donít view the business side as the adversary. According to the CCO, junior people sometimes fall into the trap of dealing with the business side as if they are the "cop" and the business side has "done something wrong." That "happens a lot with people who come from regulators," she noted. "They forget that they are no longer wearing their regulatory hat" and "think they are still the cop on the beat." In her view, the "cop" approach is counter-productive. "You are never going to get people to open up to you and learn what is going on if you treat them that way," she said.

SEC experience can certainly help. Should a junior compliance officer plan to work at the SEC at some point during his or her career? "I think it is very helpful to do that," she said. Not only can it help develop an instinct for what regulators are looking for, she said, the SEC can provide much-needed "basic training." That training, she added, can be particularly useful "if you are fresh out of school."

And, she added, having SEC experience is "still a very marketable resume line." When people see someone who has worked at the SEC, they think "you have really great insight into what the regulators want."

Consider seeking the CFA designation. Some firms are willing to pay for their compliance officers to obtain their Chartered Financial Analyst (CFA) designation. "Itís a lot of work," said the CCO. But in her view, compliance officers that work at a firm that is willing to pay for it should "take advantage of it." The CFA designation, she said, "is a great credential to have."