October 21, 2013
Interviewed by: Privcap
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CCO is a Full-Time Job

Part 3 of a 4-part series. Making your CFO wear a CCO hat won’t work. Learn from a former SEC attorney and firm-management experts from New Mountain Capital, who discuss the full-time job that is the Chief Compliance Officer.

Part 3 of a 4-part series. Making your CFO wear a CCO hat won’t work. Learn from a former SEC attorney and firm-management experts from New Mountain Capital, who discuss the full-time job that is the Chief Compliance Officer.

CCO Is a Full-Time Job

Excellence in Compliance 

David Snow, Privcap: We are joined today by Gary Kaminsky of Rothstein Kass, Adam Weinstein of New Mountain Capital and Paula Bosco of New Mountain Capital. We all know that Chief Compliance Officers are important. Some private equity firms, especially ones that are maybe a bit smaller, probably would like to just give a CCO hat to the CFO and say, “Can we just accomplish it like that without having to hire a full-time Chief Compliance Officer?” What does the SEC think about that, what do investors think about that, and does that even work?

Gary Kaminsky, Rothstein Kass: Well, it’s a very common practice that, rather than hiring a CCO, firms are anointing the person that they think is the most anal person in the firm, which tends to be the accountant, to be the CCO. The problem with that is that, as I said, the compliance program initiative the SEC has undertaken makes it clear that the CCO is someone who needs to be dedicated and experienced. They’ve even brought cases against firms that had CCOs that had been CCOs of BDs but not of RIAs and said that they weren’t experienced.

So to take a CFO that’s got no compliance experience and say, “You’re going to be the CCO just because we don’t want to hire one,” could potentially be problematic. And I think it’s something that you will see in an examination deficiency and potentially see them force you to take account of it, although they can’t force you to change things.

I think that the problem, also, is that the CFO has other jobs. And typically, the CFO of a private equity fund, any alternative manager, has very much to do. And to throw on the responsibility of insuring that there are no violations or lapses of the federal securities laws is just not realistic. And I think that the PMs of the firms are not appreciative of this.

Snow: Can GPs get away with simply handing a CCO hat to their CFO?

Adam Weinstein, New Mountain Capital: I think in the pre-registered environment, it may have worked for some firms, it worked for us pre-registering.  And I think if you are a really small firm, it could work. But I think what’s being shown today just by looking around is there is a lot to do, there was a lot on CFO plates, especially if you go to a small shop. The CFO literally may be booking journal entries, and so even a CFO in that role has a lot to do.

And so, I think that it’s a mistake for firms to go down that path, I think if it’s some interim measure, or you’re trying to find somebody, and this is somebody who’s sitting in the seat for a period of time, it works. But I think it just doesn’t work any more in this environment, and I don’t think LPs tolerate that, either. I think it’s, again one of those check the box things that it’s important to know you have a dedicated CCO.

Paula Bosco, New Mountain Capital: I agree. The SEC’s expectation is that where you can segregate duties, they will expect you to do that. Again, in smaller firms, that might not be the option. But it really goes back to having a system of checks and balances and being able to create some independence between the finance and the compliance function. So that you can make sure that you’re adequately testing the policies and procedures that you have in place.

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