Increasingly, regulators are pointing to C‑suite and senior-level personnel as gatekeepers and thus crucial to effective governance and controls at their firms. Senior-level personnel’s failure to effectively supervise the compliance function could have significant legal and reputational consequences for both individuals and their organizations. For example, in a recent enforcement action, the SEC alleged that the founder of a registered investment adviser, among other missteps, delegated responsibility for several annual compliance reviews to a compliance officer but did nothing to supervise those reviews, which was especially egregious in light of prior deficiency letters from SEC exam staff criticizing the adequacy of those reviews. In addition, the founder never asked the compliance officer if there were any issues. See “Advisers Must Appropriately Supervise, Follow Up on Red Flags and Address SEC-Identified Deficiencies to Avert Enforcement Action
” (Oct. 7, 2021). The Hedge Fund Law Report recently spoke to Ken C. Joseph, managing director and head of the financial services compliance and regulation practice for the Americas at Kroll, about a list of suggested questions that every principal should use to start a conversation with the firm’s CCO. Before joining Kroll, Joseph served for more than 21 years at the SEC, including as one of the inaugural supervisors in the Division of Enforcement’s Asset Management Unit and as a Senior Officer in the Division of Examinations. This article, the first in a two-part series, presents the discussion on the relationship between firm principals and compliance; why the 13 questions were created and how they are meant to be used; and the SEC’s likely view of a firm that uses such questions. The second article
will cover the conversation about the importance of each question. For further thoughts from Joseph, see our two-part series “Is the Advertising Rule Obsolete?”: Part One
(Aug. 29. 2019); and Part Two
(Sep. 5, 2019).