Alternative Investment CCO’s: Seat at the table or ear at the door?
Executive Recruiter Dan Kreuter’s overview on today’s reality, secular trends, compensation levels and best practices for CCO’s of Alternative Investment Managers.
It is a truism that the vast majority of Alternative Investment company CEO’s act as the Chief Investment Officer or Investment Strategist of the firm. Typically brilliant, driven, and aggressive, they are people possessed with strong egos, clear vision, and the ability to make critical decisions without hesitation.
Whether the Compliance function in the firm is a respected function, a profit-sapping utility, or simply a necessary evil – or all of the above depending on the day – the fact is that the regulatory environment is taking compliance to a whole new standard: you must follow and comply not to just that which is written, but also to that which is implied. Adding to the inherent complexity is the fact that there is much less case law, procedural work and literature concerning Alternatives as compared to, for example, Mutual Funds.
There are at least 30 decent sized companies in the United States that provide third party, outsourced Compliance services to 6,200 Alternative RIA’s. Some Investment Managers subscribe to the notion that they can shift responsibility and liability to a third party. The fact is, a case can be made that outsourcing the CCO violates the spirit of securities law. We have no axe to grind with our friends in the outsourcing space; but it is crystal clear that you can outsource the work but not the ultimate responsibility and leadership that your named CCO must bring to the table.
Seat at the Table vs. Ear at the Door
According to Andrew Bowden, the SEC’s office of Compliance Inspections and Examinations Chief: “…strength and effectiveness of a compliance department is boosted when compliance officers not only understand rules, but are integrated into a firm’s business. In OCIE … Compliance Officers who participate in weekly deal meetings and in meetings with investors, or who review deal memos, tend to be more effective in spotting issues early and are more respected in their organizations.” Referring back to the initial premise of this manifesto, while very few if any functionaries of an Alternative Investment Manager have a true “seat at the table” with the CEO, the high functioning CCO must be allowed to have “an ear at the door”.
The tone at the top of the house dictates behavior. Whether you are the Owner of a Professional Sports team, the Dean of a University, run a Government Agency, or are the head of a Hedge Fund, you make it clear by words and actions as to your perception of activities, functions, and behavioral standards throughout your organization. Regardless of whether Compliance is outsourced or done in-house, the firm’s Principal must “get it”, believe it, and drive it into all parts of the organization in order for the Compliance Officer to stay on top of critical activity within the RIA and how it impacts the complex supervisory practice requirements he or she are responsible for on a day-to-day basis.
Compensation, Skills and Credentials
Twenty years ago, for the most part, a Compliance job was something you would end up doing instead of something you aspired to do.
Things have changed. There are many bright and motivated people entering the compliance world, and compensation is rising rapidly as the stakes increase. Compliance is a technical field, and requires mastery of complex writings and legal documents. Accordingly, a Law Degree while not a must in some firms, is highly coveted. Many Compliance leaders have CPA and/or CFA designations.
Secondly, along with on-point and proven experience within a true Alternatives Manager, specifically in your asset class (Structured Credit, Real Estate, Private Equity, Hedge Funds, et al), and specific jurisdictions you work in across the globe, having experience within the SEC or a Law Firm which works with SEC, Treasury and such is quite desirable.
These are the hard, measurable credentials. But the “softer skills” – the person’s behavior – are extremely important. The CCO must be perceived as collaborative, fair, informed and business savvy, and be liked as well as respected across all channels of the firm. To the extent that the CCO is not liked – or perhaps considered nothing more than a dour “Internal Affairs cop” playing gotcha – the feeders of data and information to the CCO will parcel out only what they want to without the necessary granularity and transparency. The CCO is somewhat hostage to the RIA’s underlying organizational components providing the requisite infrastructure, so consensus building skills are paramount.
Compensation ranges for the CCO are going to be driven by the complexity of the asset class, the amount of regulatory risk directly rated to that asset class, the number of jurisdictions, and asset size. Generally speaking in the $1 Billion and under firms, compensation is in the $150k – $300k range, all-in; in the $1 Billion to $10 Billion range, $300k – $600k; and the Mega-firms ($10 Billion on up) you can see the CCO break the $1 Million barrier.
In summary, Alternative Investment firms will survive, grow and prosper with a skilled CCO who is encouraged to “have an ear at the door” and be truly integrated at the highest levels of the organization.
(Dan Kreuter is the founder of D.A. Kreuter Associates, Inc., an international executive search firm serving the Financial Services community. He can be reached at DKreuter@DAKassociates.com, or 800-669-9DAK)
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