Hedge Funds Seek CCOs, Despite Ruling
The federal appeals court decision invalidating an SEC rule requiring hedge fund advisors to register is unlikely to impact the demand for qualified chief compliance officers.
The rules, which took effect in February 2006 but struck down by the court in June, would have mandated the appointment of a CCO by hedge funds with assets of more than $25 million. The rules generated a shortage of CCO candidates and related staff, according to hedge fund and recruitment experts.
"Many investors have been comforted by the fact that some hedge fund advisers
have registered with the SEC, thereby adding another layer of scrutiny to
their businesses," says Kenneth M. Rich, a recruitment consultant for A.T. Kearney Executive Search in New York. Despite the ruling, Rich expects larger funds will either go ahead with their registration, or remain registered if they've already done so.
The SEC decided not to appeal the court ruling and instead drafted new guidance for hedge funds, according to media reports. Recruiters and other observers also expect Congress to become involved at some point. "(That's) all the more reason that prudent hedge funds will likely continue to see the value of hiring strong CCOs," Rich believes.
"This is the new job - the job of the month," says Hannah Terhune, an attorney specializing in securities and tax with GreenTraderLaw in Washington, D.C. "How you get their expertise is the question. There's not much out there you can buy."
The initial SEC regulations would have required the CCO, who is bound by a fiduciary responsibility to the hedge fund, to be "knowledgeable and competent" about the Investment Advisers Act of 1940, the federal law governing investment advisers. The CCO's job is to design policies and procedures for compliance and correct violations and compliance issues that arise. Other responsibilities may include serving on risk, policy and procedures committees; ensuring that other fund employees are fully reporting their functions; and maintaining a compliance calendar for taxes and other deadlines. Identifying and avoiding conflicts of interest is also critical to the job.
Rich, who completed his first search for a hedge fund CCO in 1992, maintains the position is always good business practice, regardless of whether the rules remain in effect.
David Claypoole, principal recruiter for Parks Legal Placement in Summit, N.J., says that funds hiring in-house CCOs are paying a steep premium, ranging from 20 percent to 40 percent of the candidate's present compensation package. Year-end bonuses can substantially increase that amount, depending on fund performance, which may be enhanced by the addition of a CCO, he says. "Institutional money can flow into the fund more easily if you have a CCO with more weight. Institutions don't want to make investments in funds that aren't set up really well," he says.
Total compensation, including bonuses, may range anywhere from $350,000 to almost $1 million, with CCOs who have multiple titles earning on the higher end.
CCOs at larger funds may require a staff in order to satisfy compliance responsibilities. The team may include a compliance manager to provide additional oversight, with a compensation ranging between $150,000 to $300,000. Claypoole also reports a surge in demand for compliance analysts, who monitor trades, earning between $70,000 to $150,000.