Chief Compliance Officers: Five Steps to Hiring the Right Team

You may as well act as though you’re responsible for everything, because you’re going to have to live with the results.

If  that sounds like the motto of an executive who doesn’t want to delegate, it isn’t. It’s knowing that taking personal control is sometimes the only right thing to do.

That is definitely the case when it comes to chief compliance officers looking for new compliance staff.  Rather than leaving it up to fate– aka human resources or other executives — they need to take control over hiring processes and hiring decisions for their staff, say management consultants and recruiters. After all, those are the folks who will be conducting reconnaissance and ensuring that funds operate within the guidelines and are not at risk for regulatory errors or omissions.

“It’s no longer about being reactive, but proactive,” says Kate Quinn, executive vice president with search firm DHR International in New York, specializing in capital markets and asset management. “Nobody wants a regulator calling to discuss a short-coming. It’s far better to catch things early on than to fix a problem later. Compliance is about following the rules and taking the preventative steps to ensure the fund or entity is following the rules, while still making money.”

Granted, CCOs have always had to keep abreast of regulations, establish internal policies and procedures to meet them, document their work and ensure that everyone follows the rules. But when the number of regulations explodes, there are simply too many policies and procedures for any single person to establish and document. By some estimates, fund managers need to track at least two dozen different legislative measures with acronyms such as Dodd-Frank, EMIR, FATCA, AIFMD and Solvency II, to name just a handful. That doesn’t even include keeping up with any revisions or adaptations in local markets as is often the case with pan-European regulations.

The enemy isn’t a foreign government or internal rival force. It is the collective group of dozens of regulatory bodies who won’t hesitate to bomb a financial firm with exams, subpoenas and even fines. And let’s not forget the watchful eye of unforgiving chief executive officers, board of directors, and shareholders. The clincher: personal liability. Regulators won’t give CCOs an “A” for effort. Instead, they will hand CCOs an “F “ for penalty fine if something is out of alignment. Career damage is also on the table when a temporary suspension or permanent ban is implemented.

Ensuring the team of subordinates is the most knowledgeable and well-trained possible could go a long way to reducing corporate and personal liability. But to do that a chief compliance officer needs to plan ahead for a rigorous exercise in matchmaking. Here are five ways to do so, distilled from FinOps Report discussions with management consultants, executive recruiters and chief compliance officers.

1. Be Specific

Don’t just trust gut feelings about whether a candidate is the one for you. The best match requires a specific detailed description of the exact job functions. “The more precise the explanation of what the oversight officer’s responsibilities will be, the more likely you will build a meaningful slate of qualified candidates,” says Michael Archer, a partner in charge of the financial services consulting practice at Kurt Salmon in New York. “Maximizing the hit rate is critical.”

Of course, writing up the job description also requires the CCO to think about exactly what he or she is looking for. “There needs to be a short list of the most important responsibilities that must be fulfilled daily, and a separate list of those which must be handled on a weekly, quarterly or annual basis,” one compliance specialist at a New York-based management firm tells FinOps.

2. Require Business-line and Regulatory Knowledge

Above all else, a serious candidate for compliance responsibilities must already have knowledge of the specific product and regulations on the asset class he or she will be dealing with . An expert in cash equity trading strategies can’t be expected to have an in-depth understanding of complex credit instruments. And that knowledge doesn’t come overnight. Although middle and back office operations specialists may have once dominated the ranks of compliance managers, attorneys are apparently now in vogue, especially for complex instrument types. “When I am deployed on a compliance search in structured products — I tend to also look for someone with a legal degree as the structures rely on complex legal documentation,” says Quinn.

Likewise, according to James Hnilo, a partner with Reed Smith in Chicago, lawyers could have a far better understanding of what’s important to look for. “A CCO is responsible for setting policies and procedures in an ever-changing regulatory environment,” he says. “CCOs are required to interpret and adapt those policies and procedures in response to new laws and regulations which a lawyer may be better suited to do than others.”  The most common red flags, fund management compliance experts tell FinOps Report: breaches in investment guidelines, incorrect trade allocations, insider trading, and conflicts of interest.

However, operations specialists shouldn’t be completely discounted. “The ideal senior level compliance manager will have experience in both regulations and the business line,” says Gary Swiman, head of compliance and regulatory services for accountancy Eisner Amper in New York. “If the job calls for oversight of middle and back-office operations rather than a trading desk or product origination, then an operations expert would be ideal based on knowledge of how the process works. One could just take a few months to learn about a specific product.”

3. Require Problem-Solving Skills

Product knowledge aside, personality becomes critical. While no one wants a compliance manager to be a pushover, being a bully won’t help either. “Compliance officers have to interact with specific business lines to come up with solutions on how to respect the guidelines while figuring out ways to make money,” says Quinn. “Compliance has become a far more integrated and integral voice within asset management and banking, which is a good thing and a big evolution in the role.”

4. Use Internal Expertise and Input

Human resource specialists may not have the exact same skill set as a compliance officer, but they are becoming increasingly expert in knowing just how to write a job description and screen for potential candidates. “Finalists should also meet with managers of the business lines they will be overseeing so their content and product knowledge as well as problem-solving skills can be put to the test,” says Archer. “Those are the same individuals the oversight manager will be interacting with on a frequent basis, so they need to have good chemistry.” Besides, who else is better qualified to judge whether or not the candidate has sufficient content knowledge than the daily practitioners?

Just how important is getting along with the family of colleagues, rather only the chief compliance officer? Very, says Hnilo. “You might have a candidate who is perfectly qualified for the job, but is a bad cultural fit which could impact the overall effectiveness of a compliance program,” says Hnilo. “The CCO could easily find another candidate who is equally qualified and fits into the business just fine. After all, a compliance role doesn’t stand alone and buy-in is important.”

5. Seek the Right External Help

Executive recruiting firms shouldn’t be discounted from the search process simply because of the perceived high cost. Those which operate on retainers, according to Quinn, will be proactive in researching the subject matter, scouting competitors and others, and ultimately coming up with the best short-list of potential candidates for the job. “No chief compliance officer wants to be stuck going through dozens of resumes of unqualified executives. That’s not their job.” says Quinn

Now is not the time to be penny-wise and pound foolish. “Recruiting to specifications for the right compliance professional will ultimately save our clients time and money,” says Quinn. “You’ll get someone who is ready and well prepped for the role — and importantly someone who fits the culture and can contribute to the team immediately.”

Swiman agrees that executive search firms can help track down the best candidates, but believes they should also pass muster. “The executive search firm needs to be well-established and know the industry well, preferably with individuals who have worked in specific roles before,” he says. “I can tell in a few minutes whether or not the executive recruiter is qualified to do the search based on the probing questions I’m asked about the job description.”

If the mounting demand for compliance professionals is creating a dearth of choices for hiring, there is another talent pool to mine in builiding a crackerjack oversight group. “The CCO should look to business people as a source of compliance talent,” recommends Archer. “These employees bring valuable insight into the day-to-day operations and are immediately credible overseers when tasked with teaming up with their former colleagues.”

In the end, personality may be a make-or-break issue. Once resumes are in hand, singling out the best candidates can be just as much an art as a science. “If I think that someone sounds a bit too arrogant and claims he or she understands everything, he or she will be disqualified,” says Swiman, a former CCO of a large fund management firm. “Being too high maintenance can be just as damaging as not knowing the subject matter well enough.”

After reviewing the resume, verifying the credentials, getting input from other executives, and testing the individual’s product and problem solving knowledge is completed, it might be time to listen to one’s gut.