Essential Elements of a Fund Compliance Program


>Essential Elements of a Fund Compliance Program

Essential Elements of a Fund Compliance Program

In the world of investment company compliance, one can have all of the essential elements of a great compliance program, but without the intangible ingredient of a highly-experienced and attentive Chief Compliance Officer (CCO), the program may fail.

Some of you may remember the campy, 1997 science fiction film classic, “The Fifth Element.” In the film, the four elements of earth, water, air and fire were needed, along with a mysterious ethereal fifth element, to activate a great machine that saves the day.

In this article, we lay out the elements of an effective fund compliance program to help fund sponsors understand the nuances of creating, implementing and maintaining one, and the critical role of the CCO for funds governed by the Investment Company Act of 1940.

The Foundation

The bedrock of a good compliance program is a well-constructed set of written fund policies and procedures that are reasonably designed to prevent violations of the federal securities laws.  A good CCO can help fund sponsors lay the groundwork to set up these procedures, conducting a risk analysis to identify any gaps in these procedures that may be particular to your fund’s investment strategy.  The risk analysis also will map out the business affiliations of your fund’s service providers to identify any conflicts and recommend procedures to address the same.

Regulatory Updates

One must be tuned in to regulatory updates, industry developments and other information coming over the airwaves, in order to keep apprised of procedural updates and best practices.  Social media also should be monitored for statements or other information about the Fund or its service providers that could impact reputation or compliance with advertising rules, or reveal undisclosed business or political activities or affiliations. A good compliance program will access multiple sources of industry information and schedule ongoing vigilance to monitor for shifts in the compliance atmosphere

Clear Communications & Oversight

To successfully navigate the daily flows of fund operations, trading, accounting, valuation, financial reporting, etc., one must maintain open and frequent communications among fund service providers. A good compliance program will schedule communications on a regular basis, even when waters are calm, to ensure smooth sailing and keep things in ship shape.  Your CCO should be able to make informative and concise board presentations to ensure that the board of trustees/directors is kept apprised of any material compliance exceptions.

Training & Adherence

To avoid getting burned by regulatory scrutiny, shareholder lawsuits, or costly internal mistakes, it helps not only to keep apprised of hot button issues, but to have controls in place to fireproof daily processes with automation and good procedures.   Business continuity, cybersecurity and other contingency planning and training can prepare the enterprise to avoid or quickly extinguish any such flare ups.  Regular testing of policies and procedures and a detailed compliance/training calendar and risk matrix help to avoid any missteps that could get your team raked over the coals.


Like an alchemist, a seasoned CCO can orchestrate all of the elements of a compliance program to life.  A highly knowledgeable CCO that loves his/her job, provides the spirit and skill that will drive the program.   An exceptional compliance firm should have compliance professionals with years of industry experience and compliance knowledge, such as former regulators, Lawyers, CPAs & Auditors, MBAs and Broker Dealer Reps, fund administrators, and other professional compliance personnel.   The SEC requires that CCOs be knowledgeable and of a stature within the organization that gives them access to and influence within the inner circles of management.

A fund CCO reports directly to the fund’s board and can be hired or replaced only by the Fund’s board.  Regardless of other duties, a CCO’s first duty is to the board and fund shareholders. One of the advantages of an independent CCO is the uncompromised oversight of fund service providers.  An independent CCO can report objectively and without fear of retaliation.  For example, a Fund CCO who is employed and paid by the Adviser (the fund CCO also may be CCO of the Adviser) may have difficulty reporting to the fund board about compliance issues at the Adviser, as it could adversely affect his/her employment.  Another advantage of an independent CCO may be found where the CCO is a member of a larger consulting team of compliance professionals, which can provide greater resources for your compliance program.


The goal of a good compliance team is to help fund sponsors set up, administer and implement an effective compliance program to safeguard your mutual fund, closed end fund, interval fund or ETF, and to instill a winning spirit of compliance within your organization.

The compliance services team at Ultimus has helped hundreds of investment adviser clients enhance their compliance programs to prepare them as advisers to investment companies and to better comply with the Investment Advisers Act of 1940. With a full complement of compliance professionals averaging over 20 years of diverse investment industry experience, our team can provide everything you need for fund compliance. Even in a virtual working environment, our compliance team is fully equipped and able to support your compliance program. If you are looking to set up a fund compliance program or think your current program needs an update, we would welcome the opportunity to be of service to you!

12981886 6/14/2021