Human Capital: Bringing the CCO to the Table

PEOPLE FIRST //

Having external compliance partners may no longer suffice for private equity firms facing a swiftly changing regulatory environment. Here’s how PE firms can bring the CCO title to the table, even with limited resources.

BY CAROLYN VALLEJO

Private equity firms have plenty of compliance issues to keep track of. Cybersecurity threats and data privacy, shifting regulatory requirements, and the rise of environmental, social and governance initiatives all add to the growing list of compliance matters, some of which can catch firms off guard.

Historically, outsourcing compliance workflows to an external third party has been a reliable strategy to ensure compliance without the financial burden of hiring in-house experts. Yet in today’s environment, that reliance on outside counsel may no longer suffice.

“Today’s regulatory requirements of registered investment advisors under the SEC call for senior-level compliance engagement, which is ill-suited for an outsourced CCO model when integration in the investment process is expected,” explains Joshua Cherry-Seto, managing director, CFO and CCO of Blue Wolf Capital Partners, and co-chair of ACG’s Private Equity Regulatory Task Force.

As PE firms respond to regulatory pressures, many must weigh the benefits of bringing on a dedicated chief compliance officer against their other priorities, given the limited resources at their disposal.

For The Riverside Company, a middle market-focused private equity firm headquartered in Cleveland, hiring its first chief compliance officer, Jennifer Boyce, came in 2012, two years after the Dodd-Frank Act went into effect.

According to The Wall Street Journal, Dodd-Frank created a wave of PE firms bringing their compliance efforts in-house with dedicated CCOs, rather than relying exclusively on outside counsel. Today, a similar trend may be on the horizon as cybersecurity threats intensify, the Biden administration signals efforts to enhance regulatory oversight of the private equity space, and more firms prioritize ESG within their portfolios.

Cybersecurity in particular is a compliance issue topof-mind for Boyce, though she tells WSJ that the main topic that keeps her up at night “could change at any given time.”

That’s especially true for growing and evolving PE firms and their holdings, whose product offerings and cross-border expansion expose the enterprise to new regulatory requirements and frameworks.

What’s more, in the U.S., PE firms are keeping a closer eye on the Securities and Exchange Commission and its anticipated changes to reporting requirements, most recently evidenced by its proposed amendment to Form PF.

As Boyce explains, having third-party external partners to support compliance efforts can be vital. But an internal chief compliance officer creates a dedicated point of contact between external partners and stakeholders within the firm to ensure communication lines are clear and compliance efforts are efficient.

However, for many private equity firms, especially smaller and midsize operations, hiring a dedicated CCO is out of the question from a cost standpoint. In order to enhance compliance efforts without draining limited resources, some firms take a hybrid approach, adding the CCO title to another member of the C-suite and strengthening collaboration between that internal leader and existing external partners.

Blue Wolf’s Cherry-Seto is evidence of this trend, taking on both roles of finance and compliance lead.

“It makes a lot of sense, as the CFO is process-oriented and touches a lot of the data required by the SEC,” he explains, adding that combining the CCO role with other C-suite titles is part of the “reality” of modest-size teams across private equity.

Already, there is evidence of the CCO role gaining popularity within private equity: In February, Houstonbased middle-market private equity firm Milton Street Capital announced the promotion of Kevin Crook to partner and CCO, while JUSTLY Markets, an ESG-focused crowdfunding platform that connects investors to private equity markets, hired Donna Bartlett as its new compliance chief.

Private equity firms One Rock Capital, ParkerGale Capital and TSG Consumer Partners have similarly welcomed new CCOs in recent months.

Whether PE firms establish a dedicated CCO or link the role to another C-suite title, the benefits of investing in internal compliance expertise could outweigh the costs of noncompliance—especially considering the complex shifts of today’s regulatory environment, which Riverside’s Boyce says demands diligence and attention.

“I think it’s just continually trying to evolve with living in these times and the pandemic,” she told WSJ. “Just when you think you might be a little bit out of the woods, along comes something else.” //