Just as swiftly as the mutual fund scandal cleaned house among fund advisor C-suites, a new trio of top chiefs have emerged as the triumphant triumvirate.
These include newly knighted chief compliance officers (CCOs), as well as the independent chairpersons who now preside over some - although certainly not all - fund boards.
The official time frame for appointing an independent board chair is still several months off, and the Securities and Exchange Commission rule is currently being legally challenged by the U.S. Chamber of Commerce. Until push comes to shove, in many cases fund boards won't nudge out fund company executives who serve as board chairpersons, although many have lead independent directors in place.
That powerful trio is rounded out with chief information officers - also known as chief technology officers - who are critically important players in many aspects of a mutual fund firm's operation, including legal and compliance areas.
These fearless leaders, all working in tandem, largely have new roles and responsibilities, a new focus and a new sense of purpose. They are also wielding a great deal more power, thanks to the series of new regulations the SEC has fired at the industry as it tries to mop up the mess created by a host of unearthed abuses.
So how are these empowered individuals handling their ever-increasing responsibilities, changing roles and inside interaction among themselves and others?
CCOs: Top Cop on the Compliance Beat
CCOs are the hot commodity right now in light of the new SEC rules that took effect last Oct. 5, and require mutual fund boards of directors to approve the appointment and salaries of these top compliance cops. In their new role, which is still evolving, they are required to carry out the firm's compliance policies and procedures, report directly to the fund's board of directors and prepare annual compliance reports, in addition to carrying out other duties.
While all firms were required to appoint and retain a capable individual to fill the new CCO position, not all CCOs are created equally.
"Companies want their CCO to think like a business owner and be able to relate to top-level executives and board members, all while running a tight ship," said Dan Kreuter, president of DAK Associates, the recruiting firm in Conshohocken, PA. The new breed of CCOs "don't necessarily have to be attorneys, although a law background is a plus, and having worked for the SEC or the NASD is a prize," he said. "What CCOs must have are strong leadership skills." That contrasts with individuals who may fully understand technical matters, but aren't necessarily leaders, he added.
In addition, competition for competent CCOs has driven salaries sky high, with many demanding - and receiving - "multiples of six-figure incomes," Kreuter admitted. This escalation in compensation has, in some cases, created bidding wars, but also turned some new CCOs into likely "lifers," said one former fund industry president who spoke on condition of anonymity.
With one felt swoop, "Eliot Spitzer has created the Compliance Employment for Life Act of 2004," Kreuter quipped.
So how are CCOs approaching their new roles?
For some who are not new to the fund company but have instead agreed to assume the new role, it is compliance business as usual - only with added responsibilities.
"This job, by its nature, is dynamic," said John Gilner, CCO at T. Rowe Price in Baltimore, who stepped up into the new role last Spring after having served as the director of compliance since October 2003. Gilner joined T. Rowe in 2000 and originally served as legal counsel with a compliance focus. Gilner still reports directly to T. Rowe top counsel Henry Hopkins, although he has the added responsibility of reporting to the board, he said. "We are at the center of seeing that acts of the firm are in accordance with SEC regulations and contractual requirements with clients."
There have been no significant changes although the role does add some formality to the reporting lines, Gilner observed. "The role has defined certain specific tasks that need to be addressed, and that has caused increased interaction with the board and its lead independent director," Gilner noted. Not only does he attend regular board meetings, but also attends committee meetings and separate meetings with the lead indy director, as the point person for the whole board, to talk and discuss issues, he said.
More frequent interaction with the board is a direct result of the new CCO mandate echoed industry insiders. At Dreyfus Corp. in New York, for example, the firm's CCO attends all board meetings as well as all executive sessions of the board where independent directors meet separately without a management representative present.
Moreover interactions between CCOs and boards are by no means adversarial but rather collegial, as both see themselves as cooperating in the best interest of fund shareholders, said industry insiders.
"A CCO is an absolute Godsend because he is working for you," said one independent fund board chairperson. "It is like having your own internal audit staff" to rely on and bring issues to, the chairperson said.
In fact, the very hiring of a CCO can be something that boards may get very involved in simply because they understand they will be working so closely with them. Under the new SEC rules, fund boards alone must approve their hiring and salaries, and are solely empowered to fire them.
In the case of AIM Investments' new CCO who came to the Houston firm fresh from another fund complex, Bruce Crockett, AIM's independent board chairman since last October, admitted that he was intimately involved in writing the CCO's job description. "Personality is a huge factor," said Crockett who had been an AIM independent board trustee since 1992. He assumed the chairman role last October after being asked to by the other board members. Crockett's appointment came just ahead of AIM's and Invesco's settlement with the SEC over marketing timing issues.
The CCO's job is "analogous with being an internal auditor, and you have to have somebody with the personality to interface and coordinate," Crockett explained. Although Crockett was invited to have his office located in "executive alley," he politely declined, preferring to occupy an office on another floor, two doors down from the new CCO's office. "I am down on the working floor; that's the way I wanted it," he quipped.
Displacing a veteran affiliated fund board chairman, often the firm founder, ceo or key executive who has for years presided over boardroom activities, is cause for concern among some newly elected fund board chairpersons who suddenly find themselves large and in charge.
"Robert Graham, the former AIM board chair (and company co-founder) is a scion of the industry," Crockett said. "Bob has industry knowledge and experience that I could never fulfill. But what I can bring to the board is to ensure governance," he said.
"This (installing an independent chairman of the board) wasn't of his choosing," Crockett admitted. "But when it was understood that this was a reality, he was very, very gracious. The relationship has improved because Bob understands the role I play."
Crockett's one big concern is that his chairman role will thrust him into the wrong spotlight. "I want to be an effective chairman, but not the spokesman for the firm. I represent the fund and shareholders, and my ego is not part of this," he conceded.
Perhaps an even more unsung hero who powerfully operates behind the scenes is a fund sponsor's chief technology or chief information officer. Building, maintaining and operating myriad interconnected systems and platforms are just a fraction of the daunting tasks at hand.
"This is a role that has become extraordinarily important over the past few years," said Charles O'Neill, principal of DMR Financial, an executive search firm in Boston. "The chief technology officer touches all of the issues of concern in the industry today - privacy, security, transaction integrity, accuracy of corporate financial data, systems to monitor trading and, of course, compliance overall."
In fact, technology has become so important a backbone to all other fund firm functions that T. Rowe Price recently created and filled a brand new "Information Systems Manager" position just for its legal department. This new manager leads the collaboration of the legal department with investment technology and addresses how systems can satisfy the legal department's business needs.
Compliance personnel has also come to rely heavily on the use of technology to aid and enhance its own initiatives.
"I do interact with our CCO," said Michael Radiemski, partner and chief information officer with Lord Abbett in Jersey City. "If you go back five years, compliance was always important and technology was a reality, but regulations were stable. Now some of the (regulatory) changes and solutions have technology impacts," he said.
One of the specific areas Lord Abbett has been honing its focus on is record retention. That scope naturally includes retention of searchable e-mails - an issue which the SEC has continued to emphasize as part of its regulatory requirements.
"Lord Abbett has been growing very rapidly and in the past, paper records were okay, but now document imaging technology is becoming important," Radiemski explained. The firm estimates that by this summer, it will have archived over one million documents into its imaging system.
Another area of change is regarding the security of information, he said. New privacy regulations and laws, coupled with threats from hackers, spyware and viruses and upped the ante for protecting information, including shareholder account information, he added.
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