I talked last week about the intricacies of investment monitoring as part of a Bloomberg BNA webinar entitled “Life After Tibble: Investment Monitoring and Litigation Defense Considerations for ERISA Fiduciaries.” One of the points I made, repeatedly I might add, is that it is critical to evaluate the facts and circumstances related to a specific situation.

A few days later, I was asked by a journalist to give a thumbs up about a particular investment strategy. I reiterated the same message to him, explaining that it would be impossible to make a blanket statement that X is right and Y is wrong without understanding what an investor seeks to accomplish (among numerous other factors). As he pushed for a simple answer in a vacuum (which I was reluctant to give for obvious reasons), I kept thinking about the tennis ball on a string that my husband installed in our garage. The idea of this nifty technique is to remind me how far I can advance with my car and know with confidence that I have enough space to avoid bumps or scratches.

There are no uniformly shaped “tennis balls” to guide investors to a perfect landing each time they “park” their car. To the contrary, adopting an overly simplistic approach may be ill-advised. Pay attention to what regulators such as the U.S. Securities and Exchange Commission (“SEC”) say.

In its November 9, 2015 National Exam Program Risk Alert, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) shares its observations about Chief Compliance Officer (“CCO”) outsourcing based on investigations of some 20 SEC-registered investment advisers and investment companies. The long list of concerns include the following:

• Personal interaction between the outsourced CCO and advisory firm employees led to a “better understanding of the registrants’ businesses” than relying on a checklist approach and electronic communication;
• “More significant compliance-related issues were identified at registrants” when its external CCO lacked sufficient staff;
• When an outsourced CCO was able to independently obtain requisite information, annual reviews were deemed more accurate than when the third party relied mostly on data provided by the investment advisor;
• Generic risk checklists used by CCOs “did not appear to fully capture the business models, practices, strategies and compliance risks” of the registrant; and
• Generic compliance policy and procedure templates used by outsourced CCOs were, in some cases, “not appropriate or applicable to the registrants’ businesses or practices.”

No matter how you slice it, the theme remains the same. Be diligent and consider the information that is germane to the investing or business activity situation at hand. There is a good lesson for investors as well. Ask whether an outside compliance vendor is used. If the answer is yes, dig deep about the rigor applied by that outsourced CCO, perhaps even ask to talk to the outsourced CCO used by the investment advisor and query about how risk is assessed, by whom and how often.