Technology Is Changing Fund Compliance – The Board-CCO Partnership Matters More Than Ever

More than 20 years after the SEC adopted Rule 38a-1, the fund compliance landscape looks very different. Advances in data analytics, automated monitoring, and emerging artificial intelligence (AI) tools have transformed how fund compliance programs operate, how risks are identified, and how information is reported to boards.

What has not changed is the importance of a strong partnership between the fund board and the chief compliance officer (CCO).

Technology has significantly enhanced the ability of compliance teams to monitor activities, analyze data, and identify potential issues. Automated testing and surveillance tools can review large volumes of information in real time, allowing compliance professionals to focus more attention on activities that require judgment, including evaluating emerging risks, conducting due diligence, and assessing the effectiveness of controls. AI and machine learning may further strengthen compliance monitoring and risk detection. 

At the same time, these technologies introduce new challenges involving cybersecurity, data governance, fraud, and regulatory compliance. Threat actors can exponentially increase fraudulent activities by leveraging AI, magnifying potential risks to funds and their service providers. As technology evolves, so too must the conversations between fund boards and their CCOs.

Fund boards play an important role in reinforcing the importance of compliance throughout the organization. Through their oversight responsibilities and engagement with management, directors approve substantive policies and procedures, and just as important, help establish expectations that compliance is not simply a regulatory obligation but a core business priority that safeguards fund shareholders.

CCOs are central to those efforts. While the position has always been responsible for administering fund compliance programs, today’s CCO increasingly serves as a strategic adviser who helps boards understand evolving risks, assess controls, and navigate an increasingly complex regulatory and operational environment. 

Issues involving AI, cybersecurity, data management, and third-party service providers often span compliance, legal, risk, and technology functions. Boards increasingly rely on CCOs to provide a holistic perspective on these interconnected risks and to help ensure appropriate controls are in place.

An effective compliance program depends on regular, candid engagement between fund directors and the CCO. Directors should ask thoughtful questions about current and emerging risks posed by new technologies, while CCOs should have the independence, credibility, and organizational support necessary to provide objective assessments and raise concerns when appropriate.

IDC's recently released paper, Board Oversight of Fund Compliance, explores how fund compliance and the role of the CCO have evolved since the adoption of Rule 38a-1 and offers practical questions directors can use to guide discussions about technology, emerging risks, and compliance program effectiveness.

The future of fund compliance will undoubtedly be shaped by continued innovation. But technology cannot determine whether an issue is material, how a risk should be addressed, or when a matter should be elevated to the board. Those decisions require human judgment, strong governance, and a collaborative relationship between the board and the CCO. Technology may change how compliance is conducted, but effective oversight will continue to depend on a strong culture of compliance and a shared commitment to protecting fund shareholders.