Conducting an Annual Review of an SEC Registered Investment Advisor

October 26, 2010

Under SEC Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”) registered investment advisors are required to maintain written policies and procedures reasonably designed to prevent and detect violations of the Investment Advisers Act and its related rules by the investment advisor or any of its supervised persons.  Many state securities regulators have similar requirements regarding written policies and procedures.  As part of developing the investment advisor’s written policies and procedures, the investment advisor should identify the areas of risk that need to be addressed.

SEC Rule 206(4)-7 also requires federally registered investment advisors to conduct a review at least annually to determine the adequacy and effectiveness of the implementation of the investment advisor’s written policies and procedures.  Part of this annual review process should be an assessment of the initial risks identified to determine if all risks have been identified and if the written policies and procedures properly address each area of risk identified.  Although SEC Rule 206(4)-7 only requires an annual review, investment advisors should consider conducting more frequent reviews when necessary or performing ongoing testing and monitoring.

When conducting the annual compliance review, the investment advisor should first consider any compliance matters that arose during the year, any violations that occurred during the year, any changes in the business activities of the investment advisor or any of its affiliates, and any changes in any applicable rule or regulations governing the investment advisor.  An annual compliance review should not simply consist of reading through the investment advisor’s policies and procedures to determine if everything is still accurate and up to date.  The annual compliance review process should be designed to test the comprehensiveness of the investment advisor’s policies and procedures.  The investment advisor should develop methods of performing transactional or quality control testing, analyzing exception reports, and forensic testing.

SEC Rule 206(4)-7 does not require an advisor to prepare a report to summarize the results of the annual review but as part of a regulatory exam the SEC or states securities regulator will request proof that the required annual reviews are being conducted.  It is a good business practice to prepare a report to document the work that was performed, the findings from the review, and the recommendations for improvements.  Examiners expect to find exception reports, compliance checklists, and management reports that note problems or issues.  Examiners will review and assess the timeliness of any corrective actions taken as well as the effectiveness of the corrective actions.  If a review of compliance records and/or a discussion with an investment advisor’s compliance staff reveals that the investment advisor has not found any compliance problems during its reviews, the examiner may be skeptical and conduct additional testing to confirm the lack of findings.

For more details regarding conducting an annual review of your investment advisor’s compliance program, register for the webinar, Conducting an Annual Compliance Review, being presented by RIA Compliance Consultants Thursday, October 28 at 12:00 pm CDT.  A fee of $59.95 will be charged for this webinar.  To register, simple click here.

RIA Compliance Consultants can help your investment advisor conduct its annual compliance review.  For more information on this or any of the other compliance support services provided by RIA Compliance Consultants, click here to schedule a time for one of our senior compliance consultants to call you to discuss your specific needs.

Posted by Bryan Hill
Labels: Annual Review