The Examiners are Coming – Is your Investment Adviser Ready?

July 01, 2013

Over the past year, we have written several articles warning investment advisers to prepare for regulatory examinations as both the U.S. Securities and Exchange Commission (“SEC”) and state securities regulators have indicated that investment advisers should expect to see an increase in the number of exams being conducted.  RIA Compliance Consultants is seeing the effects of more frequent investment adviser exams.  Lately, we have experienced an increase in the number of calls from clients and prospective clients because they have recently been trough an SEC or state investment adviser exam or have been notified by an SEC or state securities regulator that their investment advisers will be audited in the near future.  One of the most common inquiries we are receiving is regarding what we can do to assist with preparing or updating the investment adviser’s written policies and procedures.  Too often, we are hearing that, although the investment adviser has been registered for some time, the investment adviser does not have customized written supervisory policies and procedures or has not properly maintained current and customized policies and procedures.

Under Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), investment advisers registered with the SEC are required to adopt and implement written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Investment Advisers Act and the rules adopted under the Investment Advisers Act. Additionally, SEC registered investment advisers are required to review their written policies and procedures at least annually for the adequacy and effectiveness of the implementation of such policies and procedures. However, in order to prevent violations from occurring, an investment adviser may need to make updates and changes more frequently in response to various compliance events, changes in an investment adviser’s business model or regulatory changes. Investment advisers registered with state securities regulators may be required to adhere to similar state regulations depending on the particular rules of the state. Regardless of your investment adviser’s state requirements, the maintenance of written supervisory policies and procedures is a good business practice.

It is highly likely that the investment adviser’s written supervisory policies and procedures will be one of the first things an SEC or state examiner will ask for during a regulatory examination. An investment adviser’s written supervisory policies and procedures will help with the SEC or state examiner’s assessment of the investment adviser’s culture of compliance and will likely be instrumental in setting the tone of the examination. SEC and state examiners will expect to see that an investment adviser has developed customized policies and procedures to address the risks associated with the investment adviser’s business model, outside business activities and affiliations, and services.  Additionally, the SEC or state securities examiner will review whether the investment adviser is actually implementing the practices outlined in the written supervisory policies and procedures; that periodic (at least annual) assessments are being conducted of the effectiveness of the written supervisory policies and procedures; and that the written supervisory policies and procedures are updated as needed. Investment advisers need to understand that the written supervisory policies and procedures manual is a living document.  It is imperative that your registered investment adviser reviews your policies and procedures no less than annually to test the adequacy and effectiveness of the implementation of such policies and procedures.  Although SEC Rule 206(4)-7 only requires an annual assessment, SEC and state registered investment advisers may need to consider reviewing their written supervisory policies and procedures to make revisions or develop new policies and procedures any time a violation, deficiency or change occurs rather than waiting to do so annually.

If your investment adviser does not currently have in place customized written supervisory policies and procedures, RIA Compliance Consultants encourages you to get those policies and procedures in place now.  Do not wait until you receive notice of an SEC or state investment adviser examination.  While an investment adviser may still face disciplinary actions for a violation of not having customized written supervisory policies and procedures in place from the beginning of your investment adviser’s registration, actions may be less severe than an those an investment adviser will face for not having any written supervisory policies and procedures in place. Additionally, if it has been some time since you have reviewed or tested your current policies and procedures your investment adviser is encouraged to do so now.

RIA Compliance Consultants can assist investment advisers with developing, maintaining and assessing their written supervisory policies and procedures.  RIA Compliance Consultants has created an online tool, RIA Express-Compliance Manual Drafter, to assist investment advisers with efficiently developing and updating their investment adviser written supervisory policies and procedures.  Using this online tool your investment adviser will complete a detailed questionnaire about your investment adviser’s personnel, business model, and changes in your procedures and practices. The answers to the online questionnaire will generate a customized written supervisory procedures and code of ethics manual, via our electronic compliance manual authoring wizard. By using this tool your investment adviser will be able to develop its initial written policies and procedures or an updated manual reflecting current regulations and revisions to your investment adviser’s existing policies and procedures. The fee for this Self-Customized, Regulator Specific Manual that you prepare for your investment adviser through RIA Express – Compliance Manual Drafter is $695. To purchase this product or for more information about this product, please visit our online store.

For investment advisers that have developed written supervisory policies and procedures but may need help in performing the assessment of the policies and procedures, RIA Compliance Consultants has developed an online tool, RIA Express – Compliance Review, to assist investment advisers with the process of reviewing the effectiveness of their written supervisory policies and procedures.  RIA Express – Compliance Review takes the investment adviser through a series of questions about the investment adviser’s disclosures, policies/procedures and actual practices.  Based upon the investment adviser’s responses, RIA Express – Compliance Review can generate a written findings report and allows the investment adviser to track the status of its corrective actions.  The fee for RIA Express – Compliance Review is $895 or $85 per month.  To purchase this product or for more information about this product, please visit our online store.

If you would like more information about these products or any of the products and compliance support services RIA Compliance Consultants can provide to registered investment advisers, click here to schedule a time to speak with one of our consultants or contact your consultant if you are an existing client.

Posted by Bryan Hill
Labels: Compliance Program, Compliance Tool, Compliance Training, Compliance Violations, Examination, SEC, SEC Inspection, Written Policies and Procedures