RIA Compliance Consultants
FAQs – Form 13F, Schedule 13D & Schedule 13G
 
Home
About Us
Our Services
  Turn-Key IA Registration
Annual Compliance Programs
Switch from SEC to State
Code of Ethics
  Renewals / ADV Amendment 2015
Compliance Tools
  RIA Express
Upcoming Webinars
Recorded Webinars
  Online Store
Blog
Navigating the Regulatory Maze
Frequently Asked Questions
  IA Registration
Registration Costs
Series 65 Exam
Form U4
Private Fund Adviser
Form PF
Switch from SEC to State
Solicitor
Written Supervisory Procedures
Codes of Ethics
Wrap Fee Brochures
  Form 13F
Compliance Tips
  State IA Registration
Form ADV Background
Form ADV Drafting
SEC Examination
Published Articles
Contact Us

Online Invoice Payments
Newsletter Signup
Speaker Request
Resources
Job Openings
Search Our Site
Disclosures
(877) 345-4034

Frequently Asked Questions Regarding
Written Supervisory & Compliance Policies & Procedures

The following are some frequently asked questions and answers relating to SEC Rule 206(4)-7.

Please note that although there is a certain level of similarity between the various state securities regulators and the United States Securities and Exchange Commission ("SEC") with respect to the regulation of investment advisors, there are significant variances among state securities regulators and the SEC. The answers listed below will not necessarily address such differences.

The information presented here is general in nature and not a substitute for consulting with an investment adviser compliance resource regarding your registered investment adviser’s unique circumstances and the requirements of the securities regulator(s) with jurisdiction over your investment adviser.

Is an SEC registered investment adviser required to maintain written supervisory and compliance procedures?

On February 5, 2004, the United States Securities and Exchange Commission adopted SEC Rule 206(4)-7 of the Investment Advisers Act of 1940 requiring SEC registered investment adviser firms to adopt and implement written supervisory and compliance policies and procedures and to designate a chief compliance officer to administer its compliance policies and procedures.

Is a state registered investment adviser required to maintain written compliance policies and procedures?

The requirement of whether a state registered investment adviser must maintain written compliance policies and procedures varies from state to state. All investment advisors, without regard to SEC or state registration, are required to establish, maintain and enforce written policies and procedures that are reasonably designed to prevent the misuse of material non-public (“insider”) information. Many states have requirements for state registered investment advisers similar to the SEC’s requirements for federally registered investment advisers regarding written supervisory and compliance policies and procedures. A state registered investment adviser will need to review its state’s investment advisor rules and regulations to make this determination. However, regardless of your investment adviser’s state requirements, the maintenance of supervisory and compliance policies and procedures is a good business practice. It helps to create a strong culture of compliance within your firm, which is something the regulators will analyze when conducting a regulatory examination of your investment adviser.

Is a registered investment adviser firm with only one investment adviser representative and no other employees required to maintain written supervisory and compliance policies and procedures?

If your investment adviser is registered with the SEC or with a state securities regulator that requires written supervisory and compliance policies and procedures, your investment adviser is required to maintain such policies and procedures regardless of the number of employees or investment adviser representatives, if any, affiliated with the investment adviser. However, securities regulators have stated that these policies and procedures need to be written to cover the compliance considerations relevant to the operations of each particular registered investment adviser. It is expected that most smaller-sized registered investment advisers without conflicting business interests could utilize much simpler supervisory and compliance policies and procedures than larger-sized registered investment advisers that may have multiple conflicts of interest.

Who should an SEC registered investment adviser designate as a chief compliance officer (“CCO”)?

SEC Rule 206(4)-7 states that an SEC registered investment adviser’s chief compliance officer (“CCO”) should be competent and knowledgeable regarding the Investment Advisers Act of 1940 and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the investment adviser. A registered investment adviser’s chief compliance officer should have a position of sufficient seniority and authority within an investment adviser’s organization to compel others to adhere to the supervisory and compliance policies and procedures. For SEC registered investment advisers, the designated chief compliance officer should be disclosed on the investment adviser’s Form ADV, Schedule A.

With respect to a state registered investment adviser, the individual designated as primarily responsible for compliance should be disclosed on Form ADV Part 1B. Similar to the SEC’s requirements of a chief compliance officer, an individual holding such a position with a state registered investment adviser should have sufficient experience, knowledge and authority to hold such a role.

What must be covered in an SEC registered investment adviser’s written supervisory and compliance policies and procedures?

SEC Rule 206(4)-7 indicates that a registered investment adviser’s supervisory and compliance policies and procedures must be reasonably designed to prevent violation of the Investment Advisers Act of 1940 by the investment adviser or any of its supervised persons. A registered investment adviser must consider and incorporate its fiduciary and regulatory obligations. Each investment adviser must adopt policies and procedures that take into consideration the nature of the investment adviser’s operations. The supervisory and compliance policies and procedures should be designed to prevent violation of the Investment Advisers Act of 1940 from occurring, detect violations that have occurred, and correct promptly any violations that have occurred.

A SEC registered investment adviser must identify conflicts and other compliance factors creating risk exposure for the investment adviser and its clients in light of the firm’s particular operations. An investment adviser must then design policies and procedures that address those risks. Although SEC Rule 206(4)-7 does not define everything that must be covered in a registered investment adviser’s policies and procedures, SEC Rule 206(4)-7 states that an investment adviser’s supervisory and compliance policies and procedures, at a minimum, should address all of the following issues to the extent that they are relevant to the investment adviser:

  • Portfolio management processes, including allocation of investment opportunities among investment advisory clients and consistency of portfolios with clients’ investment objectives, disclosures by the adviser, and applicable regulatory restrictions;
  • Trading practices, including procedures by which the investment adviser satisfies its best execution obligation, use of client brokerage to obtain research and other services (“soft dollar arrangements”), and allocates aggregated trades among investment advisory clients;
    Proprietary trading of the investment adviser and personal securities trading (“PST”) activities of supervised persons;
  • The accuracy of disclosures made to investors, clients, and securities regulators, including account statements and advertisements;
  • Safeguarding of investment advisory clients’ assets from conversion or inappropriate use by advisory personnel;
  • The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
    Marketing investment advisory services including the use of solicitors;
    Processes to value investment advisory client holdings and assess investment adviser fees based on those valuations;
  • Safeguards for the privacy protection of investment advisory client records and information; and
    Business continuity plans.

How does a registered investment adviser determine what needs to be included in its written supervisory and compliance policies and procedures?

The first step to determine what areas should be covered in an investment adviser’s written supervisory and compliance policies and procedures is to perform a risk analysis of the investment adviser. This means that the registered investment adviser should identify conflicts of interest, business practices, arrangements, and other compliance factors creating risk exposure for the investment adviser and its clients in relation to its operations. Once this has been done, the investment adviser should begin developing written supervisory and compliance policies and procedures that specifically address those risks and conflicts of interests and the controls that the investment adviser will put in place to supervise and mitigate those areas of concern. In many regulatory audits of registered investment advisers, one of the first items that the securities regulator will ask for is the investment adviser’s risk analysis.

If a registered investment adviser purchases an off-the-shelf investment adviser compliance manual, will this meet the requirements of SEC Rule 206(4)-7?

Off-the-shelf investment adviser compliance manuals are an excellent starting point for a registered investment adviser. However, a registered investment adviser cannot expect to just purchase an off-the-shelf compliance manual and assume that the investment adviser now has sufficient written supervisory and compliance policies and procedures for the investment adviser. These documents are typically written at a very high level to cover many areas that the typical or average investment adviser must consider when developing its own manual customized to its unique business model and circumstances. For a registered investment adviser that is utilizing an off-the-shelf compliance manual, it is imperative that the investment adviser thoroughly review all of the content of the off-the-shelf version of the compliance manual and then revise the compliance manual so that it reflects the actual operation of the investment adviser and meets any unique rules or regulations of the applicable securities regulator(s).

Once a registered investment adviser has developed written supervisory and compliance policies and procedures, what happens?

The first step that should be taken after developing written supervisory and compliance policies and procedures is to provide all employees of the investment adviser with a copy or access to a copy. The investment adviser should require all investment adviser representatives (“IAR”) and employees to review the supervisory and compliance policies and procedures and have each investment adviser representative and employee sign an acknowledgement indicating that he or she has read this compliance manual, understands it and agrees to abide by the investment adviser’s written supervisory and compliance policies and procedures. (Although a signed acknowledgement is not a requirement, it is a good business practice.) A registered investment adviser should provide its investment adviser representatives and employees with on-going training of its supervisory and compliance policies and procedures. An investment adviser must also notify investment adviser representatives and employees when revisions are made to their policies and procedures and should require an acknowledgement on an annual basis.

An investment adviser and its supervised persons need to be aware that the compliance manual is a living document, and the compliance manual should not be treated as something that the investment adviser can assume is done and forget about by putting it in a drawer or on a shelf. At a minimum, an SEC registered investment adviser must conduct an annual assessment of its supervisory and compliance policies and procedures. This annual assessment must review the adequacy of the supervisory and compliance policies and procedures and the effectiveness of their implementation within the investment adviser. When conducting an assessment, an investment adviser should consider any violations, any regulatory deficiencies and any changes in the investment adviser’s business structures or manner in which business is conducted. An investment adviser must then review its supervisory and compliance policies and procedures to make any revisions to address these changes or areas of concern in order to prevent any future problems. Although SEC Rule 206(4)-7 only requires an annual assessment, a SEC registered investment adviser should consider reviewing its supervisory and compliance policies and procedures and making revisions or developing new supervisory and compliance policies and procedures any time a violation, deficiency or change occurs rather than waiting to do so annually.

Are there any special books and records requirements specifically related to SEC Rule 206(4)-7?

A SEC registered investment adviser is required to maintain those records documenting its annual assessment of its supervisory and compliance policies and procedures. Additionally, an SEC registered investment adviser must maintain current copies of its supervisory and compliance policies and procedures as well as any revised supervisory and compliance policies and procedures during the past 5 years.

 

Create Your Own CustomizedCompliance Manualvia RIA Express - Purchase for Only $695

Webinar on Demand

"Updating Written Compliance Policies & Procedures"

Purchase for Only $69.95

Buy Now

Online Store for Compliance Tools, Manuals, Forms & Webinars for Your RIA

Turnkey Investment Advisor Registration Service

Starting an RIA?

Utilize our expertise to leverage your time while growing your new business.
 

Schedule Introductory Call

Request a Proposal

Annual Investment Advisor Compliance Program

Need help implementing an ongoing and comprehensive compliance program?

Outsource the heavy lifting by partnering with industry experienced professionals.

Request a Proposal

TwitterLinkedINFacebookYouTube

 
 
Easy-to-Read Instructions

* RIA Compliance Consultants, Inc. ("RCC") is not a law firm and does not provide legal services. A compliance consulting relationship with RCC is not provided those legal and professional protections that normally exist under an attorney-client relationship. For more information, please visit our Disclosures webpage.

The determination to use a third-party compliance services provider is an important decision and should not be based solely upon advertisements or self-proclaimed expertise. A description or indication of limitation of our compliance services does not mean that an agency or board has certified RCC as a specialist or expert in investment advisor compliance. All potential clients are urged to make their own independent investigation and evaluation of RCC.

Home
About RIA Compliance Consultants, Inc.
Our Services
   Turn-Key Investment Advisor Registration Service
  Annual Compliance Programs
  Switch an IA from SEC to State
  Code of Ethics
  Renewals / ADV Amendment 2015
Compliance Tips
  Tips for Registering as a State Investment Advisor
  Form ADV Background
  Form ADV Drafting Tips
  SEC Exam Tips
Compliance Tools
  RIA Express
  Upcoming Webinars
  Recorded Webinars
  Online Store
Frequently Asked Questions
   Investment Advisor Registration FAQs
   Registration Costs
  Series 65 Examination FAQs
  Form U4 FAQs
  Private Fund Advisers Registering as Investment Advisers with the SEC FAQs
  Form PF FAQs
  Switch from SEC to State FAQs
  Solicitor Referral Arrangements FAQs
  Written Supervisory Procedures
  Codes of Ethics
  Wrap Fee Brochures
  Form 13F, Schedule 13D & Schedule 13G FAQs
Published Articles
Blog
Contact RIA Compliance Consultants, Inc.
Online Invoice Payments
Newsletter
Speaker Request
Investment Advisor Resources
Job Openings
Search
Disclosures
Site Map
Link to RIA Compliance Consultants, Inc.