Tips to Help an Investment Adviser Create a Culture of Compliance

February 19, 2013

Reading time : 6 minutes

For several years now, investment advisers have been hearing that they must create a “culture of compliance” throughout their firms.  Understanding what a “culture of compliance” means is not always clear to many investment advisers.  In a speech presented in October 2007 by Lori Richards, former Director of the Office of Compliance Inspections and Examinations for the U.S. Securities and Exchange Commission (“SEC”), she explained this concept in greater detail:

We at the SEC have often talked about the need to instill a strong Culture of Compliance within firms – this means establishing, from the top of the organization down, an overall environment that fosters ethical behavior and decision making.  Simply put, it means instilling in every employee an obligation to do what’s right.  This culture will underpin all that the firm does, and must be part of the essential ethos of the firm, so that when employees make decisions, large and small, and regardless of who’s in the room when they make them, and whether or not lawyers or regulators or clients or anyone else is looking, they are guided by a culture that reinforces doing what’s right.  Importantly, a firm’s Culture of Compliance exists outside the compliance department – it exists throughout the firm.

Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Investment Advisers Act”) requires all investment advisers 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 and the investment adviser must appoint a Chief Compliance Officer (CCO) to administer the investment adviser’s policies and procedures.  Rule 204(A)-1 under the Investment Advisers Act requires all SEC registered investment advisers to establish, maintain, and enforce a written code of ethics.  Most state securities regulations have similar requirements related to both the written policies and procedures and the code of ethics.  The CCO must make sure that the investment adviser develops strong, customized written policies and procedures and a code of ethics.  This is one of the first steps the CCO can take to ensure that the investment adviser is building a strong compliance culture.  In order to develop customized written policies and procedures, an investment adviser must first identify the areas of risks present within the investment adviser that may make it vulnerable to violations.  The investment adviser’s CCO must then make sure that policies and procedures have been developed to ensure that controls are in place to manage or mitigate the identified risks.

Developing the written supervisory policies and procedures and a code of ethics is a crucial step in building an investment adviser’s compliance culture but the building process cannot just stop with the development of these documents.  The investment adviser must ensure that the written policies and procedures and the code of ethics are communicated to and understood by all supervised persons, fully implemented, monitored, tested, and updated as necessary.  The following are some additional steps an investment adviser can take to build a culture of compliance:

  • Provide initial and ongoing training to all supervised persons of the investment adviser specific to the investment’s adviser’s code of ethics and written compliance policies and procedures.  Preparing and maintaining documentation, such as a training log, regarding the training provided. This log can be something provided during a regulatory examination to support an investment adviser’s claim of creating a culture of compliance.
  • Require all supervised persons to execute an acknowledgement upon hire and annually acknowledging receipt, review, understanding, and agreement to comply with the investment adviser’s code of ethics and written supervisory policies and procedures.  (Pursuant to Rule 204(A)-1 under the Investment Advisers Act, a written acknowledgement for receipt of the investment adviser’s code of ethics must be obtained upon employment and any time the code of ethics is revised.)
  • Conduct an annual assessment of the investment adviser’s written supervisory policies and procedures.  (Required pursuant to Rule 206(4)-7 under the Investment Advisers Act.) Determine deficiencies and areas where corrective actions or new policies and procedures are needed.  Assign a supervised person to be responsible for taking the corrective actions or developing new policies and procedures.  Establish deadlines for the completion of any follow-up projects and follow through to ensure the appropriate actions have been taken.
  • Conduct ongoing testing (other than the annual assessment) to monitor the compliance policies and procedures.  An investment adviser should have a variety of testing methods, including transactional, periodic, and forensic, to monitor the proper implementation and to determine the effectiveness of the of the investment adviser’s policies and procedures.  Develop and maintain forms, logs, or checklists to document any testing performed.
  • Develop an annual compliance calendar or checklist indicating all ongoing compliance duties.
  • Conduct an internal mock exam or hire a consultant to conduct an examination to assess how prepared the investment adviser is for a regulatory examination.

These are just some of examples of steps the investment adviser can take to ensure that the investment adviser has created a culture of compliance.  Bottom line, compliance must be embedded into an investment adviser’s culture from top to bottom.  An investment adviser must not only think in terms of doing what’s right according to the letter of the law, but also think in terms of doing what right because it is in the best interest of the client.  An investment adviser must keep in mind that during a regulatory examination, the examiner will likely take in to consideration how well the investment adviser does at preventing and detecting problems.

RIA Compliance Consultants provides a variety of sample forms and checklists, for example a Code of Ethics Acknowledgement Form, a Compliance Training/Meeting Attendance Sign-in Form or a Compliance Calendar Checklist, that investment advisers can purchase to assist with implementing the investment adviser’s compliance program and maintaining required books and records.  Individual forms can be purchased for $25 per form or the complete samples form package can be purchased for $295.  Click here for more details or to purchase available forms.

To gain a better understanding of the role the CCO must play in building an investment adviser’s culture of compliance, register to attend our webinar, “Understanding the Role of the Chief Compliance Officer (CCO).”  RIA Compliance Consultants will present this webinar on February 21, 2013, at 12:00 p.m. CST.  A fee of $69.95 will be charged to register for this webinar.  Click here to register.  A free sample Annual Compliance Calendar checklist will be provided with all paid registrations.  (If you have previously paid for registration to this webinar, contact Bre Newman at to obtain your free copy.)

Posted by Bryan Hill
Labels: CCO, Compliance Program, Compliance Training, Webinar