Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Investment Advisers Act”) requires investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) 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 it;
- Designate an individual (who is a supervised person) responsible for administering the policies and procedures adopted by the investment adviser; and
- Review, no less frequently than annually, the adequacy of the investment adviser’s policies and procedures established.
Similar to the Investment Advisers Act, many state securities regulations also have requirements for state registered investment advisers to adopt and implement written supervisory policies and procedures. State securities regulations may or may not address the requirement for state registered investment advisers to periodically assess the adequacy of the policies and procedures but, regardless of whether it is a requirement, it is in the best interest of every investment adviser to review its policies and procedures at least annually.
Investment advisers must understand that the process for developing written policies and procedures should never be considered “done.” This process should be consider an ongoing process and investment advisers must understand that the annual compliance review requirement is as important as the initial development and implementation of the written policies and procedures. SEC and state securities regulators do not have to find that harm has been done to clients in order for actions to be taken against the investment adviser. Simply not having effective policies and procedures in place to prevent situations that may result in harm to the client is enough to result in regulatory deficiencies or enforcement actions.
During the annual compliance review process, investment advisers should look back over the past year and assess the effectiveness of the program. Investment advisers should consider compliance problems or violations that arose during the past year as well as changes that have occurred within the investment adviser or to SEC or state securities regulations governing the investment adviser. Investment advisers must then look forward to determine what changes need to be made to existing policies and procedures or what new policies and procedures need to be implemented to prevent violations from occurring in the future. An investment adviser with a strong compliance program is continuously thinking about what it can do to improve its written policies and procedures in order to prevent regulatory violations and by doing so protect its clients’ information and assets.
To learn more about the annual compliance review process, register to attend the webinar, “Conducting an Annual Compliance Review,” that will be presented by RIA Compliance Consultants on November 14, 2013, at 12:00pm CST. During this webinar, our consultants will discuss the importance of conducting the annual review and will provide some tactical tips for conducting and documenting the review. Click here to purchase and register for this event.
RIA Compliance Consultants can assist your investment adviser with conducting its annual compliance review. We have developed an online software tool, RIA Express – Compliance Review, that assists an investment adviser in assessing the effectiveness of its compliance programs. Click here for more information regarding RIA Express – Compliance Review. Additionally, one of our consultants can assist your investment adviser with conducting its annual compliance review. For more information regarding a consultant led annual compliance review, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our consultants.