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

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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.

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