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Will my investment advisor firm need to implement written compliance programs?

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For SEC registered investment advisor firms, the answer is “yes”. The SEC, under Rule 206(4)-7, requires all federally registered investment advisor firms to develop and maintain written compliance programs. The policies and procedures should be designed to prevent violations from occurring, detect violations that have occurred, and promptly correct any violations that have occurred. While the SEC did not delineate all the procedures that must be made part of a written compliance program, the SEC does expect an investment adviser’s policies and procedures, at a minimum, to cover the following issues:

  • Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, disclosures by the adviser, and applicable regulatory restrictions;
  • Trading practices, including procedures by which the adviser satisfies its best execution obligation, uses client brokerage to obtain research and other services (“soft dollar arrangements”), and allocates aggregated trades among clients;
  • Proprietary trading of the investment adviser and personal trading activities of supervised persons;
  • The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
  • Safeguarding of client assets from conversion or inappropriate use by investment 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 client holdings and assess investment advisory fees based on those valuations;
  • Safeguards for the privacy protection of investment advisory client records and information; and
  • Business continuity plans.

For state registered investment advisor firms, the answer is that it’s “likely” your state securities regulator expects a compliance program in some form. Most state securities regulators require state registered investment advisor firms to maintain and enforce written procedures which set forth the procedures adopted by the firm in order to comply with the state’s rules and regulations and properly supervise its associated persons.

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