RIA Compliance Blog
The SEC Division of Examinations recently issued a Risk Alert detailing examination observations regarding SEC-registered investment advisers’ (“advisers”) compliance with the annual review requirements under Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Compliance Rule”). The Risk Alert serves as a reminder that an annual compliance review is more than a check-the-box exercise. Advisers should conduct a meaningful review of their compliance program, document the results, and address any deficiencies identified.
The SEC’s observations focused on five key areas:
(1) Timeliness of Annual Reviews
Examiners found instances where advisers failed to perform their annual reviews within the required timeframe. Specifically, examiners observed:
- Gaps in the adviser’s annual reviews;
- Failure to take corrective actions in response to deficiencies identified during a prior review;
- Annual reviews that covered periods longer than 12 months; and
- Replacement of the annual review with other compliance activities, such as employee training or annual attestation of personnel’s compliance to the advisers’ policies and procedures
The SEC highlights the importance of conducting the required annual review, in a timely manner and in compliance with applicable federal securities regulations.
(2) Completeness of Policies and Procedures
The SEC also highlighted advisers’ failure in adopting complete policies and procedures that were aligned with their business practices. In particular, examiners observed failures to adopt policies addressing key risk areas and business activities relevant to assessing whether the adviser’s compliance program was effectively implemented.
(3) Alignment of Annual Review and the Compliance Program
The SEC identified inconsistencies between adviser’s annual reviews, their applicable compliance policies and procedures, and their actual business practices. Areas where examiners identified inconsistencies included:
- Fee and expense billing practices;
- Proxy voting policies;
- Custody policies and procedures;
- Marketing policies and procedures; and
- Regulatory filing procedures, including those relating to the Client Relationship Summary (Form CRS).
These observations underscore the importance of using the annual review to assess whether the adviser’s compliance program remains aligned with its current business activities and regulatory obligations. The review should also identify and address gaps between written policies, disclosures, and actual practices.
(4) Documentation of the Annual Review
The SEC observed deficiencies in advisers’ documentation of their annual reviews, including:
- Failure to document issues identified during the annual review and the corrective actions recommended;
- Failure to prepare the written annual review report as required by the advisers’ own policies and procedures; and
- Failure to fully follow the policies and procedures requiring the annual review to be documented in a specific manner, such as using a series of checklists, workpapers, or templates.
(5) Resolution of corrective actions
The SEC identified instances where advisers failed to address corrective actions recommended from their prior annual reviews. In some cases, advisers did not implement the recommended changes to their policies and procedures or business practices. Some cases involved advisers indicating that corrective actions had already been implemented, even though the same deficiencies continued to appear in subsequent annual reviews.
Takeaways:
The Risk Alert reinforces that the annual compliance review should be treated as a meaningful assessment of the adviser’s compliance policies and procedures.
Advisers should consider whether their annual review:
- Is conducted on time;
- Addresses the applicable business activities and risk areas;
- Monitors actual compliance with the written policies and procedures;
- Identifies inconsistencies between policies, disclosures, and business activities;
- Documents the review, findings, and recommendations; and
- Tracks corrective actions through implementation and completion
Ultimately, having well-written compliance policies and procedures is not enough if they are not followed or maintained. The Annual Review should serve as a practical tool for advisers to identify weaknesses in their compliance programs and address them before those issues become larger problems.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.