Annual Reviews are a yearly reminder that compliance isn’t simply a set-it-and-forget-it function. As firm’s face new risks and heightened regulations, they must continually adapt their programs. Annual Reviews should be a comprehensive test and assessment of a firm’s program, ensuring the functionality of every area of compliance.
In this blog, we’ll discuss the types of testing which firms may utilize in the review of their compliance programs. Plus, we’ll dive into eight common areas of compliance typically included in an annual review.
Types of Testing
Your annual review documentation should be a culmination of all the various transactional, periodic and forensic testing you have completed throughout the year.
Testing types include:
- Transactional: Contemporaneous
- Periodic: At appropriate intervals over time
- Forensic: Over a period of time to determine whether there is a pattern evidencing deficiency in the compliance system or that the system is being subverted through methods that typically avoid detection
Eight Areas of Compliance
While every firm’s annual review process and testing will be unique to their firm’s business practices, these eight areas of compliance highlight some key areas which you may want to include as you test your policies and procedures and ensure compliance with relevant regulations.
Advertising and Marketing
Your marketing and advertising material helps to attract new clients and customers, however, given the recent focus by regulatory bodies, it is also a hotbed of potential compliance concerns. As a baseline, you will need to determine if policies and procedures require a review of marketing materials and, if so, whether or not all reviews were completed.
Advisory Agreements
Review each of your firm’s advisory agreements for accuracy and relevance to your current business practices. Ensure agreements are consistent with all compliance documents. This should include, but is not limited to:
- Policies and procedures manual
- Business continuity plan
- Succession plan
- Information security policy
Form ADV
A firm’s Form ADV Part 1 and Part 2 must be accurate and consistent with each other. A common exam deficiency is conflicting information between the two documents.
Custody
If passed, the SEC’s proposed rule could impact the definition of custody, however, the current rule defines custody as “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.”
Best Execution
Best execution includes more than just commission rates paid. Document the review process and due diligence conducted.
Business Continuity
In the event a disaster does occur, your firm needs a business continuity plan, which teams must practice prior to an incident. To put it simply: train, train again and train some more.
Remember! An actual disaster is a test. Document it.
Books and Records
Books and records requirements continue to be a source of SEC charges and fines with over 20 firms charged with recordkeeping failures since August of 2023. Ensure your books and records policies align with your jurisdictions requirements.
Investment Process/ Portfolio Management
Part of your fiduciary obligation is to recommend investments in the client’s best interest. To ensure investment processes and portfolio management remains in the client’s best interest, firms should, among other things, compare each client purchase with a list of client investment guidelines.
Download the 2024 Annual Review Guide for more insight and best practices.
Conducting Your Annual Review with COMPLY
The good news about annual reviews? You don’t have to do them alone.
The annual review process can be burdensome. However, armed with the right technology and regulatory expertise, your team can effectively navigate the process without sacrificing weeks or months of your time.
COMPLY offers Annual Review Tools and Services to help firms effectively and efficiently conduct their annual reviews. So whether you need a technology resources, or could use a little help in the process, we’ve got you covered. Interested in learning more? Speak with an epxert today!