It’s that time of year again! That’s right annual compliance review season is upon us. As an investment adviser, you are required to perform an annual compliance review in accordance with Rule 206(4)-7 under the Investment Advisers Act.
But what is Rule 206(4)-7 and what does it require of investment advisory firms?
The Securities and Exchange Commission (SEC) ruling, “require[s] each investment company and investment adviser registered with the Commission to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review those policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures.”
While the ruling includes multiple requirements, in this blog post, we’ll focus on the annual review aspect and what tactics your firm can implement to effectively manage your annual review in 2022 and beyond.
How to effectively conduct your annual compliance review
An annual review seems simple enough on paper, however, it can often be a source of tension for chief compliance officers (CCO) and compliance professionals who are conducting them. But does it have to be? Simply put, no.
By integrating effective practices into your annual compliance review, you can ensure your firm meets the SEC’s full requirements without causing a tension headache year after year.
1.Make sure your annual compliance review isn’t just an annual occurrence.
While the name may insinuate a yearly review of materials, your compliance program should be continuously reviewing all policies and procedures to ensure they align with any new rulings put out by relevant regulatory bodies. By following a compliance calendar and fulfilling requirements throughout the year, you mitigate the workload come December (for those who follow a calendar year).
2. Get your entire investment firm involved.
As part of your annual review, you should be holding an annual review firm-wide meeting. During this time, you can review any updates to your policies and procedures, educate your firm on appropriate best practices such as client billing and cybersecurity and review your advisory documents.
3. Document EVERYTHING.
As they say, if it isn’t documented, it didn’t happen. Your documentation should include:
- The meeting agenda.
- Any risk areas of note.
- Action items for the firm.
- Updated policies and procedures.
- Compliance issues and how they have been or will be addressed.
4. Decide who is responsible for which compliance action items.
While your compliance team may head up the overarching compliance program for your investment advisory firm, you will likely need assistance from other departments should compliance issues arise during your annual review. Take this time to assign action items to individuals or teams and, critically, decide on appropriate deadlines for completion.
5. Invest in the right compliance resources for your investment firm.
For those firms manually reviewing their compliance policies and procedures, an annual review can be a daunting task. Which is one factor behind why, according to our research, 40% of firms have invested in a compliance technology to help automate their annual review processes and 64% of firms have brought in outside experts to help conduct an annual review. Armed with the right resources, your firm can effectively and efficiently conduct your annual review without overburdening your firm and, more specifically, your compliance department.
Ready to start your annual review, but need a little more guidance? Check out the annual review checklist published by RIA in a Box, a COMPLY company.