Annual reviews: how your registered investment adviser firm can get it right

In compliance with Rule 206(4)-7, the Securities and Exchange Commission (SEC) requires investment advisers to conduct annual reviews of their policies and procedures, ensuring the ongoing adequacy and effectiveness of the program. Annual compliance reviews, when done effectively, ensure your program is up to par with regulatory requirements, mitigating potential risk points to protect your firm and its clients.

However, even the best firms can make critical errors during their annual compliance review. To help prevent those problematic pitfalls, we’ve gathered our top pointers on how to avoid common mistakes made during annual compliance reviews. Ready to start reviewing? Let’s dig in.

Common errors investment firms make during annual reviews and how to avoid them

The primary goal of an annual compliance review is to test the effectiveness of your compliance program in preventing violations of applicable federal and state regulations. During this review, your compliance team can identify where policies and procedures need to be enhanced and whether additional policies and procedures need to be implemented to address risk within the firm.

Here are the common errors investment firms make during annual reviews and how to avoid them:

1. No annual review conducted.

Sometimes missing an annual compliance review is an oversight. Other times, they are avoided because performing one seems like a daunting task. It’s important to note that annual compliance reviews don’t have to be conducted all at once. Your compliance team can conduct tests daily or periodically, aggregating the results into a summary of work done throughout the year. Some firms perform reviews on a quarterly basis. Sometimes it makes the task less daunting and easier to remember if it’s broken into chunks and scheduled for multiple times throughout the year. Whenever your compliance team decides to schedule its annual compliance reviews, it’s important you stick to the calendar and complete your review as required.

2. Annual review looks the same year-over-year.

If the only difference in your annual compliance review year over year is the date on the document – that’s a problem. This is usually an indication your annual compliance reviews aren’t digging deep enough into your firm’s compliance program. This is also sometimes an indication the annual review has failed to include any formal, thorough testing of policies and procedures. As your compliance team conducts annual reviews, it can consider questions like: why are these issues occurring? Are the policies and procedures too general or more restrictive than they have to be? Does the staff at the firm not understand expectations?

3. Registered investment advisers failed to implement recommendations resulting from annual review.

After thoroughly testing your firm’s policies and procedures, it is crucial to immediately correct the issues which were spotted during the annual review. This helps prevent your compliance team from encountering the same problem during the next annual review, improving the efficiency of your overall compliance program and proving to the regulators that your firm is committed to its compliance initiatives.

At RIA in a Box, we can help you meet regulatory requirements and remain in compliance while minimizing burdens on business processes. Let’s talk about how we can help with your annual review!