How to document your annual compliance review

Annual compliance reviews for advisers and broker-dealers are often met with trepidation from firms – after all, 37% of compliance professionals have difficulty finding time to dedicate to the RIA annual compliance review process. Any tools and tips that can streamline those compliance processes (without reducing effectiveness) quickly become invaluable.

Since the Securities and Exchange Commission (SEC) has recently rolled out a new annual compliance review documentation rule, the topic of compliance efficiency is once again at the forefront. How will your firm implement new policies and procedures in line with the requirement? How can you comply without adding unnecessary costs or time burdens?

We’ve got you covered – in today’s blog, we’re exploring how advisory firms can effectively and efficiently document their annual compliance review.

Understanding the SEC’s New Annual Compliance Review Documentation Rule

The SEC recently announced an amendment to the Investment Advisers Act that will require firms to document their annual compliance meetings. The goal of the new rule is to help regulatory agencies “determine whether the adviser is maintaining its policies and procedures correctly.”

And although concerns have been raised around the cost and implementation effects of the new rule, the SEC believes such documentation will ease agency oversight without adding a significant burden to advisers or associated parties for three reasons:

Written documentation could help advisers consider compliance matters from years past, changes in the current year and other places where policies and procedures may need adjustments.
Written documentation will help regulators determine if the adviser is regularly reviewing the adequacy of their policies and procedures.
Clients and investors can incorporate the documentation into their due diligence when assessing an adviser’s compliance program.

Under the rule, all registered investment advisers must document their annual compliance review in writing at least once per year. There is no specified method or formatting required.

Click here to download “The Ins and Outs of a Successful Annual Review Checklist”

With such flexibility involved, there are many approaches firms can use to tackle this new documentation requirement, so long as it addresses: the adequacy of their compliance policies and procedures, the effectiveness of policy and procedure implementation, compliance issues that occurred in the last year and/or any significant changes to regulations.

How to Document Your Annual Compliance Review

1. Decide on formatting

As we stated above, the SEC does not give any specific guidelines, formatting or templates for annual review documentation.

They state:

“The written documentation requirement is intended to be flexible to allow advisers to continue to use the review procedures they have developed and found most effective.”

Furthermore, the SEC’s Final rule notes that some advisers may choose to document via:

A lengthy written report with supporting documentation
Aggregated quarterly reports
A presentation intended for a board or other governing body
Short summarizing memorandums
Informal notes

As you choose a formatting for your firm, consider which of the above (if any) will best fit into your already established documentation practices.

2. Appoint a project leader

Just as with all projects, one of the best ways to ensure a task is carried out is to appoint a single individual who can take charge, answer questions and generally track progress.

For many firms, the person responsible for ensuring documentation may be your Chief Compliance Officer (CCO) or another member of the compliance team – although they don’t have to be. Whoever you choose to lead documentation should be familiar with SEC guidelines, organized and an effective communicator, as they may need to work with multiple members of your team.

3. When in doubt: Document

Since the SEC has left the rule fairly open-ended, it may seem tempting to do the bare minimum as far as documentation is concerned. However – as with most things compliance – this is rarely the best approach.

Instead, we recommend that firms take a “more is more” mindset to their annual compliance review documentation. If you think there’s a chance the SEC may want a piece of information during your next audit, then it’s best to include it.

With a comprehensive understanding of annual compliance review requirements for financial advisors and these three tips in place, your firm will be better prepared to tackle your next compliance audit.

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ComplySci can automate several parts of your compliance processes, allowing your firm to accomplish more. Click here to connect with a member of our team today.