For several years now, investment advisers have been hearing that they must create a “culture of compliance” throughout their firms. Understanding what a “culture of compliance” means is not always clear to many investment advisers. In a speech presented in October 2007 by Lori Richards, former Director of the Office of Compliance Inspections and Examinations for the U.S. Securities and Exchange Commission (“SEC”), she explained this concept in greater detail:
Category Archives: Compliance Training
New Tool to Help You Review Your Compliance Program
February 07, 2013
Has your investment adviser conducted a review of its compliance program? Is a consultant led compliance review beyond your budget? RIA Express – Compliance Review is our online compliance tool that helps guide you through the process of reviewing the effectiveness of your investment adviser’s compliance program.
Compliance Is Not Just the Responsibility of the Investment Adviser’s Chief Compliance Officer
February 06, 2013
One of the requirements of Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Investment Advisers Act”) is that each investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) is required to designate a chief compliance officer (“CCO”) to administer the investment adviser’s compliance policies and procedures. While the CCO has the primary responsibility for developing and enforcing appropriate policies and procedures for the investment adviser, this does not mean that the CCO has to be the sole party responsible for making sure that all compliance functions within the firm are carried out. The CCO can delegate duties and supervisory responsibilities related to the investment adviser’s ongoing compliance responsibilities.
According to Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), each investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) must adopt and implement written policies and procedures reasonably designed to prevent violation of the Investment Advisers Act and the rules that the SEC has adopted under the Investment Advisers Act. Rule 206(4)-7 also requires an SEC registered investment adviser to designate an individual to serve in the role as chief compliance officer (“CCO”). The investment adviser’s designated CCO will be responsible for administering the investment adviser’s compliance policies and procedures adopted pursuant to the requirements of Rule 206(4)-7.
Assuming an individual serving as the chief compliance officer of an SEC registered investment advisor firm does not regularly solicit, meet or otherwise communicate with investment advisory clients, the Investment Advisers Act of 1940 (“Investment Advisers Act”) and SEC do not specifically require such an individual to be registered as an investment adviser representative. (Please see SEC Rule 203A-3 for additional details.) However, the individual serving as the CCO of an SEC registered investment advisor must be a supervised person of the investment advisor firm. Under the Investment Advisers Act, an SEC registered investment advisor firm is required to appointment a CCO to administer the investment advisor firm’s required compliance policies and procedures. The CCO is typically responsible for overseeing ongoing compliance and provides a resource for giving guidance and answering questions of its supervised persons. The individual serving as the CCO should have a good understanding of applicable investment advisory rules and regulations, and the investment advisor firm should grant the CCO with sufficient authority to enforce the investment advisor firm’s compliance policies and procedures. Although the SEC may not specifically require the CCO of a federally registered investment advisor firm to register as an investment adviser representative, certain state securities regulators may take a contrary interpretation. Consequently, it is recommended that an SEC registered investment advisor firm also review the investment advisory rules of the state securities regulator where the CCO is located. Likewise, a state registered investment advisor firm should consult its state’s investment advisory rules for more information whether an individual serving as the CCO of a state registered investment advisor is required to register with the state securities regulator as an investment adviser representative.
Developing Your Investment Advisor’s Compliance Calendar for 2013
November 27, 2012
Determining ongoing compliance requirements may seem overwhelming to many registered investment advisors. Complying with the rules and regulations under the Investment Advisers Act of 1940 (“Investment Advisers Act”) and similar state investment advisor regulations must be a central part of an investment advisor’s fiduciary duties. Investment advisors have a variety of duties to perform throughout the year in order to comply with the requirements of the Investment Advisers Act and similar rules of state securities regulators. Having a well-organized process can help streamline an investment advisor’s ongoing compliance requirements. To help manage the ongoing compliance process, registered investment advisors should consider developing a compliance calendar that can serve as an effective and proactive tool to assist the investment advisor with meeting its ongoing compliance requirements. Developing a compliance calendar can help strengthen an investment advisor’s written compliance policies and procedures that must be developed pursuant to Rule 206(4)-7 of the Investment Advisers Act and similar state rules to detect, prevent, and correct possible regulatory violations that can occur throughout the year.
Conducting an Annual Review of a Registered Investment Adviser
November 01, 2012
Under SEC Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) are required to maintain written policies and procedures reasonably designed to prevent and detect violations of the Investment Advisers Act and the SEC’s related rules by the investment adviser or any of its supervised persons. Many state securities regulators have similar requirements regarding written policies and procedures. As part of developing the investment adviser’s written policies and procedures, the investment adviser should identify the areas of risk that need to be addressed.
Conducting a Risk Assessment of an Investment Adviser
October 23, 2012
Under Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) are required to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and the rules that the SEC has adopted under the Investment Advisers Act. Well-designed policies and procedures should also be able to detect violations that have occurred and to promptly correct any violations that have occurred. Most state securities regulators have adopted similar rules requiring investment advisers to develop and implement written compliance policies and procedures. As an investment adviser, the first step in developing written policies and procedures should be to identify the areas of risk related to the investment adviser’s practice and business model. This process of identifying risks that make the investment adviser vulnerable to violations of the Investment Advisers Act is often referred to as a “Risk Assessment,” a “Gap Analysis,” or the compilation of a “Risk Inventory.”
RIA Compliance Consultants recently hosted a webinar, Establishing Information Security Programs for Registered Investment Advisors. During this webinar, our compliance consultant discussed the regulatory requirements for establishing an information security program and then went into a detailed discussion on how a registered investment advisor can establish an information security program that effectively protects its client data.
Due diligence needs to be an important component for any investment adviser compliance program. As we discussed earlier, due diligence should not be limited to recommending investments, but must also be employed when recommending or using third party service providers. In our opinion, one of the most important, if not the most important, outside service provider decisions made by investment advisers are the selection of a recommended broker/dealer. In fact, many investment advisers require clients to use a particular broker/dealer. However, far too many investment advisers fail to perform adequate due diligence on this important selection. We hear from many investment advisers that they fully understand broker/dealer best execution reviews are expected, but are not completed because of reasons such as (1) the broker/dealer they work with is large and reputable, (2) the investment adviser only selects mutual funds so best execution doesn’t matter or (3) the differences between broker/dealers are so slight that due diligence is unnecessary. Because of these reasons and others such as time and cost constraints, broker/dealer best execution reviews and due diligence is a matter often neglected by investment advisers.
