The first step to determine what areas should be covered in an investment adviser’s written supervisory and compliance policies and procedures is to perform a risk analysis of the investment adviser. This means that the registered investment adviser should identify conflicts of interest, business practices, arrangements, and other compliance factors creating risk exposure for the investment adviser and its clients in relation to its operations. Once this has been done, the investment adviser should begin developing written supervisory and compliance policies and procedures that specifically address those risks and conflicts of interests and the controls that the investment adviser will put in place to supervise and mitigate those areas of concern. In many regulatory audits of registered investment advisers, one of the first items that the securities regulator will ask for is the investment adviser’s risk analysis.
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What must be covered in an SEC registered investment adviser’s written supervisory and compliance policies and procedures?
November 02, 2018
SEC Rule 206(4)-7 indicates that a registered investment adviser’s supervisory and compliance policies and procedures must be reasonably designed to prevent violation of the Investment Advisers Act of 1940 by the investment adviser or any of its supervised persons. A registered investment adviser must consider and incorporate its fiduciary and regulatory obligations. Each investment adviser must adopt policies and procedures that take into consideration the nature of the investment adviser’s operations. The supervisory and compliance policies and procedures should be designed to prevent violation of the Investment Advisers Act of 1940 from occurring, detect violations that have occurred, and correct promptly any violations that have occurred.
Who should an SEC registered investment adviser designate as a chief compliance officer (“CCO”)?
November 02, 2018
SEC Rule 206(4)-7 states that an SEC registered investment adviser’s chief compliance officer (“CCO”) should be competent and knowledgeable regarding the Investment Advisers Act of 1940 and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the investment adviser. A registered investment adviser’s chief compliance officer should have a position of sufficient seniority and authority within an investment adviser’s organization to compel others to adhere to the supervisory and compliance policies and procedures. For SEC registered investment advisers, the designated chief compliance officer should be disclosed on the investment adviser’s Form ADV, Schedule A.
If your investment adviser is registered with the SEC or with a state securities regulator that requires written supervisory and compliance policies and procedures, your investment adviser is required to maintain such policies and procedures regardless of the number of employees or investment adviser representatives, if any, affiliated with the investment adviser. However, securities regulators have stated that these policies and procedures need to be written to cover the compliance considerations relevant to the operations of each particular registered investment adviser. It is expected that most smaller-sized registered investment advisers without conflicting business interests could utilize much simpler supervisory and compliance policies and procedures than larger-sized registered investment advisers that may have multiple conflicts of interest.
Is a state registered investment adviser required to maintain written compliance policies and procedures?
November 02, 2018
The requirement of whether a state registered investment adviser must maintain written compliance policies and procedures varies from state to state. All investment advisors, without regard to SEC or state registration, are required to establish, maintain and enforce written policies and procedures that are reasonably designed to prevent the misuse of material non-public (“insider”) information. Many states have requirements for state registered investment advisers similar to the SEC’s requirements for federally registered investment advisers regarding written supervisory and compliance policies and procedures. A state registered investment adviser will need to review its state’s investment advisor rules and regulations to make this determination. However, regardless of your investment adviser’s state requirements, the maintenance of supervisory and compliance policies and procedures is a good business practice. It helps to create a strong culture of compliance within your firm, which is something the regulators will analyze when conducting a regulatory examination of your investment adviser.
Is an SEC registered investment adviser required to maintain written supervisory and compliance procedures?
November 02, 2018
On February 5, 2004, the United States Securities and Exchange Commission adopted SEC Rule 206(4)-7 of the Investment Advisers Act of 1940 requiring SEC registered investment adviser firms to adopt and implement written supervisory and compliance policies and procedures and to designate a chief compliance officer to administer its compliance policies and procedures.
What is a Form U5?
November 02, 2018
The Form U5 is the Uniform Termination Notice for Securities Industry Registration. Investment advisor firms must use the Form U5 to terminate with a state securities regulator the registration of an individual serving as an investment adviser representative. Similar to the Form U4, the Form U5 is filed electronically via the Web CRD.
Is the information on the Form U4 available to the public?
November 02, 2018
The Investment Adviser Public Disclosure (“IAPD) database allows public users to search for investment adviser representatives. The information published by the IAPD about the investment adviser representative includes qualifications, such as licenses, professional designations, and any exams passed; previous employment, including a list of firms where the investment adviser representative was previously registered, as well as any employment within the last ten years both inside and outside the securities industry; and a disclosure section which details any customer disputes or disciplinary events on the investment adviser representative’s record. The published information about the investment adviser representative is obtained through Form U4. Both the investment advisor firm and investment adviser representative are required to ensure the information on the Form U4 is accurate and up-to-date.
What happens to the Form U4 if an Investment Adviser Representative leaves a registered investment advisor firm and starts at another investment advisor firm?
November 02, 2018
As a general rule, when an investment adviser representative leaves an investment advisor firm, the former investment advisor firm will file a Form U5 disclosing the termination of the investment adviser representative’s affiliation as an investment adviser representative with the former investment advisor firm. The new investment advisor firm that the investment adviser representative joins will file a Form U4 registering the individual as an investment adviser representative of the new investment advisor firm. As long as the individual registering as an investment adviser representative has not gone more than 2 years between registrations as an investment adviser representative and there are no “yes” answers, the transfer is usually smooth. There may be application fees associated with registering with the new investment advisor firm.
What happens if the individual registering as an Investment Adviser Representative has a “yes” answer/disclosure event on the Form U4?
November 02, 2018
If the answers to any disclosure questions (i.e. criminal actions, regulatory disciplinary actions, customer complaints, arbitrations, civil litigation, termination, financial matters) on the Form U4 are “yes”, then the investment adviser representative is required to disclose additional details of the event or proceeding on the appropriate Disclosure Reporting Page (“DRP”) to the Form U4. Each category of items listed above has a unique DRP page asking for particular details of the disclosure event. Certain disclosure events will require multiple DRP updates. For example, when a matter arises (i.e. complaint received arbitration or litigation served, bankruptcy petition filed) and upon a change in the status or at final disposition of the matter (i.e. complaint settled, arbitration order issued, litigation settlement, bankruptcy discharged).
