The recent amendments to Rule 206(4)-7 under the Advisers Act mark a significant shift in regulatory requirements for investment advisers registered with the SEC. Previously, while the rule mandated an annual review of compliance policies and procedures, there was no explicit requirement for written documentation. However, many advisers had already adopted the practice of documenting their annual reviews as a standard compliance measure. The amendments, which now require all investment advisers, including those not advising private funds, to document their annual reviews in writing, aim to standardize this practice across the board.
The amendment to the compliance rule necessitates advisers to review and document, in writing, no less frequently than annually, the adequacy of their compliance policies and procedures and the effectiveness of their implementation. This requirement emphasizes the importance of periodically evaluating whether compliance policies are functioning as intended and whether changes are necessary to maintain effectiveness. The written documentation of the annual review should encompass any compliance matters that arose during the previous year, changes in business activities, and any alterations to regulatory requirements.
The amendments also require advisers to maintain the written documentation of their annual review in an easily accessible place for at least five years after the end of the fiscal year in which the review was conducted, with the first two years in an appropriate office of the investment adviser. This ensures that documentation is readily available for regulatory examination purposes and provides a record of the adviser's compliance efforts over time.
The written documentation requirement promotes accountability and transparency and serves several other purposes. It allows the SEC to determine whether advisers regularly review the adequacy of their policies and procedures. Clients and investors conducting due diligence may request written documentation of the annual review to assess the adviser's commitment to maintaining a robust compliance program.
The annual review process is a critical component of an investment adviser's compliance program, ensuring the ongoing effectiveness of policies and procedures in mitigating regulatory risks. Conducting the review diligently throughout the year is essential to test the firm's compliance framework comprehensively. Leveraging regulatory compliance technology can greatly assist in this endeavor by facilitating the maintenance of detailed logs documenting testing activities and any modifications made to policies and procedures.
The utilization of Regulatory Technology (RegTech) can significantly streamline and enhance the process of conducting the annual review of compliance policies and procedures for investment advisers. RegTech solutions offer advanced tools and platforms that automate various aspects of compliance testing, documentation, and reporting, thereby increasing efficiency and accuracy. These technologies can assist firms in maintaining comprehensive logs of testing activities, modifications made to policies and procedures, and findings identified during the review process. Additionally, some RegTech solutions provide robust document management and version control capabilities, ensuring that firms can easily organize, track, and manage the various documents and updates related to their compliance program. By leveraging RegTech, advisers can ensure thorough documentation of their annual reviews, facilitate collaboration among internal and external compliance team members involved in the process, and demonstrate adherence to regulatory requirements in a more efficient and cost-effective manner.
One of the key aspects of the annual review is the preparation of a comprehensive summary by the Chief Compliance Officer (CCO). This summary, or annual review report, should outline any changes made to the firm's compliance program, identify findings and concerns, and specify the actions to be taken to address them. Sharing this summary with executive leadership ensures transparency and accountability in the compliance process. It is also essential to communicate any updates to staff and provide additional training as necessary to ensure that everyone is aware of their compliance obligations.
To enhance the effectiveness of the annual review process, CCOs can consider incorporating other team members to assist with testing and documentation. Designating specific individuals within the compliance team or other relevant departments to conduct testing and gather evidence can help streamline the process and ensure thorough coverage of all compliance areas.
Another helpful tip is to compile all documents related to the annual review testing in one centralized location. This can include testing checklists, testing results, documentation of policy and procedure reviews, and any correspondence with regulators or auditors, as well as any document reviewed. Having all relevant documents organized and easily accessible facilitates the review process and simplifies the task of preparing the annual review summary.
Conducting the annual review should be an ongoing process rather than a last-minute task done in the fourth quarter or a few days over the summer. By allocating time each month to test various areas of the compliance program, such as KYC reviews, personal trading oversight, electronic communications monitoring, cybersecurity assessments, due diligence on third-party vendors, and much more, firms can help ensure that they remain proactive in identifying and addressing potential compliance issues.
Furthermore, it's crucial for firms to remain informed about regulatory updates and industry best practices. Regularly reviewing SEC risk alerts and priorities can provide valuable insights into areas of focus for compliance efforts. Additionally, attending relevant training sessions and participating in industry forums can help investment advisers stay abreast of emerging trends and regulatory developments.
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All information provided is for educational purposes and shall not be construed as specific advice. The information does not reflect the view of any regulatory body, State or Federal Agency or Association. All efforts have been made to report true and accurate information. However, the information could become materially inaccurate without warning. Not all information from third-party sources can be thoroughly vetted. Coulter Strategic Services and its staff do NOT provide legal opinions or legal recommendations. Nothing in this material shall be considered as legal advice or opinion. Â
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