Practical Guidance to Manage the Annual Review and Strengthen Compliance Oversight.
- Coulter Strategic Services
- Oct 16
- 10 min read
Introduction
For many advisory firms, the annual compliance review is a recurring line item on the calendar, one that too often becomes a documentation exercise rather than a diagnostic one. Under Rule 206(4)-7, however, the annual review is a cornerstone of every adviser’s compliance program. Done well, it is not only a regulatory requirement but also an operational stress test that can highlight both compliance gaps and business inefficiencies.
While the rule itself is concise, its practical implications reach into every corner of an advisory firm. The annual review requires firms to assess whether their written policies and procedures are reasonably designed and effectively implemented. In practice, this means evaluating whether the firm is actually doing what its compliance manual says it does and whether those practices still meet current regulatory expectations. As SEC Risk Alerts continue to show, regulators expect firms to not only have policies, but to test and document their effectiveness throughout the year.
An effective annual review goes beyond checking boxes. It brings together the firm’s leadership, operations, and compliance personnel to evaluate how well the firm’s controls function in real time. When approached this way, the process becomes a strategic management tool, one that reveals where the firm is strong, where it is exposed, and how to allocate resources more efficiently. The result is a compliance program that is both defensible to regulators and aligned with the firm’s business goals.
Test Your Firm’s Readiness and Documentation Discipline
The annual review is an opportunity to confirm that your firm’s compliance program can stand up to regulatory scrutiny at any time. It is not about anticipating what examiners might request next year, it is about ensuring that your policies, records, and controls are consistently accurate, complete, and well organized.
The September 6, 2023, Risk Alert from the Division of Examinations underscores the importance of documentation and ongoing testing as indicators of program effectiveness:
“Advisers are encouraged to assess the adequacy and effectiveness of their compliance programs by periodically testing their policies and procedures and maintaining documentation that demonstrates their review efforts.”
SEC Division of Examinations, Risk Alert: IA Compliance Programs (Sept. 6, 2023)
Firms should view that principle as a guide for internal readiness. A well-run compliance program should be able to locate and produce accurate information efficiently, not only to respond to regulators but to validate that the firm is managing its own operational and fiduciary risks effectively.
Use the Tools You Have
If your firm uses a compliance platform or regulatory technology, put it to work. These tools can house tasks, archive policies, and maintain version histories that support your review process. Centralized systems also help document the firm’s oversight activities in real time, showing not just that the work was completed but when and by whom. That audit trail can make all the difference when demonstrating a culture of compliance.
If your firm still relies on spreadsheets or shared drives, consider adopting technology that centralizes testing records, especially before your next examination cycle. Even modest workflow or tracking software can improve visibility into deadlines, task ownership, and follow-up items. Technology does not replace the judgment of a compliance professional, but it can reduce administrative risk and ensure that important evidence is not lost in email threads or personal folders.
Regulatory technology can also improve version control, a recurring challenge for growing advisory firms. Tracking which policy or disclosure is current, or who last updated a document, helps ensure that your review process evaluates the right materials. This can prevent inconsistencies among Form ADV, client agreements, and internal procedures, which remain one of the most common sources of deficiencies in SEC and state exams.
Finally, technology can strengthen accountability. When each area of the firm (portfolio management, trading, operations, marketing) can see its own compliance tasks and deadlines, testing becomes a shared responsibility rather than a one-person project. That collaboration supports a more efficient annual review and helps build a compliance culture that scales with the business.
Investing in compliance technology should be a deliberate decision. Take time to research available platforms and determine which best fit your firm’s structure and workflow. Transitioning from spreadsheets to a centralized system often works best by running both in parallel for several months or even a full year to confirm accuracy and consistency. A full regulatory platform may not be necessary for every firm, but maintaining the compliance program does require technology, organization, and an intentional process for recordkeeping and oversight.
Delegate Wisely: Compliance Leads, Others Execute
While the Chief Compliance Officer manages the firm’s compliance program, ultimate responsibility rests with the advisory firm itself. Compliance oversight is a shared obligation of firm leadership, management, and staff. The CCO’s role is to help implement the policies and procedures that support those responsibilities and to ensure they are understood and consistently applied across all business areas.
The CCO should work directly with portfolio management, trading, operations, and client service teams to explain how the rules apply to their day-to-day functions. This includes helping each area identify where compliance risks exist, what controls are in place, and how to document that those controls are working. A collaborative approach makes compliance more practical and less theoretical, ensuring that staff understand not only what is required but also why it matters.
Training is a critical part of this process. The CCO should schedule focused sessions that translate complex regulatory requirements into real operational examples. These sessions may include topics such as personal trading reviews, advertising and client communications, custody procedures, and cybersecurity practices, but those are only examples. Each firm’s training program should reflect its own business model, client base, and service structure. As the firm grows or adds new products and technology, the training should evolve to address new risks and responsibilities. Clear, role-specific education helps staff anticipate compliance considerations, not just react to them, and promotes a culture of accountability across all functions.
Testing should also be integrated into day-to-day business operations rather than treated as a separate project. The CCO can coordinate testing cycles, review supporting documentation, and track follow-up items. At the same time, department heads confirm that procedures are being followed. Documenting this interaction demonstrates to regulators that compliance is both active and embedded throughout the firm.
Finally, delegation is key. A CCO cannot and should not do everything alone. Assigning responsibility for testing and reporting to the appropriate departments strengthens ownership and creates a more efficient process. The CCO remains the coordinator and quality control point, ensuring that results are reviewed, findings are addressed, and management is kept informed.
Engaging a third-party compliance consultant to assist with the annual review every few years can also provide significant value. The CCO still manages the project and remains responsible for the firm’s compliance program, but an outside consultant brings a fresh perspective and can identify gaps or inconsistencies that may not be visible to someone immersed in daily operations. Consultants who work with multiple advisory firms observe a wide range of examination trends, best practices, and regulator expectations. Leveraging that broader experience can help a firm strengthen its internal controls, refine its documentation, and validate that its compliance framework aligns with current regulatory interpretations. Periodic outside reviews also demonstrate to senior management and regulators that the firm is committed to continuous improvement.
Your annual review summary should include:
· What was tested
· What changed during the year and why
· Recommendations or areas in need of remediation
· Status of Recommendations or remediation items
Once the review is complete, deliver a written summary to ownership or executive management outlining the areas tested, any findings, and timelines for corrective actions. Review the results with staff as well, especially when recommendations affect their specific responsibilities or procedures. Collaboration at this stage helps ensure that everyone understands both the issue and the corrective steps needed. Any remediation should be completed within a reasonable period of time so that it does not carry over into the next year’s review. Timely follow-up shows that the firm takes compliance seriously and treats findings as opportunities to strengthen its overall program rather than recurring issues.
Sample Areas to Review and Test
The areas reviewed each year will vary based on the firm’s structure, business lines, and risk profile. The following examples illustrate common areas that should be tested and documented as part of an annual review, but the list is not exhaustive. Each firm should tailor its testing to reflect its own operations, clients, and regulatory obligations. When planning the review, consider recent SEC Risk Alerts, Examination Priorities, and any past regulatory exams or interactions the firm has experienced. Incorporating those insights ensures that the review focuses on areas of higher regulatory interest and on any previously identified weaknesses or follow-up items.
Start with your core disclosures, including Form ADV Parts 1, 2A, 2B, and Form CRS, to ensure that all descriptions of services, fees, conflicts, and disciplinary history are consistent across documents. Differences between these filings, client agreements, or marketing materials are frequent sources of examiner findings.
Review marketing and client communications, including presentations, newsletters, websites, and social media. Confirm that performance information is accurate and that any hypothetical or model data includes the required disclosures under the Marketing Rule. Pay attention to testimonial and third-party rating use, which continues to receive examiner scrutiny.
Evaluate personal trading in comparison to client trading activity. Look for timing or security overlaps that could suggest front-running or the misuse of material nonpublic information. This testing should occur regularly, with evidence retained to demonstrate that reviews are performed and any exceptions are resolved.
Test client portfolios and transactions by sampling accounts to verify that holdings and trading activity remain aligned with each client’s stated objectives and risk tolerance.
This review helps ensure that the firm’s fiduciary duty of care is met and that supervision is functioning as designed.
Review your Compliance Manual and Written Supervisory Procedures to confirm that they remain current and accurately describe how the firm operates. Cross-reference your procedures with recent rule amendments, SEC Risk Alerts, and actual practices within the firm. Outdated or unused policies increase the risk of deficiencies and may indicate that the compliance program has not kept pace with operational changes. Form ADV Parts 1 and 2, Form CRS, marketing materials, and written policies should all align and present consistent information across the firm’s documentation.
Inconsistencies between these materials are among the most common findings in regulatory exams. These are only sample areas to review. Many other topics should be evaluated based on the firm’s specific risks, services, and operational structure, and they should be included in the annual review as appropriate.
Checklists vs. Task Lists: Different Tools With Complementary Purposes
A task list tracks the recurring duties that keep the compliance program functioning, such as filing Form ADV amendments, submitting Form 13F reports, conducting best execution reviews, monitoring personal trading, and completing annual certifications. These tasks represent the operational side of compliance and help ensure that deadlines are met and regulatory filings remain current.
An annual review checklist, by contrast, evaluates the quality and completeness of those activities. It documents whether each task was performed properly, whether supporting evidence exists, and whether the firm’s policies and disclosures continue to align with current practices. The checklist forms part of the documented annual review and should include observations, recommendations, and follow-up actions. Along with the checklist, firms may also prepare a summary of the annual review that consolidates testing results, findings, and remediation plans. This summary provides a concise record of the firm’s overall compliance health and supports management’s oversight responsibilities.
Both are essential components of a well-structured compliance program. The task list keeps the program on schedule, while the annual review checklist provides the verification and documentation that regulators expect to see during an examination. Using them together creates a complete cycle of planning, execution, testing, and remediation.
For smaller firms, task lists may be simple spreadsheets or built into a calendar system, while larger firms may use integrated compliance software. Regardless of format, both should be maintained as part of the firm’s official compliance records. The goal is not to automate compliance, but to organize it—ensuring that all required activities are performed, reviewed, and supported with clear evidence.
A well-designed checklist can also help identify trends over time. Comparing notes and results from prior years shows whether the firm is improving, whether certain findings reappear, and whether new risks are emerging. Reviewing this historical perspective allows management to make informed decisions about staffing, training, and resource allocation to support ongoing compliance effectiveness.
Document, Summarize, Improve
Each finding from the annual review, regardless of its significance, should be documented along with any related follow-up or corrective action. Recommendations do not necessarily indicate rule violations or formal deficiencies. They should also identify better practices for operational and compliance efficiency and effectiveness, reflecting opportunities to improve workflow, strengthen procedures, or enhance training and supervision.
Effective firms view the annual review as a continuous process rather than a once-a-year project. Progress is tracked throughout the year, allowing compliance to remain active and responsive. Maintaining that level of engagement strengthens the firm’s operational discipline and reinforces a culture of accountability across all areas of the business.
Closing Thoughts
A thorough annual review demonstrates that the firm understands its fiduciary and supervisory responsibilities and can substantiate its compliance program on short notice. It confirms that compliance is not a static obligation but an ongoing commitment to oversight, documentation, and continuous improvement.
An effective review should include testing the firm’s policies and procedures, which are living documents meant to evolve with regulatory expectations and operational changes. Regular updates reflect that the firm is monitoring its practices, adjusting to new risks, and ensuring that written policies align with how the business actually operates.
The annual review is also an opportunity to evaluate the firm’s performance against current SEC Examination Priorities, Risk Alerts, and new or amended rules. Incorporating these external resources helps ensure that the firm remains aligned with emerging regulatory focus areas and that its internal testing addresses both known and evolving risks.
Firms that leverage comprehensive annual review checklists and structured task-tracking tools find the process more consistent, less reactive, and ultimately more defensible under examination. When supported by sound documentation and thoughtful follow-up, the annual review becomes more than a regulatory requirement—it becomes a framework for operational excellence and sustained compliance effectiveness.
Coulter Strategic Services provides customized compliance and regulatory consulting designed to meet the specific needs of each investment advisory firm. Services are tailored to the firm’s structure, business model, and regulatory obligations to help maintain an effective and sustainable compliance program aligned with current expectations. Contact us today to discuss your firm’s compliance program needs. Learn more at https://www.coulterstrategicservices.com/
All information provided is for educational purposes and should 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.
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