The Importance of Written Policies and Procedures and a Code of Ethics for Investment Advisers

For registered investment advisers, the written Policies and Procedures Manual and Code of Ethics are required components of the compliance program under the Investment Advisers Act of 1940. These documents form the operational foundation of an adviser’s compliance framework and are among the first items regulators review during an examination. A well-crafted manual should accurately reflect how the firm operates, supervises its personnel, and manages risk. By contrast, a generic or “boilerplate” manual often copied from a template without customization can create unnecessary exposure and signal to examiners that the firm’s compliance program is not fully implemented or understood.

The Regulatory Framework

Two SEC rules establish the baseline requirements for all SEC-registered investment advisers. Rule 206(4)-7 under the Investment Advisers Act of 1940 (the “Compliance Rule”) requires advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules. It also requires each firm to review these policies and procedures at least annually and to designate a Chief Compliance Officer responsible for administering them.

Rule 204A-1 (the “Code of Ethics Rule”) requires each adviser to adopt and enforce a written code of ethics that sets forth standards of business conduct reflecting the adviser’s fiduciary duties. The Code must address personal trading by access persons, pre-approval of IPOs and limited offerings, reporting of holdings and transactions, and written acknowledgments from all supervised persons. Advisers must also maintain records of the Code, any amendments, access-person reports, and any violations or disciplinary actions taken, as required under Rule 204-2.

Putting the Rules into Practice: Demonstrating Compliance Effectively

Examiners consistently emphasize that it is not enough for firms to simply “have” a compliance manual. Examiners expect policies and procedures that are customized, implemented, and tested. They look for evidence that each section of the manual corresponds to the adviser’s actual business operations and that the firm can demonstrate it follows what it has written.

A policy that looks good on paper but has no evidence of implementation will be viewed as a deficiency. For example, if a firm’s manual states that personal trading is reviewed daily but the firm actually performs those reviews quarterly, the SEC will likely note that the firm is not following its own written procedures. The rule does not require perfection; it requires reasonable, documented oversight consistent with what the firm says it does.

The same principle applies throughout the manual. Every policy should describe the firm’s actual practices in a way that can be consistently followed, tested, and demonstrated. The manual should reflect real, repeatable processes that the adviser’s personnel understand, apply in their daily work, and can demonstrate to examiners when requested.

Why Customization Matters

Every advisory firm is different. A manual that accurately describes one firm’s workflow, risk profile, and supervisory structure may be entirely unsuitable for another. Yet it is common to see both new firms and established firms, particularly those where the Chief Compliance Officer also serves as a financial adviser, principal, or holds multiple job titles, rely on generic manuals written in dense legal language that few employees can interpret. These documents often cite the rules but omit the firm’s actual procedures for complying with them, leaving gaps between written policy and daily practice.

In many cases, manuals are prepared by legal professionals who focus on ensuring that all regulatory requirements are addressed. While that legal foundation is essential, the result can sometimes be lengthy documents written in formal legal language, making them difficult for advisory staff to understand or apply. Some template manuals or off-the-shelf compliance documents indicate that customization is required, but this involves far more than simply inserting the firm’s name. In many cases, the procedures that describe how the firm complies with those regulatory requirements must be added or expanded as part of the customization process. The level of tailoring often depends on the service package purchased, and some templates available online require little or not enough information about the firm’s structure or business model before purchase.

Designing and implementing a usable manual takes time, and it requires active participation from the firm. Several functional areas may need to contribute to ensure that the policies and procedures accurately reflect how the business operates in practice. Whether a firm hires a consultant or completes this work internally, meaningful customization requires effort and coordination. The firm itself remains ultimately responsible for ensuring that its manual accurately reflects its operations and demonstrates compliance with applicable rules.

A good test of whether your manual is practical is to hand it to a new hire. Can that person understand how the firm reviews advertising, approves client accounts, monitors trading activity, and performs other key compliance processes? These are only examples, but if the procedures are difficult to follow, the manual may be too formal or generic to serve as a useful operational guide for your staff. A manual should be written so that those responsible for compliance can clearly understand and apply its requirements in day-to-day operations.

When “Not Applicable” Is Not Enough

Some regulatory professionals advise omitting sections of the manual that do not apply to a firm’s current business. In principle, that is correct. If a firm does not manage private funds, for example, there is no need to include a detailed private-fund policy. However, leaving a topic out entirely can create unintended problems later.

Many lawyers, consultants, and even regulators who make these recommendations have never actually worked inside an advisory firm. From my experience working within advisory firms in multiple roles, including Chief Technology Officer, Chief Operating Officer, and Chief Compliance Officer, I have seen how easily important areas can be overlooked when not addressed in the manual. The reality is that if certain subjects are never mentioned, they often fall off the radar as the firm grows or changes, leading to unintentional gaps, violations, or deficiencies.

In my consulting work with both new and established firms, I often see the same issue when a new rule or regulatory requirement is introduced. If the manual has never referenced that area, the firm may have no internal framework for evaluating what needs to change or who is responsible for updating procedures. The pattern is typical when firms begin showing performance results to prospective clients, launch new marketing efforts, or add additional services. Since those topics were once considered “not applicable,” staff members often lack a reference point for the related disclosure, supervisory, or recordkeeping requirements. In many of these situations, no one pauses to ask, “Should we run this by compliance or our compliance professional?” Including even a short description or placeholder statement in the manual can help prevent these oversights and give the firm a foundation for addressing new requirements as they arise.

Ensuring that compliance is part of the discussion when new initiatives or business practices are considered is critical. Involving compliance at the outset helps identify regulatory implications early and prevents issues that can arise when policies or activities are implemented without review. Having compliance at the table from the start supports a proactive approach rather than a reactive one, and it can save firms significant time during future examinations. The importance of compliance involvement in business planning is a topic that might warrant its own article in the future.

Realism and Accuracy

Regulators expect manuals to reflect what the firm actually does, not what it hopes to do. Many advisers over-promise in their manuals by committing to procedures that are unrealistic given the firm’s resources. It is far better to describe a sustainable process than to copy language from a sample policy that sounds thorough but cannot be implemented.

For example, stating that “the CCO will review all marketing materials prior to distribution” may seem appropriate in a manual, especially if it is copied from a template, but it should only remain if that review actually occurs for every item. If certain materials, such as routine social media posts, are subject to post-distribution review or a different approval process, the manual should clearly describe that approach. Likewise, policies should accurately reflect how the firm oversees its operational controls, such as cybersecurity, information security, or vendor oversight, without overstating the frequency or scope of review. The goal is to ensure that the manual realistically describes how compliance is carried out in practice, rather than how the firm might ideally wish to operate.

Firms should also avoid including overly detailed operational instructions that change frequently, such as login steps or vendor system workflows. Those details are better maintained in a separate internal reference document or process checklist that can be updated as systems evolve. The manual should include a summary of each procedure or a reference to where the detailed process is maintained, focusing on the compliance requirement itself, including the rule, the responsibility, and the review process.

Each procedure in the Compliance Manual should describe how the firm complies with a particular regulatory requirement at a policy level, not in technical detail. It should identify who is responsible, how often the task is performed, what documentation or evidence is retained, and how exceptions are handled or escalated. Where applicable, procedures should also reference any supporting materials or operational guides that contain the detailed steps. This allows the firm to keep the Compliance Manual concise and stable while maintaining separate records that can be updated as systems, technology, or vendors change. By defining responsibilities, frequency, and documentation standards, the manual becomes both practical for staff and defensible during an examination.

Maintaining a Dynamic and Practical Compliance Manual

Rule 206(4)-7 requires an annual review of written policies and procedures. In practice, firms should view compliance as a continuous process rather than a once-a-year task. The manual should be reviewed whenever there are significant business, regulatory, or personnel changes. Each review should be documented, and findings should result in concrete updates or remediation steps.

During an exam, the SEC often requests evidence of the last annual review, including the testing performed, issues identified, and corrective actions taken. Firms that maintain a well-organized annual review file linking findings to specific sections of the manual demonstrate an active compliance program and a culture of accountability.

Regular staff training and acknowledgement are equally important. Every supervised person must acknowledge in writing that they have received and understood the firm’s Code of Ethics, as required under Rule 204A-1. Acknowledgment is also expected when the Code or Compliance Manual is materially updated or redistributed. Although an annual signature is not specifically required by rule, obtaining it each year is considered a best practice. Doing so provides evidence that staff remain familiar with current policies and reinforces firm-wide accountability. Compliance should not exist only in the CCO’s inbox; it should be part of the daily conversation.

Adapting to Rule Changes and Regulatory Updates

Keeping the Compliance Manual current involves more than inserting new citations or rewording existing procedures when a rule changes. Adapting to regulatory amendments requires a structured and informed approach that combines legal analysis, compliance interpretation, and operational planning. The process requires time and coordination, and should start long before the compliance date of a new rule.

When significant amendments are adopted, most compliance consultants can produce strong policy language and even well-designed templates to help firms integrate new requirements. Those tools are valuable, but they are only part of the process. Each firm must take time to absorb the new rule, understand how it affects its business model, and determine how to implement it effectively. The written language is the outcome of that work, not the beginning.

The first step is to review the rule itself and identify what is changing, what activities are newly covered, and what may no longer apply. Firms should listen carefully to the lawyers and regulatory specialists who analyze these rules and help interpret areas that may be ambiguous. It is equally important to evaluate what regulators may emphasize during examinations based on early speeches, guidance, or risk alerts. Understanding not only what the rule says but how it may be applied in practice helps a firm design procedures that are both compliant and operationally realistic.

Next comes the internal discussion. Compliance should work closely with the firm’s leadership, operations, technology, and client service teams to determine how the new requirements can be built into daily workflows. Often, the most meaningful insights emerge during these internal discussions. Teams can identify potential bottlenecks or conflicts between regulatory intent and operational reality. The goal is to build procedures that meet the new rule’s expectations while remaining functional within the firm’s existing systems and supervision model.

After the legal and operational elements are aligned, the firm should document the changes clearly and concisely. Examples include preparing staff training, developing checklists of new requirements, or creating tracking logs to monitor readiness. The resulting policies and procedures should be vetted internally before the rule’s compliance date, or ideally, well in advance. Early preparation allows the firm to adjust its systems, vendor relationships, and supervisory reviews before the rule becomes enforceable.

Firms that approach rule changes in this way demonstrate a strong compliance program and foster confidence within their own teams. The manual becomes not just a document of compliance, but a reflection of how the firm anticipates change and responds to it thoughtfully. While the process of integrating new rules could easily be its own article, the key takeaway is that adaptation requires both technical understanding and practical coordination. The policies and procedures that ultimately appear in the manual are the result of that collaboration.

Compliance Culture and Practical Implementation

The written manual is more than a regulatory checklist; it is a reflection of the firm’s culture. When policies are written clearly, kept current, and discussed openly, they promote accountability and trust across the organization. Employees know where to look for guidance, and management can demonstrate that controls are both documented and functioning.

Conversely, when a manual is ignored or misunderstood, it undermines compliance credibility. Regulators can quickly tell when a firm’s staff are unfamiliar with their own policies. A compliance manual written in plain language, aligned with firm operations, and reinforced through periodic training is one of the strongest indicators of a healthy compliance program.

Customization, Commitment, and Expertise

Firms can certainly start with a template compliance manual, many do, but that is only the first step. The actual effort lies in tailoring it to reflect how the firm actually conducts business. Each section must make sense for the firm’s structure, client base, and supervision model. Customization takes time and requires an understanding of what regulators expect to see during examinations.

A firm may choose to handle the customization of its manual internally or work with experienced compliance professionals who understand the regulatory framework and how advisory businesses operate. Either approach can be practical, but the firm itself must remain directly involved. No consultant, regardless of expertise, will ever know the details of your business as well as you and your team do. At a minimum, firm leadership and staff should carefully read and understand what has been written on their behalf.

Even the best-designed templates or questionnaires may overlook operational nuances that only the firm can identify and address. Attention to these details is essential before the next examination, as a manual that is outdated, inaccurate, or disconnected from actual practices remains one of the most common and easily avoidable compliance deficiencies.

Whether a firm chooses to build internally or work with outside experts, the compliance manual and Code of Ethics deserve the same care as client portfolios. They are not just regulatory paperwork; they are living tools that guide the adviser’s conduct, document its fiduciary obligations, and help protect the firm when regulators come calling.

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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