Investment Adviser Compliance Consulting

As a registered investment adviser or RIA (registered with the SEC), you have an obligation to comply with all of the applicable provisions of the Investment Advisers Act of 1940 (“Advisers Act”) as well as any rules that have been adopted by the SEC since then, such as Rule 206(4)-7, often referred to as the Compliance Rule and as summarized below.

With all the compliance rules that must be navigated, SEC compliance can feel overwhelming and burdensome. Hopefully this investment adviser (or advisor) compliance overview provides some guidance and organization.


Chief Compliance Officer

You must designate a chief compliance officer (“CCO”). The CCO is responsible for administering the policies and procedures and training employees about compliance to build a culture of compliance at the firm. The CCO should be competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce the compliance policies and procedures for the firm.

Compliance Policies & Procedures

Registered investment advisors are required to have a Compliance Manual – a set of written policies and procedures that are reasonably designed to prevent violations of the Advisers Act.

 

As a registered investment advisor (“RIA”), you are expected to develop and maintain a detailed risk assessment that identifies the risks and potential conflicts to the RIA’s business and operations. Then, design compliance policies and procedures not only to mitigate the risks and conflicts identified but also to prevent, detect, and correct any violations of the Advisers Act.

At a minimum, the following areas should be included:

  • Portfolio management
  • Accuracy of disclosures
  • Proprietary/personal trading
  • Safeguarding of client assets
  • Record keeping
  • Privacy protection
  • Trading practices
  • Marketingservices including use of solicitors
  • Valuation and billing
  • Business continuity and disaster recovery planning
  • Use of social media
  • Cybersecurity
  • Proxy voting
  • Political Contributions

Code of Ethics

In addition to the above compliance policies and procedures, as outlined by Rule 206(4)-7, registered investment advisors are required to develop and enforce a written Code of Ethics that complies with Rule 204A-1 of the Advisers Act. This is a rule the SEC takes literally and should be followed with accuracy. The areas that must be addressed to ensure registered investment advisor compliance are:

  • A standard of business conduct that the registered investment advisor requires of all its supervised persons, and it must require compliance with the federal securities laws.
  • A complete report of each access person’s securities holdings both initially and annually thereafter.
  • Quarterly reports of all personal securities transactions by access persons.
  • Access persons’ transactions and holdings reports reviewed by the registered investment advisor.
  • Registered investment advisor’s approval before an access person invests in an initial public offering or private placement.
  • Prompt internal reporting of code violations to the advisor’s chief compliance officer, or to another designated person.
  • Requirement that the registered investment advisor provide each supervised person with a copy of the code of ethics and any amendments.
  • Code of ethics requirement that each supervised person acknowledge, in writing, his/her receipt of those copies.

There are specific requirements within each of the areas identified above that registered investment advisors must address and follow within the Code of Ethics. In our experience, this is an area that typically receives deficiencies, as the SEC does take this rule literally. Therefore, to ensure registered investment advisor compliance, the Code of Ethics must be followed with complete accuracy.

Annual Review

Rule 206(4)-7 requires each registered investment advisor to review its compliance policies and procedures annually to determine its adequacy and the effectiveness of its implementation. The review should consider:

  1. any compliance matters that arose during the previous year;
  2. any changes in the business activities of the registered investment advisor or its affiliates; and
  3. any changes in the Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures.

Although the RIA Compliance Rule requires only annual reviews, registered investment advisors should consider the need for interim reviews.  While it is not required to maintain a written report as a registered investment advisor, it is best practice to support the reviews conducted and for communicating with the principals, officers, and directors of the firm.

Filings

An additional component, and a very important one, for registered investment advisor compliance is the filing of specific reports. Some are to provide information to the SEC and some are for public use to disclose the potential conflicts of the advisor and general business practices. The goal is to provide transparency within the industry.

Form ADV Part 1

ADV Part 1A is the firm’s registration form with the SEC, and it is filed online with the SEC through the Investment Advisers Registration Depository (“IARD”). This form is required to be updated annually within 90 days following the firm’s fiscal year end as well as anytime there are materials changes within the fiscal year. This form is used by the SEC to gather relevant information and facts about the firm.

Form ADV Part 2A

ADV Part 2A, often referred to as the “disclosure brochure” or “brochure,” is a written document that provides information about the advisor’s business and operations. There are specific requirements that must be addressed. The brochure must be in plain English and identify material potential conflicts of interest, including how the registered investment advisor mitigates these conflicts. The ADV Part 2A must also be filed with the SEC through IARD within 90 days of the firm’s fiscal year end. In addition, this document must be delivered both a) initially, prior to, or at the time the client signs the investment advisor contact and b) annually, upon material changes, within 120 days after the firm’s fiscal year end. For the annual delivery, registered investment advisors can choose to either a) deliver only the summary of material changes with an offer to deliver the complete brochure upon request or b) deliver the complete brochure, which must include a summary of material changes.

Form ADV Part 2B

ADV Part 2B is the firm’s supplemental brochure which provides information about the firm’s supervised persons that a) have discretionary authority over client assets (even if they do not have direct client contact); and b) formulate investment advice for a client and have direct client contact.

The Part 2B does not get filed with the SEC but must be delivered initially to the registered investment advisor’s clients. It needs to be delivered before or at the time the supervised person begins providing advisory services to the client and again only upon material changes.