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Does conducting your firm’s internal annual review have to cause annual stress, work overload, and a headache?
No.
The annual review burden that investment advisors feel is the result of cramming the process into a few days’ work. Your annual review isn’t something that should be conducted over the course of a couple days. To thoroughly conduct your review, your compliance team must integrate aspects of the review process into their day-to-day activities.
Under Rule 206(4)-7, firms must:
- Adopt and implement written customized policies and procedures;
- Designate a chief compliance officer;
- Conduct annual review of policies and procedures; and
- Maintain records of policies and procedures and annual reviews.
While most firms perform an annual review, many face penalties for conducting annual reviews that simply “check the box” during a one or two-day session. How can you be sure you are adequately covering the required aspects of your annual review?
Checkmate: Your checklist for annual review success
Developing a process for your annual review, while painstaking at the start, will provide a clear path for your team, enabling scalability of the process as your firm itself scales. Below is a list of steps to take:
- Review regulatory developments and update your firm's policies accordingly.
- Review each of your firm's documents for accuracy and relevance to your firm's current business practices.
- Conduct a risk assessment to identify the areas of highest risk to your firm based on its unique business practices and update your compliance program accordingly.
- Ensure that your firm’s books and records include all necessary and updated information.
- Review all advertising materials to ensure compliance with the firm’s policies and procedures.
- Review your client holdings for consistency with objectives and constraints.
- Spot check fees charged to various clients for consistency with contract terms.
- Conduct a cybersecurity assessment, including policies and practices aimed at the five pillars of your cyber program (identification, protection, detection, response, and recovery).
- Hold a firm-wide annual compliance meeting.
- Document the meeting including the meeting agenda, compliance issues addressed, and any changes made to your firm’s policies and procedures.
- Document all findings from the annual review and identify action steps that will be taken as a result.
The key to many of these items is regularity, moving away from a one-and-done check-the-box at the end of the year toward frequent assessments of risk factors. For instance, while you may already be frequently reviewing client holdings, you should also be reviewing client files more broadly on a periodic basis to ensure any issues get rectified promptly. Similarly, conducting portions of your risk assessment monthly not only avoids a rush job at the end of the year but permits you to make quicker updates to policies and procedures. The common theme is smoothing out your compliance workload over time, rather than relying on a cursory annual review once a year.
Rules 206(4)-7 was designed to mitigate the compliance risk investment advisors face by either proactively working to ensure issues do not arise or addressing those issues that have arisen in a timely fashion. While the SEC has not provided a specific roadmap for a firm’s annual review process, it does expect a level of thoroughness and detail that only comes when you are prioritizing compliance not year after year, but day after day.
Christopher DiTata, Esq. is RIA in a Box's vice president and general counsel. A former associate of Goodwin Procter, LLP and Babchik & Young, LLP, he brings a business law background to the company, with specialized knowledge in corporate governance and compliance. He holds a JD from NYU School of Law and a BA in Economics from the University of Pennsylvania. For more information, please visit www.riainabox.com.
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