REGULATORY COMPLIANCE Watch

Investment Advisers Act rule 206(4)-7 requires that an SEC-registered investment adviser must review the adequacy and effectiveness of its policies and procedures at least annually.  The rule states that the review should consider any compliance matters that arose during the previous year, any changes in the business activities of the adviser or its affiliates, and any changes in the Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures.
 
Although the rule requires only annual reviews, advisers should consider the need for interim reviews in response to significant compliance events, changes in business arrangements, and regulatory developments, the Commission states.

Exam interest

Make no mistake:  the SEC is keenly interested in how you plan, conduct and document your firm’s annual review.  Before arriving on site, Commission examiners are seeking via their document request letters “documentation maintained regarding any reviews conducted … including any annual reviews and/or interim reports.” [Note:  investment advisers are not specifically required to generate a written annual review while investment company advisers must generate a written report].
 
The SEC isn’t the only one looking for documentation—many institutional investors and others are now insisting on seeing copies of the annual review.  Whether you decline, generate a summary or provide the full blown, written annual review is up to you. 
 
Assessing risks and identifying conflicts should comprise the building blocks of your annual review.  Regular, rolling forensic and transactional testing is highly recommended as is involving others in your firm in this extremely important annual review requirement.