As we enter the final quarter of 2012, for investment advisers, it may be a good time to reflect again on the annual review. The annual review process should be something that chief compliance officers think about (and document) throughout the year. At year-end, from a “best practices” framework, all that should remain is preparing a written report of findings made and addressed throughout the year. Unfortunately, with demands on compliance personnels’ time, this sometimes doesn’t always happen.
Under the “Compliance Rule,” Rule 206(4)-7 of the Advisers Act, advisers should be asking themselves two questions. First, are the compliance policies and procedures adquate. Second, are they being effectively implemented. With this in mind, an investment advisers review of its policies and procedures should consider (i) any compliance matters that arose during the previous year, (ii) any changes in the business activities of the investment adviser or its affiliates, and (iii) any changes in the Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures. Further, an investment adviser is required by Rule 204-2(a)(17)(ii) to keep a record documenting its annual review.
According to the Adopting Release for the Compliance Rule, some prime areas of an adviser’s compliance program that should be considered, at a minimum, include:
- Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, disclosures by the adviser, and applicable regulatory restrictions;
- Trading practices, including procedures by which the adviser satisfies its best execution obligation, uses client brokerage to obtain research and other services (“soft dollar arrangements”), and allocates aggregated trades among clients;
- Proprietary trading of the adviser and personal trading activities of supervised persons;
- The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
- Safeguarding of client assets from conversion or inappropriate use by advisory personnel;
- The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
- Marketing advisory services, including the use of solicitors;
- Processes to value client holdings and assess fees based on those valuations;
- Safeguards for the privacy protection of client records and information; and
- Business continuity plans.
For clients and friends who would like to discuss how we can assist you with planning and conducting the Annual Review by former SEC attorneys and examiners, you can contact Dexter Johnson at (312) 346-8890 or email him at firstname.lastname@example.org.