Investment advisers should review, no less frequently than annually, the adequacy of its written compliance policies and procedures and the effectiveness of their implementation. The states expect annual reviews to take into consideration 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 Investment Advisers Act or related rules that may impact the adviser’s policies and procedures. In addition, the state expects that an investment adviser will review its compliance policies and procedures on an interim basis in response to significant compliance issues, changes in business activities, and new regulation. In accordance with state rules, this memorandum summarizes the key components of annual reviews for the adviser.
Importance of Written Procedures
An investment adviser that does not adopt and implement written procedures exposes itself and its management personnel to significant disciplinary action for failure to supervise. Conversely, an investment adviser that adopts and implements written procedures greatly minimizes its exposure to failure-to-supervise liability. According to a safe harbor found in section 203(e) and (f) of the Advisers Act, a person cannot be deemed to have failed to reasonably supervise another person if:
- There have been established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person; and
- Such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and systems without reasonable cause to believe that such procedures and system were not being complied with.
In light of the importance of having effective written procedures, the firm conducts the annual review with the aim of verifying that its supervisory system is reasonably designed to afford it and its management personnel safe harbor protection from failure to supervise.
Compliance Matters that Arose During the Previous Year
The firm completes various reviews and tasks that are designed to detect matters of non-compliance. Material compliance matters, if any, are described in the review or task that identified the compliance matter.
Material Changes in Business Activities
The firm performs periodic compliance reviews throughout the year that are designed to identify material changes that would require the firm to update its Form ADV or amend its written procedures. Material changes in business, if any, are described in the documentation associated with the reviews.
Changes to the Investment Advisers Act and Applicable Regulations
The firm considered any applicable changes in the legal, regulatory, and business environment. To keep current on changes that could affect the firm, the Chief Compliance Officer receives and reviews communications and other helpful information from compliance professionals. These matters are reviewed constantly and address matters prior to any changes taking effect. This way the firm can proactively take measures to implement new procedures and policies to mitigate risk.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. For help preparing for and conducting annual reviews for your firm, please contact us.