More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
Malls are starting to be overrun with holiday shoppers, temperatures are dropping and congressional members will soon take a recess from fulfilling their civic duty of wearing power suits and hemorrhaging taxpayer dollars. Ah yes, all the signs of a coming winter are upon us.
Although the SEC may have hemorrhaged senior staff this year, its rules and regulations remain in full force and effect. For RIAs, this means that the end of the year should be a time to prepare for and tackle the annual regulatory requirements imposed upon them.
All RIAs must “review, no less frequently than annually, the adequacy of [their] policies and procedures… and the effectiveness of their implementation.” So says Rule 206(4)-7 of the Investment Advisers Act of 1940, the rule which imposes what’s more colloquially known as the “annual review” requirement.
According to the SEC’s Compliance Rule release, a firm’s annual 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.” The review technically does not need to be documented in an official written report, but there should at least be voluminous documentation to support the fact that an annual review was actually conducted (such as working papers, compliance program testing results, and action items).
The annual review can summarize the testing of any number of policies and procedures of the firm, but the SEC will expect areas fraught with more risk or more conflicts of interest to garner more attention. A few specific documents that should also be reviewed no less frequently than annually include your policies and procedures manual, code of ethics, advisory agreement, business continuity and disaster recovery plan, risk assessment, and conflicts of interest assessment.
Importantly, evidence your review of these documents to demonstrate your oversight to regulators when they come to examine you.
Form ADV is arguably the most important regulatory document for a RIA, and it imposes a myriad of filing and client delivery requirements that become important shortly after a RIA’s fiscal year end. Though complete instructions are provided by the SEC here and here, below is a summary of certain important takeaways:
- File your annual updating amendment to Form ADV using the IARD system within 90 days after the end of your fiscal year (generally by the end of March for RIAs using the calendar year for their fiscal year). At the same time, file your summary of material changes (if any) to Form ADV Part 2 (the “Brochure”), and file your then-current version of Form ADV Part 2.
- Filing your ADV Part 2B (the “Brochure Supplement”) is optional.
- Within 120 days of the end of your fiscal year, deliver to each of your existing clients one of the following:
- A summary of material changes since your last annual updating amendment (including an offer to provide a free copy of the entire Brochure); or
- the entire Brochure, including a summary of material changes since your last annual updating amendment; or
- Only if you have not had any material changes since your last annual updating amendment: nothing.
- Delivering your Brochure Supplement to existing clients on an annual basis is not required.
- Don’t forget to check state-specific requirements.
- Electronic delivery of documents is permitted subject to SEC interpretive guidance, which can be found here. Yes, the guidance is well over a decade old, but that’s what we have to work with. In a nutshell, obtain positive consent from your client prior to delivering documents electronically.
- Interim delivery of your Brochure or Brochure Supplement may be required if there is a disclosable disciplinary event, the information contained in either document becomes materially inaccurate, or there is a fiduciary obligation to inform clients of material information that could affect the advisory relationship.