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October 27, 2004 at 08:00 PM
Are you a federally regulated RIA? If so, have you received The Letter? If not, you certainly will be getting one soon.
I am talking about the 11-page missive, called the “List of Books and Records Requested for Review,” that the Securities & Exchange Commission will send you prior to conducting an audit of your practice. The letter is so new that even leading compliance consultants were surprised when it began to hit advisors’ mailboxes a few weeks ago. An RIA in California, who was recently audited and asked to remain anonymous, sent me a copy. To download a copy of the letter, click here. But let me highlight it now.
The letter asked the advisor to produce documents going back over more than two years, but it left room to request other data going back to the founding of the firm in the 1990s. This shows how the SEC is shining a broadening searchlight on RIAs in the wake of the mutual fund and brokerage house scandals. Indeed, while the SEC asked for many specific items, such as e-mails or trade blotters, it also allowed examiners to ask for other documents that they–or you–might suggest. After you receive the letter, you’ll have just two or three days to get your records together for the examiners.
For example, you’ll need to demonstrate your “overall commitment to establish an effective system of controls and compliance,” something the SEC calls “tone at the top.” This could include your written compliance procedures and manual, a code of ethics for your firm and any affiliates, and your anti-money laundering policies and procedures, updated to conform with the latest regulations. In addtion, you will also be asked to produce a wealth of trading and client data. Included is your trade blotter or journal, which you’ll need to produce as a computer file, but also every securities position you have, broken down by client, and a list of every client you have signed up or lost for a specified period. Be prepared to document how you obtained clients, including payments to third parties for referrals, as well why any clients departed. If you have any soft-dollar agreements with brokers, you’ll have to lay them out, as well as how you pay for securities quotations and portfolio accounting systems.
