Four-Step Guide to Investment Adviser Compliance Program Readiness

January 2, 2024

Last year was a busy year for the SEC, and 2024 is expected to be even busier. The New Year is a great time to take a fresh look at your compliance program to make sure you are meeting the most up-to-date best practices, and to ensure you are prepared for regulatory inspection. An annual review of your firm’s compliance program should also include thorough review of your policies and procedures. 

The step-by-step guide below is intended to help walk your through the key questions and considerations to keep in mind when conducting an annual review, to help make sure you start off 2024 with a solid, up-to-date compliance program. 

Step 1: Review the Fundamentals: Key Questions  

1. When were your compliance policies and procedures last updated? If it’s been close to—or over a year—they need to be updated as soon as possible.
2. Were there any action items from your last annual review? If so, ensure they have been completed and documented.
3. Are your Form ADV disclosures accurate? If not, they should be corrected as soon as possible.
4. Have employees received compliance training? We suggest that firms conduct annual compliance training.
5. Are there regulatory changes that will impact the firm? We recommend that firms begin preparing for the new, and proposed rules, as there are many significant changes to current requirements. This includes but is not limited to: The Private Fund Reform rules, Form PF Enhancements, the proposed Cybersecurity Risk Management Rule, and the proposed Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers Rule.
6. Has the firm grown quickly? If so: ensure that policies and procedures are updated, and that the firm’s compliance team is adequately resourced.
7. Has the firm added new products/services or strategies? If so, ensure that the firm’s disclosures are brought up to date and determine whether any additional policies and procedures are needed.
8. Have you had deficiencies from a previous SEC exam? If so, you should have a documented plan and testing to avoid repeat deficiencies.
9. How does the CCO stay current with rules and regulations? Make sure to check relevant SEC websites regularly and sign up for timely updates, such as subscribing to Fairview Flash Reports, which provide SEC- and compliance-related news and insights. 
10. Does the CCO have good insight into the operations of the adviser? The CCO should be engaged in day-to-day operations. This may include approving trades, reviewing marketing materials, and being involved in firm-level operations discussions.  

Step 2: Prioritize: What Needs to be Addressed First?  

The Compliance Manual is the foundation of your compliance program. Ensure that it:  

1. Fits your firm and its operations 
2. Reflects compliance risks that you have identified for the firm 
3. Is current with new rules and best practices 
4. Mitigates recidivism for past deficiencies 

Ensuring your Compliance Manual includes risk-based best practices helps set your firm on a good path to a solid compliance program. 

Other priorities that may need to be addressed concurrently include: 

• Correcting material compliance issues (i.e., code of ethics reporting, fee calculations, custody issues or regulatory deficiencies) 
• Identifying ability to produce books and records for the firm 
• Ensuring the CCO has the resources and authority necessary to support a robust compliance program 
• Conducting a compliance risk assessment that addresses the firm, Advisers Act rules, and best practices 

Step 3: Make a Plan 

The SEC is likely to finalize rules that may require immediate action to ensure your firm is prepared to meet new requirements and new deadlines. This will involve significant involvement by your compliance team. This is why another aspect of having a sold compliance program is ensuring that you have a plan to update and maintain your compliance program, on a regular basis. 

Follow these steps to help make a solid plan:  

1. Set goals: Identify realistic objectives that integrate your priorities and break them into small steps that will seem less overwhelming.
2. Ensure you have support of senior management: Communicate with senior colleagues and firm principals by providing periodic compliance program updates and confirm commitment to “tone at the top.”
3. Calendar applicable regulatory deadlines: Build a specific timeline to prepare for filings and to meet other deadlines.
4. Ensure you have separate, well-organized compliance files in a secure environment
5. Explore whether additional resources, such as a compliance partner, are needed based on firm growth (or plans for growth), new product lines, or new rules impacting the firm 

Step 4: Document, Document, Document 

In every SEC Exam, one of the first things regulators will ask for is documentation. Creating and maintaining a process for documentation is not only a requirement, but it is also going to simplify any sort of Exam request or regulatory inquiry you may encounter. Consider these tips: 

• Document testing to demonstrate that procedures were followed (i.e., the Annual Review, investment committee minutes, best execution review, share class review, trade process testing, etc.)
• Prompt for documentation in your policies and procedures manual
• Include the documentation processes in your compliance training
• Ensure that there is documentation showing that procedures were followed (i.e., committee minutes, evidence of required reviews, logs that track document updates, evidence of deadlines being met, etc.)

Questions?  

We can help. Our team of regulatory experts partners with investment advisers to help CCOs maintain the day-to-day administration of your compliance program. If you have questions, or need guidance, let us know.