Rule 206(4)-7 of the Investment Advisors Act of 1940 requires investment advisors to adopt and implement written policies and procedures, based on the size and scope of their business. These policies and procedures must be tested at least annually. This test should include a risk assessment and an evaluation of their continued adequacy for your current business model.
Recently, the Securities and Exchange Commission (“SEC”) published the core areas they will review when they are examining your firm. Those areas are list below and taken directly from the SEC’s website.
- Certain general information to provide an understanding of the firm's business and investment activities, including organizational charts, demographic and other data regarding advisory clients, and a record of all trades placed for its clients (trade blotter).
- Information about the compliance risks that the firm has identified (e.g., an inventory of compliance risks) and the written policies and procedures the firm has established and implemented to address each of those risks to provide an understanding of the firm's compliance risks and corresponding controls.
- Documents relating to the results of and output from the various transactional (quality control) and period (forensic) testing conducted to provide an understanding of how effectively a firm has implemented its compliance policies and procedures. This includes the results of any compliance reviews, quality control analyses, surveillance, forensic or transactional tests the firm has used to determine if activities have been performed as expected and to identify activities or transactions that have fallen short of or breached related policies and procedures.
- Information regarding the results of any tests and follow-up actions taken by the firm to address shortfalls or breaches revealed by such tests to provide an understanding of steps taken by the firm to address the results of compliance reviews, quality control, forensic or transactional tests conducted. This information might include, for example, warnings to or disciplinary action of employees, changes in policies or procedures, redress to affected clients, or other measures.
- Information to perform testing for compliance in various areas.
The SEC also outlines specific items they are looking for as they review these core areas mentioned above. To view the SEC article in its entirety and to learn more about these specific items go to: www.sec.gov/info/cco/requestlistcore1108.htm. If you have questions about your procedures or need compliance assistance, Regulatory Compliance’s Investment Advisor Department is ready to help. Please give them a call at 603-434-3594 ext. 117 or email Renee at rhall@regulatorycompliance.com.
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