Year End Compliance Checklist for Investment Advisers

Updated: Jan 2

Guest Contributor: Hope Newsome

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Enjoy this guest blog, brought to you by one of the seasoned compliance experts in our network. This information is being provided for educational purposes only and should not be construed as legal advice. The views, opinions and positions expressed within this post are those of the author alone and do not necessarily represent those of Complect.

A well-designed compliance program incorporates a time of reflection at the end of every year. Before heading into 2019, investment advisers can take small steps that will make a significant impact on their firm’s compliance program. This article provides a brief overview of just some of the steps advisers can take at the end of the year to bolster an effective compliance program.

Look backward

As the firm transitions to the last two weeks of the year and the office slows down, take time to review the core elements of the firm’s compliance program.

§ Review the compliance calendar and annual review results

Compliance calendars are designed to organize the periodic obligations found within the investment advisory compliance program. Advisers should review and make sure that the firm has completed each item noted on the firm’s specific calendar. Use this opportunity to consider any changes to the business or its clients that may impact the compliance manual and day-to-day operations. Additionally, take this opportunity to confirm the compliance calendar is up-to-date. If certain items on the compliance calendar are not applicable, be sure to document the record with an adequate explanation. Importantly, pay particular attention to confirm your 2018 regulatory filings and other specific deadlines, for example, the filing of your Form ADV, the payment of regulatory fees and, where applicable, filings under Sections 13 of the Securities Exchange Act of 1934, as amended.

Advisers should also review the results of the firm’s annual review, being sure to address each exception identified during the review. Conducting ongoing testing, where advisers use various methods to review the firm’s ability to prevent, detect and correct violations is essential. However, it is just as important to document the follow up on items identified during the test.

§ Review the firm’s books and records

The investment advisory business is document heavy and whether or not the firm maintains records in the cloud or a file cabinet, ensuring documents are in good order is a necessary year-end task. Firms particularly do not want to start the year with lingering compliance issues.

The firm’s investment advisory compliance policies will likely require specific documentation be maintained in each client file. To complete a thorough review, firms should test firm records and make sure that documents are filed, complete, and fully executed while looking for gaps of information. These information gaps, if any, may help identify the need to update firm forms or conduct internal training. If your firm uses cash solicitors, make sure the client required disclosures are in order.

The firm’s invoices and related calculation methods are critical functions of the compliance program and the firm’s books and records. Accordingly, you should conduct a review of the processes related to calculating client fees to make sure client invoices are accurate.

§ Compliance Events or Exceptions

No one likes to receive complaints, but it happens. If the firm has received complaints, they were probably reviewed with a specific focus on the individual matter. At the end of the year, take a step back and look at any such complaints from a broader perspective and use this opportunity to identify potential patterns. Any such pattern may be indicative of a gap within the firm’s compliance program.

Next, review whether there were internal compliance concerns and review any internal compliance exceptions (e.g., late reporting, email communication flags, late attestations, etc.) This review will help you identify the need for internal training for all advisers and employees or someone or some topic individually.

§ Regulatory Guidance: Updates & New Rules

2018 was packed with regulatory guidance from the Securities and Exchange Commission (SEC). Advisers should review these updates and guidance as part of the year-end review and consider other regulatory organizations, (e.g., CFTC, etc.) that are applicable to the firm’s business.

In 2018, the SEC Office of Compliance Inspections and Examinations (OCIE) released risk alerts and other guidance about risk-based examination initiatives focused on registered investment companies, the cash solicitation rule, best execution issues, and advisory fee and expense compliance issues identified in recent examinations of investment advisers.

These alerts provide critical and timely guidance to SEC-registered investment advisers. State-registered investment advisers may also benefit from reading the guidance. As you review the regulatory updates, consider if they are applicable to your business and as appropriate update firm policies and procedures to comply with applicable guidance.

You can find a link to the SEC’s OCIE materials here: https://www.sec.gov/ocie.

Look Forward

Another critical step at the end of the year is to look forward to upcoming activities. Consider the following:

§ Did the firm have an SEC or state examination this year?

Review your last examination from the SEC and/or state. Specifically, review the results and follow-up, confirming the firm resolved each item noted during the examination. Repeat deficiencies can make minor matters more serious as regulators may likely view repeat deficiencies as a sign of a weak compliance program.

§ Client profile, risk tolerance and objective information

Don’t forget about the client. Do your procedures require that you have a process to obtain updated investment objective, risk tolerance and other profile information from each client? Consider how the firm has documented change requests from clients and evaluate the methods used to ensure that the information on file is up-to-date.

§ Cybersecurity, Vendor Due Diligence, Advertising

There is limited time left in the year but don’t forget about other risk areas. Develop a plan to conduct further testing and a risk assessment in 2019. Consider whether the firm should update its cybersecurity policies and procedures and whether consultations with key vendors or new vendors would be beneficial. Finally, review recent advertising and marketing materials along with your methods for ensuring they are reviewed before distribution. Do they have the appropriate disclosures and backup materials?

Takeaways

Ultimately, a successful compliance program examines the past, present and prepares for the future; each element to informs a holistic perspective founded in the realities of firm performance This approach allows firms to be equipped to ensure current and future compliance in an environment of evolving regulatory guidance and operational standards. Many of these tasks will help prepare the firm for 2019 annual compliance program review and the upcoming disclosure deadlines.

4 min readmilan