However, this does not necessarily mean that lower risk firms should consider themselves exempt from the audit process. For this reason, all firms should continue to establish strong compliance programs, an integral aspect of which must be the assessment of areas of compliance risk. The Chief Compliance Office should then establish and adopt policies and procedures to address those areas of compliance risk. Any policies adopted and procedures established should themselves be the subject of ongoing review by trained compliance professionals to ascertain their effectiveness and sufficiency.

Companies operating within the financial services industry as registered investment advisers must be cognizant of developments in federal and sate securities laws. Within the past year, the United States Securities and Exchange Commission (“SEC”) enacted Rule206(4)-7 under the Investment Advisers Act of 1940, which addresses compliance-related policies and procedures. During the past year, we have monitored regulatory examinations conducted by various securities bureaus, specifically relating to the Examiner’s review and evaluation of firm compliance policies and procedures. There appears to be a growing concern, that theses documents are not sufficiently tailored to the firm’s operations. In light of this concern, it has become increasingly important for all advisory forms to conduct an internal comprehensive review that compares the firm’s written documents with those procedures undertaken on a day-to-day operational basis.

An integral aspect of Rule 206(4)-7 compliance is the designation of a chief compliance officer (“CCO”) who is charged with the administration of all adopted policies and procedures. The CCO should conduct the aforementioned policy and procedure review to ascertain the adequacy and effectiveness of its implementation. The review must occur at least annually, but this presupposes that the foundation documents upon which the firm relies are consistent with the firm’s operations. While the exact policies and procedures to be addressed differ from one advisory firm to another, it is clear that the CCO who attempts to prepare compliance policies and procedures must consider the specific intricacies of the advisory firm itself. The individuals acting on behalf of the firm should begin by identifying both actual and potential areas of conflicts of interest, in addition to other compliance factors that create risk exposure. Most importantly, the final product must reflect that the firm undertook a reasonable attempt at preventing regulatory violations.

Since initial passage of the SEC Rule, many state advisors have expressed their preference to delay adoption of compliance policies and procedures until such time as required by the state(s) within which they are registered. Our office has anticipated that state securities bureaus would either adopt the SEC Rules or establish a comparable rule, and true to form, many states have in fact already adopted the SEC Rule. For both state and federal advisers who have yet to establish compliance policies and procedures, firm personnel should immediately conduct an internal evaluation and adopt appropriate internal procedures. To avoid heightened regulatory scrutiny and potential statutory violations, remedial action should occur prior to regulatory examination.

As with all regulatory requirements, it is extremely important to consult the Advisers Act directly and/or obtain counsel competent in this area for the full breadth of requirements and expectations. The investment advisory atmosphere has become exceedingly litigious, and it is absolutely imperative that registered investment advisers understand and satisfy their regulatory obligations.

In the coming weeks, all investment advisers must begin the process of renewing notice filings (for federally registered investment advisers), state registrations, and investment adviser representative registrations. Generally, the renewal process involves electronic renewal filings, but there are some states which require hard copy submission as well as the completion of documents not available through the electronic filing system. Please notify our office at your earliest convenience so that we may effect a smooth renewals process for you. Please be advised that Stark & Stark will only automatically perform the renewals process for those clients who have indicated in writing that they wish for us to do so. If you would like us to effect the renewals process, and you have not previously so indicated, please let us know as soon as possible so that your renewal registration/notice filings can be made in a timely manner. If you intend to complete the process on your own, please be mindful of the various processing deadlines imposed by the NASD.

The first of these independent audits were to have been done by all broker/dealers by April 24, 2003 (the one-year anniversary of the stat date of the AML regulations related to broker/dealers). Independent audits are required to be performed at least once a year following the date on which a broker/dealer did its last annual audit.

When the SEC conducts a regular examination of a broker/dealer, it has indicated its intention to focus on confirming that such independent audits are taking place, as and when required, and to ask for a copy of the independent auditor’s report on findings. Additionally, the SEC and NASD have indicated they will also focus on whether the audit was sufficiently independent.

Independent audits can be performed by either broker/dealer personnel or a qualified outside party. However, the NASD has made clear that if a broker/dealer uses internal personnel then sufficient separation of functions should be maintained in order to ensure the independence of the testing personnel. It has also been directed that internal testing personnel should be sufficiently trained in all aspects of the AML rules and regulations to be able to adequately perform the audit.