Companies operating within the financial services industry as registered investment advisers must be cognizant of developments in federal and state securities laws. Within the past year, the United States Securities and Exchange Commission (“SEC”) enacted Rule 206(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 Examiners’ review and evaluation of firm compliance policies and procedures. There appears to be a growing concern that these documents are not sufficiently tailored to the firm’s operations. In light of this concern, it has become increasingly important for all advisory firms 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 Rule 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.