Compliance Solutions for Investment Advisers

3 Types of Compliance Testing

Transactional Tests

Transactional tests (also known as quality control tests) are compliance tests that are conducted contemporaneously with the activity in question and are used to detect deviations of actual transactions from firm policies or regulatory standards. Examples of transactional testing include checking personal trades submitted for pre-approval against any watch or restricted lists and reviewing a client’s investment guidelines prior to purchasing a security for that client’s account.

Periodic Tests

Periodic tests are conducted at regular intervals rather than contemporaneously with the activity in question and are used to uncover violations of, or verify compliance with, legal requirements and/or firm policies and procedures. Examples of periodic testing include a monthly/quarterly key word search of email and the quarterly review of access persons’ transaction reports.

Forensic Tests

Forensic tests are compliance tests that analyze information over time in order to identify unusual patterns that spot checking may not find. Examples of forensic testing include an analysis of the quality of brokerage executions (for the purpose of evaluating best execution); an analysis of the portfolio turnover rate (to determine whether portfolio managers are overtrading securities); and analysis of the comparative performance of similarly managed accounts (to detect favoritism, misallocation of investment opportunities, or other breaches of fiduciary responsibilities).

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