Compliance Alert! Compliance Resolutions (Part 1)

posted in: Alert! | 0

Dear Compliance Professional,

As we start the new year, I think it appropriate that investment advisers add a few compliance-related resolutions to go along with the more typical “eat healthy, exercise more” resolutions we usually break by the second week of January.  Unlike our personal resolutions which are governed by moral opprobrium and enforced by the disapproving stare of one’s spouse when you reach for that second helping of pie, compliance resolutions are governed by the best practices of investment advisory industry and enforced by the full authority and might of state and federal regulators.

Our own New Year’s resolution is to help advisers stay the course and improve their compliance practices. To this end, we will supplement our timely compliance alerts with more frequent newsletters that cover important, but perhaps less time-sensitive, compliance topics. The first of these newsletters suggests two compliance-related actions that advisers should resolve to undertake as part of any New Year’s compliance shape-up.

Review Compliance Manual Requirements

Our recent involvement with a few regulatory audits has once again shown us that the regulators will parse your compliance manual with a fine tooth comb. In short, if it is in your manual, you better be doing it. And if you are doing it, you better be documenting that you are doing it. Unfortunately, even the most highly customized policies and procedures can be rendered obsolete or insufficient by changing advisory practices, investment adviser regulations or industry best practices. We suggest, therefore, that every adviser go through their current compliance manual page by page and list each and every requirement, who is responsible for supervising and completing each such requirement and how your firm documents the completion of the specific tasks involved.

When we do this for advisers as part of the annual review process, they are often surprised by: (i) the number of unnecessary policies and procedures contained in their manual; (ii) the lack of certain policies and procedures given the conduct of their advisory business; (iii) their failure to do what their manual actually requires them to do; and (iv) their failure to document (e.g., prove) that they have adequately satisfied a certain requirement.

Review Your Disclosure Brochure, Advisory Agreements and Marketing Material (In Unison)

Since most advisers will be filing their annual amendment soon, they are probably going to undertake a comprehensive review of their ADV Part 2A. Clearly, advisers need to ensure that their ADV 2A reflects the current conduct of their advisory business. As with the compliance manual, you need to make sure that your ADV 2A discloses exactly what you do, and that you do exactly as you have disclosed. Sounds simple, but again, it is remarkable how much drift can occur in your advisory business in just one year.

Our suggestion is that you take your review one step further (because that is what the regulators will do). You should not only review your ADV 2A as a singular component of your advisory program, but also in conjunction with your firm’s advisory agreements and marketing materials. All of the information and resulting disclosures must match up. If your ADV 2A states that your advisory agreement can be terminated by either party upon notice to the other, but your ADV 2A states that you must provide 30 days’ prior written notice, then that is a problem.  While this is a rather obvious inconsistency, others can be much more subtle. Best you find them before the regulators.