Year-End Compliance Checklist

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Dear Compliance Professional,
There are a few compliance actions that all investment advisers can benefit from undertaking at this time of year. Some obvious, some not so obvious. All important. So, without further ado, here is our end-of-the year checklist:
1. Pay Renewal Fees
Hopefully, most of you have already logged on to your IARD account and obtained your renewal statement. If you are our client, we have, of course, done this for you (shameless plug). But you only have until December 13th to make payment and you should not wait that long as the crush to pay at the deadline can often lead to late payment.
2. Update IARs Form U-4
Ok, how many of you are at the same weight you were in 2002? You would be amazed at how often we find outdated Form U-4s.  This is because unlike the Form ADV Part 1, which must actually be updated and filed on an annual basis, the Form U-4 gets “renewed” simply by paying the annual renewal fee. In a case of “out-of-sight, out-of-mind” the information in the U-4 tends to get overlooked. While you do not need to update the U-4 because you weigh less now than in 2002 (and remember, you sign these under the penalty of perjury), you are required to update it for changes in address, names, other business activities, etc. We suggest printing out a copy of each IARs Form U-4 and having the IAR review and, if necessary, update the information.
3.  Review Client Lists for State Filing Purposes
Whether for notice filing or state-registration purposes, advisers must be aware of going over the de minimisnumber of permitted clients. The national de minimis level is 5 clients (e.g. you can have up to five clients before you need to take action). There are, however, 3 states – Texas, Louisiana and New Hampshire – where registration/notice is triggered by having one client in the state. Of course, what would compliance be without exceptions to the exceptions as in some of these states you can avoid notice filing if you do not have an office located in the state. The point being, is that you should keep track of where your clients are so you can look into the requirements in greater detail.
4.  Update Your Policies and Procedures
There have been a lot of new rules enacted over the past few years and you should make sure your policies and procedures manual reflects these regulatory developments. Check to see if your manual has policies and procedures that pertain to:
  • Identity Theft Red Flags
  • Whistleblowers
  • Pay-to-Play
  • Performance Compensation
  • Large Trader Reporting
  • Form PF Reporting
5.  Set Up your 2014 Compliance Calendar

While this may seem overwhelming to some advisers, there is no better way to manage your ongoing compliance requirements. The best method for creating a calendar, other than having us do it for you, is to go through your compliance manual and list each and every task that is required of you. Sound onerous? Well, it should, but well worth the effort. Sound so onerous that you won’t do it?Well, regulators are going to do it and hold you to each and every task set forth in your manual. Going through this process and creating a calendar of compliance actions is the best way to eliminate uncertainties about your ongoing obligations. It will also show you if you have not sufficiently customized your policies and procedures. After all, how many smaller advisory firms are actually having quarterly meetings of their marking committee? Best to get rid of those items that have no place being in your manual.

6. Best Execution Review
This is often overlooked by advisers that use one broker-dealer/custodian, such as a Schwab or a Fidelity or a TD Ameritrade. For some reason, these advisers feel bullet proof when it comes to their best execution obligations. I can assure you that while in the past it may have been this way, even those advisers that use one single broker-dealer/custodian for all of their clients had better be reviewing execution quality and comparing it to reasonable alternatives. The regulators will expect as much.
7. Give Your Web Site the Once Over
Check all third-party links and internal links on your firm’s web site. There is nothing that screams mediocrity louder than broken links. I realize that for many advisers, a web site is the 2013 version of a yellow pages ad. Putting aside the wasted opportunity, ignorance of what is going on with your firm’s web site is not bliss. Absolutely true story: during a mock audit we discovered that a link on a client’s web site had been hijacked and instead of linking to whatever news source the adviser though it was linking to, it instead linked to a pornographic web site. It certainly gave new meaning to the phrase “holistic advisory services.” While reviewing your site, you should also check for outdated or incorrect information. You will be glad you did.
8. Compare and Contrast
Beyond making sure that your ADV Part 1 and your ADV Part 2 accurately reflect the conduct of your firm’s advisory business, you need to make sure that they, together with your advisory agreement, tell a consistent story. Here then, are the areas where regulators find the most inconsistencies:
  • The types of clients listed on Item 5.D of Part 1 does not match Item 7 of Part 2A.
  • The type of compensation listed on Item 5.E of Part 1 does not match Item 5 of Part 2A.
  • The fee schedule listed in Item 5 of Part 2.A does not matches the fee schedule in your investment advisory agreement/contract.
  • How often fees are paid as listed in Item 5 of Part 2A does not match your investment advisory agreement/contract.
  • Services marked in Item 5.G of Part 1 do match the services described in Item 4 of Part 2A.
  • Discretionary authority marked in Item 8.C of Part 1 does not matches the discretionary authority described in Item 16 of Part 2A.
  • Other business that is listed in Item 6 of Part 1 is not discussed in Item 10 of Part 2A.

Of course, all of this is in addition to the usual compliance testing, training, reviewing, documenting, approving, auditing, cajoling, pleading, threatening and explaining that you, as compliance professionals, are required to do on a daily basis.