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Compliance Checklist for Registered Investment Advisers

    

First and foremost, Registered Investment Advisers (RIAs) are held to a standard of fiduciary duty by the SEC. As defined by the SEC, RIAs must act in the best interests of their clients, should not engage in activities that are in conflict with the interest of the client, and must provide a full disclosure of all material facts to clients and prospective clients.

To prove that they are able to meet these standards, RIA firms must have solid compliance programs in place.

As defined by FINRA, an investment adviser is an individual or company who is paid for providing advice about securities to their clients. The term investment adviser is used to refer to an individual or company that is registered with either the SEC or a state securities regulator. 

The Investment Advisers Act of 1940 regulates and defines the role and responsibilities of an investment adviser in the United States.  Since the Act was amended in 1996 and 2010, generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission. Other investment advisers typically register with the state in which the investment adviser maintains its principal place of business.

Conflicts of Interest – are Advisers acting in the best interest of their client, or their own?

While compliance is not one size fits all and should meet the individual needs of the firm, RIA firms of all sizes need robust compliance to make sure that their fiduciary duty is being upheld. Below is a list of some of the key obligations that should be included in a Registered Investment Adviser Compliance Program under the Act and its Rules.

  • Code of Ethics – Under the Compliance Rule 275.204A-1, registered advisers must adopt and enforce a written code of ethics applicable to its supervised persons.
  • Insider Trading Safeguards The written code of ethics must prohibit advisers from making financial investments based on information others do not know about.
  • Policies and Procedures – Under the Compliance Rule 206(4)-7, RIA firms must implement written Policies and Procedures designed to prevent, detect, and correct violations of the Advisers Act.
  • Chief Compliance Officer Rule 206(4)-7 also requires each adviser registered with the Commission to designate a Chief Compliance Officer to administer its compliance policies and procedures.

  • Annual Compliance Review – In addition, Rule 206(4)-7 specifies that each registered adviser must review their Policies and Procedures annually to verify their adequacy and the effectiveness of their implementation.

Regular compliance meetings with the executive team set the stage for an efficient and effective annual review. Learn more in the on-demand webinar CCO Insurance - The Importance of Transparent Escalation.

  • Business Continuity Planning – The SEC expects that policies and procedures should contain Business Continuity Plans (BCPs) to protect clients in situations including natural disasters and the loss of key staff members.
  • Disclosures and Form ADV Form ADV is the required form used by investment advisers to register with both the Securities and Exchange Commission (SEC) and state securities authorities. Form ADV filing requirements are contained in Rule 204-1 of the Advisers Act. Rule 275.204-1 specifies when amendments to Form ADV are required, at least annually.
  • Exams and Inspections Section 204 of the Act grants examination authority to both the SEC and state regulators, stating “All records (as so defined) of such investment advisers are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by representatives of the Commission as the Commission deems necessary or appropriate in the public interest or for the protection of investors. ... The purpose of SEC examinations is to protect investors by determining whether registered firms are complying with the law, adhering to the disclosures that they have provided to their clients, and maintaining appropriate compliance programs to ensure compliance with the law.”
  • Political Contributions and DonationsRule 206(4)-5 prohibits a RIA from receiving compensation for services provided to a government entity for a two-year period after the adviser, any of its covered employees, or any covered PAC makes a political contribution to a public official. This also includes a person who becomes a covered associate within two years after the contribution is made.

Learn more about Pay-to-Play Compliance and how MCO helps firms proactively manage Political Contribution Compliance.

  • Books and Records – Under Rule 204-2, the “Books and Records Rule”, registered advisers must keep true, accurate and current books and records relating to their investment advisory business, including business financial and accounting records, records pertaining to providing investment advice and transactions in client accounts, records that document the authority to conduct business in client accounts, advertising and performance records, records related to the Code of Ethics Rule, records regarding the maintenance and delivery of disclosures, and documentation around policies and procedures.
  • Best Price and Execution – As fiduciaries, registered advisers are required to seek to obtain the best price and execution for securities transactions and to ensure that clients to not incur unnecessary brokerage fees and charges. Rule 206(3)-2 provides guidance around agency cross trades when acting as a broker.
  • Advisory Contracts Section 205 of the Advisers Act includes specifics that must be included in contracts with advisory clients. Contracts must convey that services may not be assigned to any other person without the prior consent of the client, cannot include provisions providing for compensation to be based on the performance of the client’s account, and should not contain “hedge clauses” because such provisions are likely to lead clients to believe that they have waived their rights of legal action. 
  • Advertising Practices for Solicitation of New Clients – Under Rule 206(4)-1, the “Advertising Rule” regulates investment advisers’ marketing communications. Updated in December of 2020, the rule takes into account the increasing use of electronic media and mobile communications in marketing.

Investment adviser licensing requirements

In addition to registering with the SEC, individual RIAs must pass the Series 65 Exam. The Series 65 exam, the Investment Advisers Law Examination, is a North American Securities Administrators Association (NASAA) exam administered by FINRA. In order to pass, candidates must answer at least 94 of the 130 questions correctly in 180 minutes. The exam covers topics important to the role of a financial adviser including Economic Factors and Business Information, Investment Vehicle Characteristics, Client Investment Recommendations and Strategies, Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practices.

Automation can Streamline RIA Compliance

Having a Code of Ethics and written Policies and Procedures is not enough. RIA firms can run into non-compliance issues when they fail to insure that their Policies and Procedures are correctly and consistently implemented. Inaccurate, misleading, or omitted Form ADV disclosure is the most frequently cited finding  from SEC examinations of investment advisers.

That’s where software and automation can help. Automating regular compliance tasks can help firms uphold their Code of Ethics and encourage employee adherence to the firm’s Policies and Procedures.

MCO's Know Your Employe (KYE) compliance solution provides organizations with an easy and affordable way to monitor, manage and ensure that Policies and Procedures are followed. The platform facilitates workflow, communications, alerts, approval, reporting and record-keeping for critical compliance tasks. 

To learn more about how automation can bring efficiency, accuracy and visibility to your RIA compliance program, contact us today.