Before you even start reading this, go to Outlook or whatever calendar you use, pick a date, and put in “Annual Review.” Any time in the year that works for you will do, although I gravitate towards getting housekeeping items like this out of the way early on in the year.
Rule 206(4)-7 of the Investment Advisers Act of 1940 requires investment advisers to “review, no less frequently than annually, the adequacy of [their] policies and procedures… and the effectiveness of their implementation.”
On the chosen date, take stock of what has happened in the last twelve months, compliance-wise. The taking stock may take the form of a walk through a checklist with the elements of your company’s compliance program, or a more formal internal or external mock-exam, and either way will require data-gathering and testing.
As part of the review, in SEC speak, firms “should consider any compliance matters that arose during the previous year, any changes in the business activities of the adviser or its affiliates, and any changes in the Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures.” The result of the review should be documented, presented to your company’s management, and maintained in your files.
As a minimum, you should address these issues in your review/testing:
- Conflicts of interests, for example personal trading, allocation practices, compensation arrangements, soft dollars, best execution and transactions with affiliates;
- Valuation practices and procedures;
- Violations of policies and procedures that arose during the year;
- Changes in the company’s business and the law;
- Code of ethics, including an assessment of the effectiveness of its implementation;
- Marketing documents and performance presentations, including the accuracy of disclaimers and adequacy of records;
- Whistleblower policies and procedures;
- Social media policies and procedures; and
- Business continuity plans should be stress-tested and adjusted if necessary.
For many firms, the annual review process will result in updates to their policies and procedures, whether it’s fine-tuning existing policies or adding new ones based on changes to the law. Anyhow, it’s a really great opportunity to bridge gaps and eliminate discrepancies between the actual business and the laws that apply to it. .
As always, if you have questions or comments, please call, e-mail or tweet me.
Eckerle Law offers legal advice in a variety of transactional and regulatory matters and serves companies’ plenary business law needs. Its founder, Bettina Eckerle, is a veteran of Debevoise & Plimpton and Wachtell, Lipton, Rosen & Katz. She also served as the General Counsel of two companies en route to IPO. Please visit the Eckerle Law website for more details.