A recent SEC Risk Alert focuses on how well investment advisers have complied with the Annual Compliance Review requirement of Rule 206(4)-7. Examination results show that many firms have received a failing grade when it comes to adequately completing their annual review according to the rule. Amy Lynch, FrontLine Compliance’s Founder and President, comments in the lead quotes that firms often fail to comply on a number of issues, with the timing of a firm’s annual review a primary concern for the SEC. She explains that many new registrants believe they have 18 months post registration to complete their annual review when they do not, with the first annual review required to cover the 12-month period from the registration date. Ms. Lynch continues by stating that the missed timing is problematic since it sets the annual review date going forward for the firm. The timing issue is also a concern for firms that register first and implement their compliance program afterwards, when a firm’s compliance should be in place upon its registration to correctly coincide with the required timing to review its program. Other issues discovered by the SEC’s exams include not having an actual cohesive written report and simply using system certifications as “evidence of review,” and failing to document and cover items that were scheduled for review as part of the annual review process. The SEC also points to inadequate or undocumented testing of compliance processes to validate policies and procedures. Ms. Lynch states that FrontLine also sees this as a common problem at firms. She stresses the importance of testing compliance systems and processes, and having the documentation of the testing, results and remediation since this is what shows the SEC that the firm is following the rule.
See ThinkAdvisor (free registration), “SEC Urges Advisors to Fine-Tune Compliance Reviews”
Also see our ComplianceAlert, “SEC Exam Findings on Adviser Annual Compliance Reviews”
