Its Official, RIA Annual Compliance Reviews Must be Documented in Writing

The Securities and Exchange Commission (“SEC”) adopted new rules under the Investment Advisers Act of 1940 (“Advisers Act”) that are designed to protect investors who invest in private funds by increasing transparency related to certain practices involving compensation schemes, sales practices, and conflicts of interest. While the new rule’s primary focus is private funds and the protection of their investors, the rule also included a provision related to the annual compliance reviews of investment advisers, which impacts all SEC registered advisers.

The intent of SEC Rule 206(4)-7 (“compliance rule”) was to require advisers to review and document no less frequently than annually, the adequacy of their compliance policies and procedures and the effectiveness of their implementation. As such, the annual review requirement was intended to require advisers to evaluate periodically whether their compliance policies and procedures continue to work as designed, and whether changes are needed to assure their continued effectiveness. However, while the majority of advisers do in fact document their annual review, some advisers have pushed back on the delivery of documentation related to the review based on attorney client privilege.

The amendments specific to the compliance rule now require all SEC registered advisers, including those that do not advise private funds, to document in writing their required annual review of their compliance policies and procedures. The SEC believes that requirement will not only focus attention on the importance of the annual compliance review process, but it will also allow the SEC staff access to records of annual compliance reviews that were previously withheld, in order for the SEC staff to determine whether an adviser has complied with the review requirement of the compliance rule.

Thus, it should be noted that the amended compliance rule is another tool that will be utilized by the SEC in its oversight of registered investment advisers’ compliance with the Advisers Act of 1940. Access to the written documentation related to the written annual review will help the SEC to determine advisers’ compliance with the rules, and identify potential compliance program weaknesses, as the required written documentation of the annual review is meant to be made available to the SEC staff promptly upon request.

It should also be noted that the SEC did not prescribe a specific format for the written documentation, allowing advisers flexibility to record the results of the annual review in a manner that best fits their business and to use the review procedures. As a result, those advisers currently documenting their annual review should see minimal impact on their reports at this time.

Finally, the adopting amendments to the compliance rule, are effective as of November 13, 2023, and will impact all annual compliance reports generated in 2024.