Many investment advisers understand that a fundamental obligation of registration as an investment adviser is the need to establish a compliance program. Yet, there are surprisingly few resources that unpack what a compliance program actually is – which, in our view, is fundamental to helping advisers understand how to go about establishing such a compliance program or, in the alternative, hiring someone to do so.

In this article, we will discuss the key elements of an investment adviser compliance program and explain why each element is vital to ensuring that the compliance program is effective in accomplishing its goals.

The first element of a compliance program is a risk assessment, which is necessary in order to help an adviser evaluate what the compliance program should look like. A risk assessment evaluates the firm’s business model, services, organizational structure, and operations in order to evaluate the topics that must be addressed in the firm’s compliance program based on applicable regulatory requirements. For instance, an adviser that has access to client funds or securities will generally need to address how to safeguard client funds and securities in light of such access in its compliance program.

Risk assessments must be conducted not only at the outset of a firm’s efforts to establish a compliance program, but also on an ongoing basis to address changes in the firm’s business or operations and changes in applicable regulatory requirements and regulators’ expectations.

The second element of an adviser’s compliance program is its policies and procedures manual, which generally serves as the principal governing document (or set of documents) which outline the core tenets of the firm’s compliance program. It’s important to understand the different components of a policies and procedures manual. Policies are general statements of principle relating to specific compliance topics. They outline the firm’s general position as to how it approaches specific compliance topics. Procedures are the actual steps that the firm commits to take to ensuring that its business (and compliance program) is operated in to fall in line with the firm’s stated compliance policies. Often these procedures designate the personnel responsible for carrying out these procedures. Therefore, procedures are much more detailed than policies and provide the roadmap for ensuring the firm’s compliance with its policies. For instance, a policy could state that the firm is committed to safeguarding client funds and securities while the procedures outline how the firm intends to do that in line with applicable regulations. Processes or workflows are developed based on these procedures to help an adviser follow the procedures.

The third element of an investment adviser compliance program are the documents that evidence a firm’s attempts to follow its procedures. These documents can range from reports that are required to be submitted by firm employees, attestations and certifications submitted by firm employees, requests for approval of certain activities and associated responses, meeting minutes, and tests conducted on the firm’s compliance program in accordance with the firm’s stated procedures.

The fourth element of a firm’s compliance program is the designation of an individual that is responsible for ensuring that the compliance program is properly implemented and administered. Often this person will hold the title of Chief Compliance Officer or “CCO”. Chief Compliance Officers are typically responsible for keeping abreast of changes in the firm’s business and applicable regulations, identifying if any compliance violations have occurred at the firm, testing the firm’s compliance program to ensure it is functioning properly, training firm personnel to ensure their compliance with the firm’s policies and procedures, and updating the firm’s policies and procedures as necessitated by changes in the firm’s business or regulations or the need to address compliance violations that have been identified.

The fifth element of the compliance program is the review and testing to ensure compliance with the firm’s policies and procedures. CCOs other compliance personnel review large amounts of documents submitted in accordance with the firm’s procedures designed to ensure that the firm’s policies and procedures are being followed. In addition to reviewing data, designated personnel will also be tasked with conducting tests to ensure that such policies and procedures are being followed. For instance, firms will designate personnel responsible for reviewing client fee billing to ensure that any amounts billed to clients are consistent with the fees stated in a client’s advisory agreement. Other professionals may be tasked with reviewing client portfolios to ensure that they are suitable given the client’s stated financial circumstances as reflected in any client profiles or investment policy statements. Other personnel may be tasked with reviewing files on any trade errors to ensure that the firm followed its policies and procedures with respect to handling such trade errors. These reviews and tests ensure that the firm is in compliance with its policies and procedures. If any violations are identified, the firm can make adjustments (which could include modifications to firm policies and procedures) to remedy such violations.  

The sixth element of a compliance program is the training required to ensure firm personnel understand their obligations when it comes to the firm’s compliance program. Because the firm’s policies and procedures apply to firm personnel in different ways, it’s vital that such personnel understand their roles and responsibilities when it comes to the firm’s compliance program.

What questions do you have about investment adviser compliance programs? Please contact us so we can help answer them for you.  

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