On episode 45 we’re here to discuss the pillars of the “compliance rule.”
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CCO Buzz: Hello & Welcome Back! On episode 45, we’re going to hit the ground running as this episode is quite a doozy. We’ve got a lot to cover and not a lot of time. Heck, this might even have to be a two-parter because there is that much information – but we’ll see. Today, we’re joined by Core Compliance’s Compliance Consultant. We haven’t heard from him in a bit; so, he’s here to discuss the pillars of the “compliance rule.”
With that, take it away…
Compliance Consultant: Most investment advisers should know that one of the three pillars of Rule 206(4)-7 (“The Compliance Rule”) of the Investment Adviser’s Act of 1940 (“the Adviser’s Act”) requires SEC registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violation of the Adviser’s Act and the rules promulgated thereunder. The same goes for state registered RIAs and both the SEC and state regulators expect investment advisers to have customized policies and procedures reasonably tailored to their Firm’s business and risks.
CCO Buzz: Now, why is this worth repeating?
Compliance Consultant: Well it comes down to the review, analysis, and possible revisions to your Firm’s P&P manual. In order to ensure that Firms’ P&P Manuals continue to be reasonably tailored to their business, all advisers should be reviewing their Firm’s P&P Manuals at least annually to determine if their P&P Manuals continue to be accurate and correct. With the continual introduction of new rules by regulators, P&P Manuals can quickly become stale and this could present a gap in your Firm’s compliance program. Much like the Form ADV, each P&P Manual is a snapshot in time that should be made current and should correlate with the Firm’s service offerings and applicable regulatory updates.
CCO Buzz: Now, one might ask: where should I begin?
Compliance Consultant: There are two important processes that can benefit a Firm’s review and revision of their P&P Manual: (1) the annual review, and (2) risk assessments.
The Annual Review is another important pillar mandated by the Compliance Rule. Annual Reviews are crucial because they can help Firm’s determine if their P&P Manual continues to be effective in administering compliance for the Firm and can help identify gaps to provide the CCO with a roadmap for updates to their firm’s controls and policies and procedures.
The risk assessment is another important tool in a CCO’s toolbox to help with the process of reviewing and revising P&P manuals. You might remember in episode 24 of the CCO Buzz, Core Compliance’s Tina Mitchell outlined steps for conducting risk assessments. One of the most important aspects of the risk assessment is making sure that the firm has written policies and procedures covering the risks and appropriate monitoring controls in place.
After identifying any gaps in the Firm’s P&P Manual and controls, the next step will be sitting down with appropriate parties at your Firm to discuss what controls will need to be implemented to address those gaps. For larger firms, it could be useful to have a P&P manual committee to discuss the different sections of the P&P manual that need to be updated. For smaller firms, it may be more effective to have senior managers discuss the gaps or to reach out to a compliance consultant to review and assess the shape of the Firm’s P&P manual. Once the gaps have been analyzed, putting an action plan into place to update each section in a timely manner will be necessary along with the creation of any ancillary procedures related to the updates in the Manual.
For example, if the Firm’s P&P manual describes how the Firm conducts its annual billing but doesn’t provide any steps on how that billing is periodically reviewed by the CCO or their designee, then this would be a gap that should be disclosed in the P&P Manual. Additionally, once the policy and procedure have been added to the P&P Manual the CCO’s calendar should be reviewed to ensure that it has been added as a task and that desktop procedures have been created to describe how to generate the materials necessary to complete the testing.
All Firm’s need to make sure that their P&P manuals remain current and up-to-date. While this may seem like a daunting task, it requires coordination and consistent reviews to ensure that the P&P manual is accurate. If you have questions or concerns, about reviewing, analyzing, or updating your P&P Manual, please visit Core Compliance at www.corecls.com or call us at 619-278-0020.
CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn or Twitter @CoreCLS. Thank you and we hope you tune into next week’s episode of the CCO Buzz.
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