Episode 76: Making the Most of Your Annual Review Testing Opportunities

On episode 76 of the CCO Buzz, Core Compliance discusses how to make the most of your Annual Review through simultaneous testing opportunities.


CCO Buzz: Hello and welcome back to the CCO Buzz. Today we’re in for a treat as we’re joined by Core Compliance’s very own Senior Compliance Consultant. He is here to share some insight on an untapped service of Core Compliance – our remote Annual Review. Today’s discussion will include the power of email review and [the] opportunities of simultaneous testing. So, with that, let’s begin.

CCO Buzz: You work alongside numerous Chief Compliance Officers, also as known as CCOs.  And expectedly, many of them have been working remotely during the COVID-19 shelter-in-place orders. In your opinion, how has this new environment impacted them?

Senior Compliance Consultant: Well, one of the things I’ve been hearing is that many of the CCOs that I work with feel they’re falling behind on the monitoring and testing of their firm’s policies and procedures as part of the annual review process.

CCO Buzz: Hm, that’s interesting. Could you elaborate? What is the annual review and testing process and what do they encompass?

Senior Compliance Consultant: Under Rule 206(4)-7 of the Investment Advisers Act [of 1940], RIA firms are required to conduct an annual compliance review of the adequacy and effectiveness of their policies and procedures. This would include performing actual tests of these policies and procedures and drafting an annual report that describes the results of the testing, and whether any revisions of the firm’s policies and procedures are needed.

CCO Buzz: That does sound difficult to stay on top of during these shelter-in-place orders.

Senior Compliance Consultant: It certainly is.  I can understand their anxiety over this.

CCO Buzz: What are you recommending to these CCOs to help with anxiety?

Senior Compliance Consultant: Well, the main thing I tell them is to make the most of every testing opportunity they do have.

CCO Buzz: Well I guess that sounds like great advice. What do you mean by that though? And how would you recommend they accomplish this?

Senior Compliance Consultant: Let’s use their email reviews as an example.  Most CCOs will be able to perform this function remotely and are in fact doing so.  But this review is more than just a review of the emails.   This review can function as a test of:

  • The firm’s electronic communications procedures, by ensuring reviewed emails are not violating any of the firm’s electronic communication policies.
  • It can be a test and review of the firm’s complaint process, by reviewing if any complaints were received via email and if they were processed properly.
  • It can function as a test [and] review of the firm’s insider trading policy, to see if any insider information was received and not reported.
  • It can also function as an advertising and marketing test in that the CCO can review any materials provided and see if they’re properly disclosed for example.

CCO Buzz: So, wait, let me get this straight. While doing or completing an email review, they could be performing several tests simultaneously?

Senior Compliance Consultant: Exactly.  The same can be said for a trade log review.  The CCO can review the trade log and perform testing for block trading policy, employee personal trade code of ethics policy, the firm’s allocation policy can be tested, etc.

CCO Buzz:  Wow! So, with the CCOs you’ve been working with, have they found this to be an effective way to approach annual review testing?

Senior Compliance Consultant: Absolutely.  In fact, I had one tell me that he would continue to take this approach to testing even after the shelter in place order is lifted.

CCO Buzz: Great! Is there, or do you, have any other guidance or nuggets of knowledge available for those CCOs who don’t have much experience in this type of testing?

Senior Compliance Consultant: Absolutely.  At Core Compliance and Legal Services, we can help provide guidance on annual review testing and reporting, but we can also help CCOs who may not have that experience, engineer some testing protocols based on the firm’s policies and procedures and what access they have right now.  If anyone has a need, they can reach us at 619-278-0020.

CCO Buzz: Well thanks so much for joining us today!

Senior Compliance Consultant: Absolutely, thank you.

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-in to next week’s episode of the CCO Buzz.


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