Why Those Free to Download Annual Compliance Review Checklists Aren’t Good Enough

It’s tempting, I know, to want to search online for a compliance review checklist you can simply download for the required annual review.

Among the many requirements within the Investment Advisers Act of 1940, the annual compliance review requirement in Rule 206 (4)-7 can be inadvertently overlooked. This rule requires SEC-registered investment advisers to, among other things, conduct annual reviews of their policies and procedures to determine their effectiveness and ensure they adequately cover applicable federal and state regulations and the firm’s business practices.

With a few dozen other compliance requirements that need to be done on an annual basis, the time available for personnel to conduct annual reviews may be limited. A solution, then, maybe to simply print a free annual compliance review checklist, and use that as the required “documentation” of the annual review.

How confident are you that a free checklist you found by Googling for a few minutes is going to hold up against an SEC examination?

When someone says it like that, it probably seems a bit absurd to think that anyone would be searching for a free checklist to use for their required annual review process. It’s highly unlikely that an SEC examiner would consider a free checklist to be adequate documentation of an annual review.

Google search shows over 64 million results for “compliance checklist”, and about 600 searches a month, on average, looking for free, easy to download checklists for compliance reviews. It’s clearly not viewed as such an outlandish idea by many individuals.

If you think that all there is to an annual compliance review is reading off a list and checking a box, you’re missing the intent of the requirement. You’re also probably going to be faced with a deficiency or worse from the SEC if you’re not making the effort to perform and document a detailed review.

A properly conducted annual compliance review needs to be customized to your firm.

The reason a downloaded, generic compliance checklist doesn’t work is that it cannot be tailored to cover everything that your firm needs to review each year, and cannot include all the information that needs to be documented to substantiate that a review was performed.

For example, you need to look back at the review conducted last year and confirm that all the recommended courses of action from that review were implemented. If they weren’t, it should be noted why.

Your firm may have unique areas of risk that aren’t covered in a generic online form. You’ll need to review the compliance policies around those areas, and document or update them as appropriate. What areas of your firm are especially prone to risk, and have those areas changed from one year to the next?

Your firm is unique, has unique needs, and should have a unique compliance program. The annual review process needs to be cognizant of that.

A downloaded checklist isn’t necessarily a complete waste of time, though.

It may seem like we’re telling you that it’s foolish to download a checklist from the internet and that it’s a complete waste of time to look them up.

That’s not quite it.

A printable checklist can be an excellent starting point for determining where your annual review should begin. It can be a way to look for new ideas on what you should be looking for when conducting your annual review.

You can also use them as a way to introduce the idea of compliance and risk management as an integral part of your entire organization. It’s not that every person on every team needs to be a part of the annual review – but they should know what is going to be expected, and what they’ll need to maintain for the process.

Alternatively, instead of attempting to amalgamize an annual review from multiple free checklists and items from the compliance manual you last reviewed, you could work with a compliance consulting firm to perform the review the right way.

Working with Core Compliance? means working with compliance consultants who partner with your business to find the best solution that fits your firm. Thanks to years of experience working with firms of all shapes and sizes, the Core Compliance team can work with you to help ensure your annual review process is customized to your firm, robust, and in line with all regulatory requirements. There is no checklist that can completely cover exactly what your firm needs to do each year but to give you an idea of where to start, you can look through our latest Risk Management Update by clicking here.

Need assistance with your annual reviews? Schedule time for a call with one of our team.

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