For investment advisers, compliance is more than just a regulatory requirement — it’s a critical safeguard for the firm’s integrity, client relationships, and long-term viability. From the moment a firm registers with the U.S. Securities and Exchange Commission (SEC), it assumes a host of responsibilities governed by the Investment Advisers Act of 1940, particularly under Rule 206(4)-7, commonly referred to as the Compliance Rule[1].
The purpose of a Compliance Program is straightforward: to help prevent violations of securities laws and to support the adviser’s fiduciary obligations to clients. But achieving that purpose requires more than a static set of rules; it demands a tailored framework that evolves alongside the business, integrates oversight at every level, and reinforces a culture of accountability.
In this month’s Risk Management Update, we explore practical, key elements for strengthening your firm’s Compliance Program, from adopting risk-based policies and procedures, to leveraging technology, to enhancing supervision and surveillance. A well-designed program not only fulfills regulatory expectations but also supports a resilient, trustworthy, and well-managed organization.
Leadership Starts at the Top
Ask a CEO what keeps them up at night, and many will say: a market downturn. That concern stems from a chain reaction — declining performance, investor dissatisfaction, asset withdrawals, complaints, regulatory inquiries, litigation, and reputational damage — that could jeopardize the entire business.
A strong compliance framework, however, serves as a safeguard. It fosters investor trust, protects the firm’s reputation, and offers controls that reduce operational and regulatory risk. Key components include supervisory procedures, written policies, and executive oversight.
Under Rule 206(4)-7, advisers must adopt written compliance procedures designed to prevent, identify, and correct violations of federal securities laws. These efforts rely on effective supervision and operational oversight, both at the individual and organizational level, and are guided by the firm’s Chief Compliance Officer (CCO), who must be empowered to assess and enforce the firm’s policy.
Establishing A Culture of Compliance
While a capable CCO is essential, the overall effectiveness of a Compliance Program depends on senior leadership’s support. A culture of compliance is driven from the top down — beginning with the CEO and executive team — and must be consistently reinforced throughout the organization.
The CCO’s role is multifaceted: interpret relevant laws, draft appropriate policies, lead training efforts, and collaborate with senior leaders to ensure compliance is woven into the firm’s operational fabric. Importantly, the CCO should be involved in strategic discussions across departments, from hiring decisions to investment strategies, to proactively identify potential compliance implications.
Once a policy is in place, the CCO must monitor its implementation, identify any violations, and work with leadership to impose consistent and proportionate disciplinary measures. This reinforces accountability across all levels of the organization, including senior personnel.
One Size Does Not Fit All
SEC guidance over the years continues to stress the need for dynamic, customized Compliance Programs. Former SEC officials have underscored the importance of regularly assessing whether policies are achieving their purpose: Are they identifying risky conduct? Are revisions needed? Are the enforcement measures effective?
Effective compliance programs should:
- Identify and assess firm-specific risks;
- Implement policies that address those risks; and
- Adapt those policies as risks evolve.
Each firm’s risk profile varies based on its services, fee structures, marketing practices, business continuity capabilities, communication protocols, trading strategies, and compensation models. Once risks are identified, firms must either adopt new policies or enhance existing ones, with input from leadership, to address vulnerabilities.
Firms should also:
- Implement controls (e.g., supervisory reviews, exception reports, escalation procedures);
- Consider findings from prior SEC examinations and internal reviews;
- Evaluate whether operational changes necessitate policy updates; and
- Determine whether new risks require enhanced client disclosures.
This process should include staff training tailored to newly adopted procedures. The CCO should guide this training and determine the most effective format, whether in person or virtual, group-based or role-specific.
The CCO’s Oversight Role
While the CCO may not supervise every employee directly, they must have a comprehensive understanding of the firm’s regulatory risks and internal control needs. Their job is to ensure that all applicable rules are addressed through practical, firm-specific policies that support investor protection and regulatory compliance.
Monitoring and Surveillance: Staying Ahead of Risk
In today’s regulatory environment, surveillance of high-risk activities is non-negotiable. Firms are expected to monitor employee activity, conduct vendor oversight, and document whether associated persons comply with internal procedures. Technology plays a critical role in making this efficient and effective.
Common tools include:
- Archiving/surveillance software for emails, messages, and social media;
- Personal trading monitoring systems (including attestations, reports, and disclosures);
- Trade compliance platforms (for trade analysis and guideline monitoring);
- Compliance calendars (for managing reviews and filings);
- Advertising/social media review tools;
- Cybersecurity platforms;
- Proxy voting systems; and
- Branch office exam software (for multi-office firms).
While automation can streamline compliance, its effectiveness depends on how it’s implemented. Poorly configured tools or excessive data output can undermine surveillance. It’s essential to calibrate systems to produce clear, actionable reports, and to regularly review settings in partnership with IT teams and vendors, especially when software is updated or new threats emerge.
Final Thoughts
Compliance is not static. As your business evolves and regulatory demands shift, your Compliance Program must adapt accordingly. The CCO plays a pivotal role in assessing firm risks, engaging leadership, and ensuring internal controls stay aligned with your business model and regulatory obligations.
As you review your Compliance Program, consider these key takeaways:
Do:
- Conduct and document annual risk assessments
- Explore tech solutions that yield efficient surveillance and meaningful reports
- Ensure policies are tailored to your business and reviewed alongside current SEC guidance
Don’t:
- Assume all staff understand compliance expectations; conduct targeted training
- Rely solely on the minimum requirements outlined in the Compliance Rule; instead, customize your internal controls to your business and the clients you service
- Believe that regulatory issues “can’t happen here” — enforcement actions are ongoing against firms with deficient programs
If building or enhancing your Compliance Program feels overwhelming — you’re not alone. The regulatory landscape is complex.. Ensuring your firm has the right policies, oversight, and culture in place takes time and expertise. If your organization is seeking experienced guidance or needs a knowledgeable Chief Compliance Officer to support or lead your compliance efforts, Core Compliance is here to help. Our seasoned professional team provides practical, customized solutions to meet your firm’s specific needs.
Author: Michelle Jacko, CEO, Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and private fund managers on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon regarding any particular facts or circumstances without first consulting with a lawyer and/or tax professional.
[1] See SEC.gov | Compliance Programs of Investment Companies and Investment Advisers