Updates and Changes to Your Firm’s Policies and Procedures

Under Rule 206 (4) -7 all Registered Investment Advisers (“RIA’s) are required to have compliance Policies and Procedures, adequately designed to help them meet their regulatory requirements.  A Firm’s obligations regarding their Policies and Procedures manuals do not end at just having a manual.  RIAs are required to test the effectiveness of their Policies and Procedures annually (the Annual Review) and are further required to update their manuals as new regulations emerge and the Firm’s business model evolves.

While most RIAs perform the required steps to test their Policies and Procedures annually, many either do not perform or don’t conduct a thorough review of the manual for regulatory updates.  The result, after a few years of neglect, is a manual that does not cover all regulations and is no longer adequately designed to meet regulatory requirements.  This can lead to many issues, including regulatory sanctions.  For example:

  • On June 4, 2018, the Securities and Exchange Commission (“SEC”) began cease-and-desist proceedings against Lyxor Asset Management, Inc., for among other violations “Lyxor willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 promulgated thereunder by failing to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules. [1]
  • On April 16, 2018, the SEC instituted administrative and cease-and-desist proceedings against Arlington Capital Management, Inc. and Joseph F. Lopresti, for among other things “failure to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act in connection with its advertisements.[2]
  • January 3, 2018 – The Securities and Exchange Commission announced that formerly registered investment adviser, LKL Investment Counsel LLC (“LKL”), and its sole principal, Mark H. Love (“Love”) of Phoenix, Arizona, agreed to settle Investment Advisers Act charges alleging misrepresentations in Forms ADV filed with the Commission, failure to produce documents to Commission examination staff, various compliance-related deficiencies, and failure to adopt policies related to advisory fees and made errors in charging and refunding advisory fees.[3]

As the above examples show, it is imperative that RIAs maintain up-to-date, accurate, and well-designed policies and procedures Manuals.

As stated previously, under rule 206(4)-7, it is unlawful for an investment adviser registered with the SEC to provide investment advice unless the adviser has adopted and implemented written policies and procedures reasonably designed to prevent violation of the Advisers Act by the adviser or any of its supervised persons.  This rule also requires federally registered investment advisors to conduct a review at least annually to determine the adequacy and effectiveness of the implementation of the investment advisor’s written policies and procedures. This design and annual review should include updating, deleting, or adding policies as regulatory requirements change.  For example, does your current manual reflect recent regulatory requirements, SEC guidance, and alerts or best practices regarding:

  • Cybersecurity?
  • Whistleblower procedures?
  • Elderly Investors? (including diminished capacity)
  • Inactive Accounts?
  • Conflicts?

If not, your manual is probably out of date and requires updating.

If this is the case, you should start taking steps to update your manual.  This update can include comparing your current manual against guidance provided by the SEC, best practices provided by compliance groups or local roundtables, and seeking the assistance of compliance consultants among other resources.  While there are many ways to approach this review and update, the following provides a basic road map of steps that should be taken during this review:

  1. Assess your current policies and procedures as written.  Annotate any areas that require amendment due to inadequacies discovered, changes in business model, etc.
  2. Check resources for updated requirements.  These resources may include the SEC website, compliance publications, and groups, and Compliance Consultants.
  3. Use subject area managers and other internal resources to develop amended policies.
  4. Train Firm personnel on new or updated Policies and Procedures.
  5. Publish updated manual for all employees.
  6. Receive attestations from Firm personnel that they have read and understand the manual updates.

Accurate and effective Policies and Procedures are critical for Firms to be successful and regulatory compliant businesses.  Accurate Policies and Procedures provide your Firm employees guidance on how to meet the Firm’s fiduciary responsibilities as well, and therefore, the review of Policies and Procedures remains a critical practice for all Firms.

Author: Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-deals, investment companies, hedge funds, private equity firms, and banks 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 in regard to any particular facts or circumstances without first consulting with a lawyer and/or tax professional.

[1] INVESTMENT ADVISERS ACT OF 1940 Release No. 4932 / June 4, 2018 ADMINISTRATIVE PROCEEDING File No. 3-18526  https://www.sec.gov/litigation/admin/2018/ia-4932.pdf

[2] INVESTMENT ADVISERS ACT OF 1940 Release No. 4885 / April 16, 2018 ADMINISTRATIVE PROCEEDING File No. 3-18437 https://www.sec.gov/litigation/admin/2018/ia-4885.pdf




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