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On August 23, the Securities and Exchange Commission (SEC) amended Rule 206(4)-7 of the Investment Advisers Act of 1940, mandating that all investment advisers document the annual review of their compliance policies and procedures in writing. This will come into effect in October 2023, which means that firms will have to comply with this requirement for any annual review completed at the end of this calendar year.
What are the new requirements?
The new amendment applies to all registered investment advisers, and requires them to review their compliance program and document the review in writing in writing. The rule doesn’t detail specific elements that must be included in the written documentation as the rule is intended to be flexible, allowing advisers to use review procedures they have developed and found effective. The SEC recognizes that many advisers already document the review in writing while others do not, aiming to standardize this practice.
What should an annual review cover?
The content requirements of an annual review did not change. Each year, a firm must evaluate the adequacy of their compliance policies and procedures and the effectiveness of their implementation. The evaluation should consider whether changes to the compliance program are required based on compliance matters arising during the prior year; changes in business activities of the firm; and, changes to the Advisers Act or the rules thereunder.
How can you demonstrate compliance?
We recommend a formal review document that can be completed by aggregating quarterly compliance reports and specific discrete testing. Based on SEC guidance, we believe this will be the most effective way to demonstrate compliance with the new rule. However, as there are no prescribed requirements a variety of measures may be acceptable, including aggregating quarterly documentation, an annual presentation to a board or governing body, a short memo summarizing the findings of the review, or informal documentation such as a compilation of notes throughout the year.
We can help
Our team of SEC regulatory experts can help you understand the implications of these changes and adapt your compliance systems accordingly.
