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What to Consider Before Conducting an Annual Compliance Review

Nov 3, 2023

The SEC announced, on August 23, 2023, the adoption of the new Private Fund Adviser Rules (“The Rules”) under the Investment Advisers Act of 1940 (“Advisers Act”). The Rules require, among other things, each investment adviser registered with the SEC to document in writing an annual compliance review as prescribed by Rule 206(4)-7 of the Advisers Act. The Rule regarding the annual compliance review becomes effective on November 13, 2023, and firms must begin to comply on or by November 13, 2023. Under Rule 206(4)-7, investment advisers are required to: (1) adopt and implement written policies and procedures designed to prevent violations of the Advisers Act and its rules; (2) review policies and procedures annually for the adequacy and effectiveness of their implementation; and (3) designate a chief compliance officer (CCO) to administer the compliance policies and procedures.

Considering the requirement imposed by Rule 206(4)-7, here are a few considerations for investment advisers to ponder before initiating an annual compliance review:

Stay Up-to-Date on Regulatory Changes and Update the Compliance Manual, as Necessary

Incorporate a regulatory change management process which the firm can use to keep up with new securities rules and regulations. This can be done by relying on compliance consultants and lawyers for guidance to identify and interpret proposed, new, and amended rules and regulations. After identifying and interpreting the rules and regulations, assess their impact on the firm’s business and, if necessary, update the compliance manual. 

Create a Compliance Calendar to Track and Monitor Compliance Tasks

A compliance calendar is a tool to help stay organized. Use a compliance calendar to track compliance tasks and regulatory due dates and as a checklist to monitor compliance controls. A compliance calendar coupled with the assistance of regulatory compliance technology to send compliance due dates reminders and alert red flags is a sure way to stay on track.

CCOs Urged to Leverage Internal Teams to Assist in Compliance Review 

Conducting an annual compliance review of the firm’s policies and procedures can be quite an undertaking. It is a heavy lift that the CCO should not execute alone. Before commencing the review, identify key contacts within the firm’s various internal departments and solicit their help. In doing so, communicate what is required to complete the review and how they can help complete the review timely.

Conduct the Annual Compliance Review Throughout the Year 

Do not wait until year-end to conduct the annual compliance review. The compliance team should monitor, test, document, and remediate the firm’s policies and procedures quarterly and aggregate documentation from each review performed. Incorporating quarterly reviews alleviates the burden of having to review all the policies and procedures at once. 

Proactively Monitor Proposed Securities Regulation and SEC Rules 

Proactively monitor proposed rules and regulations and determine whether they are potentially applicable to the firm’s business. If so, consider the following: (1) how the rule will impact the firm’s business; (2) how to communicate the rule to the impacted business area; and (3) how to build a process to identify potential updates to the policies and procedures. 

There is no one right way to prepare for an annual compliance review. However, proper planning and organizing will make for a more streamlined process and the five considerations above are a feasible starting point.

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TaNeka Ray

TaNeka Ray is a Senior Manager in the firm's Global Compliance & Regulatory Solutions Group & and has over 5 years of experience.

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