A Checklist for Investment Advisers to Streamline and Organize Their Annual Compliance Program Reviews (Part One of Two)

Rule 206(4)‑7 under the Investment Advisers Act of 1940 requires registered investment advisers to evaluate, at least annually, the adequacy of their compliance policies and procedures and the effectiveness of the compliance program’s implementation. Compliance with the annual review requirement is an area of focus for the SEC, and failure to comply can result in significant penalties. Although Rule 206(4)‑7 does not mandate a specific deadline, investment advisers often perform their annual compliance reviews to coincide with other year-end review processes, such as their annual financial audits. Given the present time of year, this two-part series is structured as a checklist that investment advisers can adapt and use to streamline and organize their annual reviews. The first part of this series analyzes Rule 206(4)‑7 and sources of guidance on complying with the rule; spells out who should be involved in conducting an investment adviser’s annual compliance program review, what information should be gathered for review and what areas should be covered; and notes the questions that SEC examiners are likely to ask about an adviser’s annual review during an examination, which advisers should be able to answer after having conducted their reviews. The second part will provide a non‑exhaustive list of the questions advisers should answer for each substantive area covered in the review. For more on conducting an annual review, see “RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part One of Two)” (Feb. 21, 2013).

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