RIA Compliance and Practice Management Blog

Compliance Requirements for Registered Investment Advisers

Posted by RIA in a Box

Oct 14, 2020 10:25:44 PM

RIA Compliance 101

Over the years, we have helped thousands of registered investment adviser (RIA) firms manage the initial registration process and navigate a myriad of ongoing regulatory compliance obligations. Given the diverse array of types and sizes of RIA firms, specific compliance requirements will vary significantly firm to firm. Often for smaller RIA firms registered both at the state or federal level with the Securities and Exchange Commission (SEC), there will not be an experienced or dedicated full-time Chief Compliance Officer (CCO). On the other hand, for larger firms, the CCO may have a very strong investment adviser compliance background and be exclusively focused on leading the RIA firm's compliance program.

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For SEC-registered RIA firms and for many state-registered RIA firms, the Investment Advisers Act of 1940 (“Advisers Act”) outlines investment adviser regulatory compliance requirements. Among other requirements, The Advisers Act requires RIAs to establish policies and procedures that will help prevent violations of the law. It is intended to assist RIAs in understanding their compliance obligations with respect to these provisions. The SEC and many states have established additional rules and guidance that helps RIAs understand the responsibilities set forth by the Advisers Act. Compliance requirements applicable to a particular RIA will depend on specific facts and circumstances such as the registration jurisdiction.

Here are a few key compliance requirements that RIAs should keep in mind as they build their compliance program:

Policies and Procedures

Pursuant to Rule 206(4)-7 of the Advisers Act, an RIA is required to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act. The SEC has said that it expects that these policies and procedures would be designed to “prevent, detect, and correct” violations of the Advisers Act. RIAs are generally required to review their policies and procedures at least annually for their adequacy and effectiveness of their implementation.

Chief Compliance Officer (CCO)

Under Rule 206(4)-7 of the Advisers Act, a CCO must be designated to be responsible for administering a firm's compliance program. The RIA industry is highly fragmented and we estimate that only around 10% of RIA firms likely employ a full-time CCO.

Form ADV

After the initial investment adviser registration process, RIA firms are required to file an annual update of their Form ADV through the Investment Advisers Registration Depository ("IARD") website. Annual amendments must be filed within 90 days of a firm's fiscal year end. In addition, a firm's Form ADV must be updated throughout the year whenever it becomes materially inaccurate.

Fiduciary

RIAs have a fiduciary duty to their clients. This means that they have a fundamental obligation to act in the best interests of their clients and to provide investment advice in the best interest of their clients. According to recent SEC staff guidance, "Although the ability to tailor the terms means that the application of the fiduciary duty will vary with the terms of the relationship, the relationship in all cases remains that of a fiduciary to a client. In other words, the investment adviser cannot disclose or negotiate away, and the investor cannot waive, the federal fiduciary duty."

Code of Ethics

Rule 204A-1 ("Code of Ethics Rule") requires every registered investment adviser ("RIA") firm registered with the SEC to "establish, maintain and enforce a written code of ethics." Firms need to ensure that the Code of Ethics is followed and fully implemented and also need to make sure that all relevant persons are properly identified as "access persons.

Books and Records

Under Rule 204-2 of the Adviser Act, RIAs are required to maintain certain books and records, and must make and keep true, accurate and current books and records relating to their investment advisory business. Books and records that an advisory firm must make and keep are quite specific, but a few notable items which may be required include:

    1. Advertising and performance records
    2. Records related to Code of Ethics including personal securities trading
    3. Polices and procedures adopted and implemented under the Compliance Rule
    4. An archive of all written communications received and sent by the firm 
    5. A copy of each brochure, brochure supplement and Form CRS (for SEC-registered firms), and each amendment or revision to the brochure, brochure supplement and Form CRS (for SEC-registered firms), that satisfies the requirements of Part 2 or Part 3 of Form ADV.
    6. Trial balances and financial statements
    7. Documentation of the firm's annual compliance program review

Disciplinary Disclosures

Under Rule 206(4)-4 of the Advisers Act, investment advisers are required to disclose certain disciplinary and financial and/or legal events that would be material to a client’s or a prospective client’s evaluation of the adviser’s integrity or its ability to meet its commitments to. Disciplinary disclosures may include but are not limited to:

  1. Criminal or civil actions; or
  2. Administrative proceedings before a federal regulatory or state agency.

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Note: The information contained herein is an overview regarding certain private fund regulatory compliance considerations. It is not intended to be a comprehensive analysis or apply to any one private fund's particular situation.

Topics: RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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