Compliance reviews are an annual opportunity to show the SEC (and yourself) that your firm is running a tight ship. They help you catch blind spots, update outdated processes, and stay ahead of regulatory scrutiny.
This guide walks you through the nuts and bolts of a solid compliance review. From tackling key SEC rules to using tech that takes the grind out of the process, we’ve got you covered. Let’s make this as painless—and maybe even as productive—as possible.
Understanding SEC Requirements
If you’re an RIA, you’ve probably seen the SEC’s playbook. Here are the key rules you need to tackle during your review:
Rule 206(4)-7 (Compliance Rule):
This rule asks you to get your compliance house in order. Your firm needs a written manual that actually reflects how you operate, not a boilerplate download from the internet. It’s also your job to update it every year. A Chief Compliance Officer (CCO) is the point person here, making sure policies are relevant and risks are addressed.
Human Angle: If your firm takes on more ESG clients this year, your manual should explain how you evaluate those investments. For example, detail how you assess ESG criteria to avoid accusations of greenwashing.
Rule 204-2 (Books and Records Rule):
The SEC cares about your receipts—literally. Keep client agreements, trade logs, and even emails for at least five years, with the first two stored onsite or in easily accessible digital formats.
Quick Reality Check: That text from a client confirming a trade? Yep, that counts too. Archiving everything, even the “small stuff,” protects you in an exam.
Update: The SEC recently fined financial institutions over $1.6 billion for failing to archive business communications on personal devices. Make sure off-channel communications, like texts and personal email, are properly captured. This is especially crucial for firms with remote or hybrid workforces.
Rule 206(4)-1 (Marketing Rule):
Testimonials, endorsements, and performance data must be accurate and transparent. If you’re using hypothetical returns, disclose the assumptions. If a client says nice things about you in a testimonial, note whether you compensated them.
Example: Showing performance numbers for a model portfolio? Make sure they’re clearly labeled and come with the appropriate disclosures about risk. Additionally, provide disclaimers for any hypothetical performance to clarify it’s not based on actual client portfolios.
Form ADV Requirements:
Your ADV is basically your firm’s official biography. It must be updated annually to reflect any changes in your business, fees, or services. If you’ve started offering ESG portfolios or changed how you charge clients, your Form ADV needs to reflect that.
Best Practice: Regularly cross-check your Form ADV against marketing materials to ensure consistency. Discrepancies often trigger SEC scrutiny.
Cybersecurity Guidance:
This isn’t technically a rule, but the SEC will dig into your cybersecurity during an exam. You need policies that cover data protection, access controls, incident response, and vendor oversight.
Pro Insight: If your vendors do not have a breach notification process, your company may be liable for mismanaged data.
Update: Under new SEC guidelines, corporations must now disclose material cybersecurity events and provide yearly reports on cybersecurity risk management and governance.
Other Rules to Consider
Depending on your firm’s activities, additional SEC rules may apply. For example:
- The Custody Rule: Requires extra safeguards if your firm handles client funds or securities.
- The Proxy Voting Rule: Mandates policies and records if you vote proxies on behalf of clients.
- Trade Allocation and Best Execution: Standards apply to firms trading on behalf of multiple clients.
- Identity Theft Prevention: Programs are necessary for firms managing client accounts or extending credit.
- Anti-Money Laundering (AML): Requirements may be relevant if your firm serves foreign clients or high-risk industries.
Each RIA’s responsibilities will differ, so consider these guidelines in light of your firm’s operations. Consulting with compliance specialists or utilizing solutions such as SmartRIA or ComplySci can help ensure that nothing is forgotten.
How to Conduct an Effective Compliance Review
1. Audit Policies and Procedures
Start with your compliance manual. It should reflect what your firm actually does, including changes in regulations, services, or risk profiles.
- Check if your policies align with the SEC’s latest guidance.
- Ensure that procedures address firm-specific risks like conflicts of interest or ESG oversight.
- Confirm that staff are following documented procedures.
Example: If you’ve expanded your client base to include more institutional investors, your conflict-of-interest policies might need updates to address those relationships.
2. Inspect Books and Records
Your records should be accurate, complete, and ready for scrutiny. This includes client communications, trade logs, and fee schedules.
- Verify that all required records are stored securely and can be retrieved quickly.
- Randomly sample records to catch inconsistencies or missing documentation.
- Include electronic communications like emails and text messages in your review.
Practical Tip: Set up automated archiving for emails and texts to avoid manual errors or missed records.
3. Review Marketing Materials
Marketing is one of the SEC’s top focus areas. Every piece of client-facing material must comply with disclosure and substantiation rules.
- Verify that performance data is labeled correctly and includes disclaimers.
- Ensure testimonials and endorsements include disclosures about compensation or conflicts of interest.
- Keep records of all marketing materials for at least five years.
Quick Check: If you’re promoting a portfolio’s past performance, include a clear disclaimer that past performance isn’t a guarantee of future results.
4. Examine Fee Structures and Billing
Fee-related issues are among the most common SEC violations. Check that all fees are disclosed accurately and billed consistently.
- Match billing statements to fee disclosures in client agreements and your Form ADV.
- Review fee schedules for accuracy across all clients.
- Ensure you have a documented process for notifying clients about changes in fees.
Tip: Use software to audit fee calculations quarterly and catch errors early.
5. Evaluate Cybersecurity Protocols
The SEC pays close attention to how you protect client data. Review your policies to ensure they cover access controls, encryption, and incident response.
- Test your systems regularly to identify vulnerabilities.
- Review vendor contracts to confirm they include cybersecurity requirements.
- Train your staff to recognize phishing attempts and other common cyber threats.
Action Item: Run a mock phishing attack on your employees. Use the results to refine your training, not to embarrass anyone.
Common Pitfalls to Avoid
- Stale Policies: A compliance manual is only as good as its relevance. If your firm’s operations or risks have evolved but your manual hasn’t, you’re leaving gaps wide open for the SEC to spot. Update it annually, or more often if significant changes occur.
- Disorganized Records: Missing or incomplete documentation—whether it’s trade logs, fee disclosures, or even client emails—can send up red flags during an audit.
- Marketing Missteps: The SEC isn’t lenient when it comes to misleading claims. Performance data without proper disclaimers or testimonials that don’t disclose conflicts can quickly lead to fines.
- Weak Cybersecurity: Data breaches don’t just hurt clients; they draw regulatory scrutiny.
Best Practices for RIAs
Compliance works best when it’s integrated into your firm’s daily operations. These practices can help you build a reliable and efficient compliance program:
- Know Your Weak Spots: Regularly assess your risks—whether it’s conflicts of interest, outdated cybersecurity measures, or fuzzy marketing disclosures. Spotting issues early means fewer headaches later.
- Write It Down, or It Didn’t Happen: Keep track of everything: training sessions, policy updates, client communications, and audits. Imagine explaining a missing document to the SEC—it’s not a fun conversation. Save yourself the trouble and document everything neatly.
- Make Training Fun (or at Least Not Dreadful): Compliance training doesn’t have to be a snooze-fest. Gamify it, use real-world scenarios, or turn it into a quiz competition. The goal is to keep your team engaged so they actually remember what they learn.
- Lean Into Technology: There’s no medal for doing compliance the hard way. Use tools like SmartRIA, ComplySci, or Redtail to automate the boring stuff—recordkeeping, task tracking, and even vendor monitoring. Bonus: It makes audits way less stressful.
- Treat Deadlines Like VIPs: Deadlines aren’t suggestions. Set up reminders (or let your tech solution do it for you) so you never miss a filing or update. Regulators love a firm that’s on top of its schedule.
Conclusion
Compliance reviews keep your firm aligned with SEC regulations and ready for anything. They’re a chance to dig into your operations, refine your processes, and ensure everything is working as it should. Breaking the process into manageable steps and using tools like SmartRIA helps you stay organized without the stress.