The SEC’s Division of Examinations has issued a Risk Alert describing deficiencies its staff has observed in investment advisers’ annual compliance reviews under Advisers Act Rule 206(4)-7.
The alert underscores that the review should be a substantive, documented assessment of whether an adviser’s compliance policies and procedures remain reasonably designed and are being implemented effectively—not simply a recurring administrative exercise.
Among the deficiencies cited, the staff observed advisers that failed to:
- Conduct reviews at least annually. Changes in an adviser’s business or personnel were not viewed as a sufficient reason to defer the review.
- Update policies and procedures as the adviser’s business, operations, and regulatory requirements evolved.
- Adopt policies and procedures addressing risks central to the adviser’s business.
- Remediate issues identified during prior annual reviews.
The Risk Alert also emphasizes the importance of written policies and procedures governing the annual review process itself. These may include direction on the testing and validation personnel should perform, the factors to consider when assessing whether policies and procedures are adequate and effectively implemented, and the documentation to prepare and retain in support of the review and resulting assessments.
What Should Investment Advisers Do Now?
Compliance officers should review the Risk Alert closely and assess whether their firm’s annual review process addresses the areas highlighted by the SEC.
In particular, advisers should consider whether they need to:
- Confirm when their last Rule 206(4)-7 review was completed and, if the next review is due, begin or complete the review promptly.
- Evaluate whether current policies and procedures reflect applicable regulatory requirements, current business practices, and the risks most significant to the firm’s business.
- Confirm that findings from prior annual reviews have been addressed and establish a clear remediation plan for issues identified in the current review.
- Assess whether personnel have sufficient written direction on how to conduct and document the annual review, including testing and evaluation.
How ACA Can Help
ACA has conducted thousands of Rule 206(4)-7 reviews over nearly 20 years and continually evolves its annual-review approach in response to regulatory developments, including SEC Risk Alerts and examination observations.
We can support advisers in several ways, including:
- Performing a comprehensive outsourced annual compliance review.
- Assisting with discrete components of an annual review, such as compliance testing and validation.
- Supporting the documentation of annual review procedures, testing, assessments, findings, and remediation.
- Advising on the development and maintenance of policies and procedures as business practices and regulatory expectations change.
ACA also offers broader compliance support, including mock examinations and outsourced compliance officer services, where appropriate. However, the most direct response to the issues raised in this Risk Alert is a timely, well-designed, risk-based, and thoroughly documented annual compliance review.
For advice or assistance addressing the matters raised in the alert, please contact us or reach out to your existing ACA contact.