Attention: Chief Compliance Officers - Madatory Compliance Requirement

Investment advisers registered with the U.S. Securities and Exchange Commission (the "SEC") are subject to a number of requirements. One of the key compliance requirements directly applicable to Chief Compliance Officers is Rule 206(4)-7, promulgated under the Investment  Advisers Act of 1940. This rule mandates that investment advisers perform, no less than annually, a detailed review of their compliance programs. The rule also requires that a knowledgeable and empowered Chief Compliance Officer (the "CCO") enforce  appropriately tailored policies and procedures for the firm.

CCOs must be diligent throughout the year with testing their written compliance procedures to ensure that their internal controls are reasonably designed to prevent and detect violations of federal and state securities laws.   The rule does not require a comprehensive written report to be completed at the end of the year and does provide some flexibility on how to test an adviser's compliance procedures.  However, during an SEC examination it is often difficult to demonstrate how the testing was implemented during the year unless the Chief  Compliance Officer memorializes the findings in a written report. Producing a comprehensive summary of your compliance testing results may save time during an SEC examination and assist the Chief Compliance Officer with implementing necessary corrective action, if any. A written annual compliance report must be concise and should be reviewed carefully to ensure that privileged records and/or communications are not inadvertently disclosed to third parties. 


The required annual compliance testing must cover the policies and procedures relevant to the following areas:

  • Portfolio management process
  • Trading practices
  • Proprietary trading and personal trading activities of supervised persons
  • Accuracy of disclosures to clients and regulators
  • Safeguarding of client assets
  • Accurate creation and secure maintenance of required records
  • Marketing of advisory services, including the use of solicitors
  • Processes to value client holdings and asses fees based on those valuations
  • Privacy protections of client records and information
  • Business continuity plans

While Rule 206(4)-7 only applies to SEC registered investment advisers, most state securities regulations have similar requirements. For example, Form ADV Part 1B requires a state registered investment adviser to disclose the person responsible for supervision and compliance of the investment adviser. This person acts in a similar capacity of the CCO of an SEC registered investment adviser. Most state registered investment advisers are also required under the applicable states' securities regulations to adopt and implement written compliance policies and procedures.


Cheryl Spratt