Strategies for RIA Compliance: A Roadmap for Registered Investment Advisers

In the world of finance and investments, registered investment advisers (RIAs) play a crucial role in managing assets and providing financial advice to clients. To ensure transparency, integrity, and adherence to regulatory standards, RIAs are required to establish robust compliance programs. These programs not only help in complying with the investment Advisers Act of 1940 (The Act), Securities and Exchange Commission (SEC) and state regulations, but also safeguard client interests, enhance operational efficiency, and maintain market integrity.

Below are strategies you can use to craft an effective compliance program focusing on regulatory requirements and cybersecurity for your RIA,

Understanding the Regulatory Landscape

The Investment Advisers Act of 1940 sets forth regulations governing the activities of investment advisers. It aims to protect investors by ensuring transparency and ethical conduct, and outlines fiduciary duties, disclosure requirements, and prohibitions against fraudulent activities. In addition to the Advisers Act, RIAs must comply with rules and regulations from the SEC and other regulatory bodies that address specific areas such as advertising, custody of client assets, privacy, and recordkeeping. RIAs must also stay informed about guidance from these regulatory bodies, which often provide insight into best practices for compliance. Compliance with this Act forms the foundation upon which all other regulatory requirements are built.

Key Components of an Effective RIA Compliance Program

To establish a comprehensive compliance program, RIAs should focus on several critical components:

1. Written Policies and Procedures: Policies and procedures must be tailored to your firm’s unique business model, products, technology and operations platforms, and governance structure. They must also be kept current.
2. Appointment of a Chief Compliance Officer (CCO): Your CCO should be experienced and have sufficient resources.
3. Regular Compliance Reviews: Compliance reviews should be scheduled regularly to identify areas for improvement and remediate deficiencies.
4. Training and Education: Employee training should be ongoing and conducted regularly.
5. Monitoring and Surveillance: Your firm must have reasonable monitoring and surveillance systems to identify and prevent compliance failures.
6. Annual Compliance Review: RIAs are required under Rule 206 to conduct a full assessment of the firm’s compliance program at least annually.

Written Policies and Procedures

Start by documenting policies and procedures tailored to your firm’s activities and the requirements of the Advisers Act. Policies and procedures should cover your firm’s current, specific activities. Policies and procedures should cover everything from client onboarding to investment strategies and disclosure practices. Your policies and procedures manual is a living document. This document should be reviewed and revised on a regular basis to remain accurate as your firm’s business grows and changes.  

Cybersecurity has emerged as a critical aspect of compliance for RIAs. Given the sensitive nature of client information and the increasing frequency of cyber threats, RIAs must implement robust cybersecurity measures. These include:

• Data Encryption: Encrypt sensitive client data both in transit and at rest to prevent unauthorized access.
• Access Controls: Implement strong authentication and access controls to protect systems and data from unauthorized use.
• Incident Response Plan: Develop and maintain a comprehensive incident response plan to promptly address cybersecurity breaches and mitigate potential damages.
• Regular Assessments: Conduct regular cybersecurity risk assessments and audits to identify vulnerabilities and strengthen defenses.

Appointment of a Chief Compliance Officer

Designate a competent individual as the CCO responsible for overseeing the compliance program. Ensure your CCO understands your business model and the regulatory environment related to that type of business. The CCO should have sufficient authority and resources to enforce policies effectively. Often, within small RIAs, the CCO is one of many hats a single individual wears.

When it comes to compliance, it is imperative you have someone who has the bandwidth to ensure your program stays current, is implemented as written, and stay abreast of the ever-changing regulatory environment.

Regular Compliance Reviews

RIAs should conduct regular, ongoing reviews of their compliance policies and procedures to ensure they are meeting regulatory requirements. This is the time to address any deficiencies found during the review process. Your assessment should include reviewing client agreements, marketing materials, and internal controls, among other critical areas. Firms with a strong compliance program typically schedule these reviews on a monthly, quarterly or annual basis.

Conducting the annual and other ongoing reviews is an important role of the CCO. Ensuring the CCO has the resources to perform these reviews on a routine basis is imperative. The firm should consider engaging third-party software and auditors to provide an objective assessment of your compliance program.  

Training and Education

Implement a comprehensive training program for employees to educate them about regulatory obligations, ethical standards, and cybersecurity best practices. This helps foster a culture of compliance throughout the organization. Training should be conducted, at a minimum, during onboarding and as part of your annual compliance meeting. Highlighting high-risk areas of the firm, access person requirements, and new regulations or policies should be included in this meeting. Periodic compliance bulletins or reminders are also an effective tool to keep compliance top of mind.

Your firm is also required to establish, maintain and enforce a written Code of Ethics that set forth standards of conduct expected of advisory personnel and address conflicts that arise from personal trading by advisory personnel. Among other things, the rule requires supervised persons to report their personal securities transactions, including transactions in any mutual fund managed by the adviser. Firms must distribute the Code of Ethics, keep copies of their code of ethics, records of violations of the code and actions taken as a result of the violations, and copies of their supervised persons’ written acknowledgment of receipt of the code. 

Monitoring and Surveillance

Establish systems for ongoing monitoring of activities such as trading, portfolio management, fee billing and client communications. Testing your monitoring and surveillance systems to ensure they are surveilling and reporting correctly should happen regularly. If your firm uses technology-driven surveillance tools to assist in detecting potential compliance breaches, assess how these technologies are used, either by themselves or by a third-party vendor, and determine whether your firm is complying with any rules implicated by their use.

Beyond monitoring and surveillance, your firm must have procedures for addressing and improving any areas where compliance failures arise.

Annual Compliance Review

SEC Rule 206(4)-7 requires RIAs to conduct an annual review of the entire compliance program to assess its effectiveness and make necessary adjustments. Routine compliance reviews, monitoring and surveillance, as mentioned above, can be documented in this annual review. Additionally, the firm should consider the SEC’s Annual Priorities notice when determining the areas of testing for this review. This review should be documented and presented to senior management and the board of directors.

Record Keeping

Making sure your records are in order is a basic requirement for a strong compliance program. Many firms retain records long past their regulatory requirements. However, just retaining them isn’t enough. You must establish and maintain procedures to safeguard the records from loss, alteration, or destruction, limit access to authorized personnel, the Commission, and fund directors, and ensure that electronic copies of non-electronic originals are complete, true, and legible.

If you have records, you need to keep them organized so they can be produced efficiently if requested by a regulator or as part of a subpoena. That production will cost time and money. More importantly, a good data destruction process should be part of your information or cyber-security program. Criminals can’t steal what you don’t have.

Your Partner in Compliance

The keys to a successful compliance program are proactive planning, thorough documentation, continuous education, and embracing technological advancements to safeguard client interests and enhance operational resilience. Continuous vigilance, adaptation to regulatory changes, and a commitment to best practices will ensure that your firm not only complies with the law, but also thrives in an increasingly complex financial landscape.

At Oyster Consulting, we understand the importance of efficient and effective compliance management for Registered Investment Advisors (RIAs). Our team of industry professionals specializes in creating tailored policies and procedures designed for your firm’s business model. You’ll know exactly where to focus your time and resources. We can help with registration, outsourcing your Chief Compliance Officer role, or conducting annual reviews. Establish a compliant program aligned with industry best practices to position your firm for long-term success.