A ticked box stating an annual review has been completed is a no-go, with the SEC highlighting widespread failures in RIA’s ‘shortcuts to being compliant.’
TL;DR: create a running log of signed-off marketing material.
Two and half years after the SEC amended their annual compliance review requirements, plenty of firms have not adjusted accordingly to document and date their written reports.
Given recurring deficiencies, the SEC’s Division of Examinations has published a new risk alert in how RIAs conduct such reviews under the Advisers Act’s core ‘Compliance Rule’ – Rule 206(4)-7 – and outlined six major problems:
- Reviews being conducted late, or not at all.
- Procedures that do not cover the areas they are supposed to.
- Reviews that go against how a firm’s own written procedures say they should be performed.
- Policies no longer matching how the business operates.
- Poor, or missing, documentation of what was reviewed and found.
- Identified problems that were never fixed.
That last point is perhaps the most worrying, and indicates that advisers often lean to one particular shortcut: an employee’s sign-off that policies are being followed to appease the annual review rule. The exam staff has made clear that such a certification does not count as a review.
So, what does this mean for fund marketers?
The alert is not fundamentally steeped in marketing activity, although it is prevalent for anyone that owns pitch decks or web-based content aimed at RIAs.
The Compliance Rule’s annual review (among other things) tests whether a firm’s procedures around performance charts, endorsements and third-party ratings are actually followed correctly, in practice, beyond being written down. So a superficial annual review is automatically a superficial check on marketing compliance as well!
In light of this recent news, US-based fund marketers can expect a few more extra steps to take:
- Compliance teams may cycle back with more evidence of marketing materials being checked in line with a firm’s actual written procedures, rather than being filed then forgotten, with tracked records of drafts to approvals and dated sign-offs.
- Annual reviews that have been an email certification from a marketing or IR lead does not cut the mustard, explicitly deemed insufficient by the SEC.
- Build a running log of which marketing collateral is reviewed and when, against which procedures, and any changes in the process. You can also ask your CCO for help here, which becomes the audit-ready documentation all firms need to produce.
Live examination risks are increasing. Now is the time to treat any gaps between what marketing says and does quite seriously (i.e. a testimonial disclosure skipped under submission deadline pressure), where even a lack of paperwork can land a firm in a tricky compliance situation. Luckily, it is easily avoided!
Sources
SEC Division of Examinations, “Examinations Observations Regarding Investment Adviser Annual Compliance Review”; reported by Compliance Building
