By Lindsay Burkett-St Laurent, Senior Managing Director
Written annual compliance reviews have long been a cornerstone of a robust regulatory compliance program, particularly for firms operating within the financial services industry. Despite recent legal developments affecting the regulatory requirements for private fund advisers, the practice of conducting annual compliance reviews in some form, remains a regulatory requirement.
Written annual compliance reviews were mandated under the U.S. Securities and Exchange Commission’s (SEC) private fund rule, which required investment advisers to private funds to document the annual reviews of their compliance policies and procedures. However, this rule was recently struck down by the fifth circuit.
Notwithstanding, the SEC has consistently emphasized the importance of a formalized annual review process through various risk alerts and enforcement actions. For instance, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert in November 2020 highlighting common deficiencies observed in the compliance programs of registered investment advisers. The alert underscored that advisers failing to conduct regular compliance reviews often face significant compliance risks, including inadequate policies, insufficient oversight, and failure to adapt to regulatory changes.
Enforcement actions by the SEC further illustrate the consequences of neglecting formalized compliance reviews. Notably, when firms are the subject of an enforcement action, the SEC frequently requires them to engage an outside compliance consultant to conduct a comprehensive review of compliance policies and procedures. This external review aims to ensure firms correct identified deficiencies and implement compliance measures to prevent future violations.
While the legal requirement for written annual reviews under the private fund rule is currently in flux, the following best practices remain pertinent for firms aiming to uphold high standards of compliance:
- Comprehensive policy review: Firms should have formal procedures for conducting thorough reviews of their compliance policies and procedures annually, ensuring they remain relevant and effective in addressing current regulatory requirements and industry practices
- Risk assessment: Regular risk assessments should be integrated into the review process, identifying potential areas of vulnerability and implementing strategies to mitigate identified risks
- Training and education: Ongoing training programs for employees at all levels are essential to ensure awareness and understanding of compliance obligations and the importance of adhering to established policies
Documentation and record-keeping: Meticulous documentation of the review process and any resulting changes to policies or procedures is crucial for demonstrating a firm’s commitment to compliance and providing a clear audit trail.
Self-examination questionnaires for CFTC/NFA registered firms
For firms registered with the Commodity Futures Trading Commission (CFTC) and members of the National Futures Association (NFA), the requirement to complete self-examination questionnaires annually underscores the continued importance of regular compliance reviews. These questionnaires serve as a structured tool for firms to assess their compliance with regulatory requirements, identify areas for improvement, and implement necessary changes.
The NFA’s self-examination questionnaire, for example, covers a broad range of topics, including supervisory controls, promotional material, and use of third-party service provider practices, among others. Completing this questionnaire helps firms ensure they are meeting their regulatory obligations and maintaining effective compliance programs.
Additionally, for firms registered with the CFTC, IQ-EQ offers comprehensive support in completing the self-examination questionnaire. We can support clients to satisfy their requirements of NFA Compliance Rule 2-9 in reviewing their operations on a yearly basis using NFA’s self-examination questionnaire. The IQ-EQ team will curate a tailored annual compliance review, perform testing of operations during the prior 12 months, and provide clients with a formal self-examination review summary report. Following the self-examination process, we will support clients to remediate any areas of enhancement that were identified during the self-exam process.
All firms should continue to prioritize annual compliance reviews as a critical component of their risk management and regulatory compliance strategies. IQ-EQ is well-positioned to assist clients in navigating the complex regulatory landscape of both the SEC and CFTC/NFA. Our team of experts is adept at ensuring adherence to SEC best practices including comprehensive compliance reviews and risk assessments.
About the author
Lindsay Burckett-St Laurent is a Senior Managing Director at IQ-EQ with over 15 years of experience in regulatory compliance. She excels in delivering tailored compliance solutions for firms of all sizes, across various investment strategies and fund types. Lindsay integrates seamlessly with investment teams, ensuring clients are prepared for regulatory examinations, managing filings, and developing compliance frameworks to that adapt to any firm’s needs. Lindsay graduated from Fordham University with a degree in Organizational Leadership.
