Navigating regulatory compliance in your first year as a new RIA

As a newly registered investment adviser, the excitement of launching your firm and serving clients can be palpable. However, it’s crucial to remember that along with this new chapter comes a host of regulatory compliance obligations that must be met diligently. When navigating the complex regulatory terrain in your first year, careful planning and expert guidance can help ease your path to becoming, and remaining, compliant.

Using Rule 206(4)-7 as a starting point

In your first year as a newly registered investment adviser (RIA), establishing a strong foundation for regulatory compliance is paramount. The compliance landscape is multifaceted, requiring the adoption and implementation of robust policies and procedures consistent with Rule 206(4)-7 under the Investment Advisers Act of 1940. This will serve as the backbone of your firm’s compliance framework and ensure you meet your regulatory obligations effectively.

Incorporating Rule 206(4)-7 into your policies and procedures

To prevent federal securities law violations, Rule 206(4)-7 mandates that RIAs adopt and implement written policies and procedures in the following ways:

Risk assessment: Begin by conducting a comprehensive risk assessment specific to your firm’s operations. Identify potential compliance risks and vulnerabilities that could arise in your day-to-day activities.
Policy development: Based on your risk assessment, develop written compliance policies and procedures tailored to your firm’s business model. These policies should cover various aspects, including portfolio management, trading practices and recordkeeping to name but a few.

Implementation: Once your policies and procedures are in place, ensure that they are fully integrated into your firm’s daily operations. This involves educating your staff and ensuring their active adherence.

Monitoring and testing: Regularly monitor and test the effectiveness of your compliance policies and procedures to make sure they remain robust and appropriate. This proactive approach helps identify and rectify any compliance gaps promptly.

Documentation: Maintain thorough documentation of your compliance efforts, including records of internal reviews, employee training and any remedial actions taken. Comprehensive documentation is critical during regulatory examinations.

Annual review: Rule 206(4)-7 requires an annual review of your compliance policies and procedures. This review will assess your effectiveness in preventing violations of federal securities laws and is a vital component of your compliance framework.

Updates and amendments: As your firm evolves and industry regulations change, be prepared to update and amend your policies and procedures accordingly. This flexibility ensures that your compliance program remains current and aligned with regulatory requirements.

Setting the compliance foundation

The SEC requires registered investment advisers to conduct an annual review of their compliance policies and procedures. This review should assess the effectiveness of your policies and procedures in preventing violations of securities laws, and is an essential component of establishing a strong compliance foundation.

During this process, you should:

  • identify compliance risks by evaluating your operations to identify potential compliance risks and vulnerabilities
  • review and update policies to ensure that your compliance policies and procedures are up-to-date and reflective of your current business activities
  • implement necessary changes and, if any compliance gaps are identified, take prompt action to rectify them.

Form ADV Part 1, Form ADV Part 2, and what comes next

One of the primary reporting requirements for RIAs is the submission of Form ADV. In your first year, you will need to file Form ADV Part 1 and create Form ADV Part 2, also known as the “Brochure.” These documents are crucial for disclosing important information to clients and regulators.

Form ADV Part 1: This form provides key information about your firm, including its structure, assets under management (AUM), investment strategies, and disciplinary history, if any. It must be filed electronically on the Investment Adviser Registration Depository (IARD) system and updated annually.

Form ADV Part 2 (Brochure): The Brochure is a document you provide to your clients. It includes information about your services, fees, conflicts of interest and the background of your firm’s key personnel. Creating and maintaining an accurate Brochure is vital for transparency and client communication.

In addition to Form ADV, RIAs may have other reporting requirements to consider:

  • Form 13F: If your firm manages over $100 million in certain securities, you may need to file Form 13F to disclose your holdings.
  • Form 13G: This form is for beneficial owners who acquire more than 5% of a class of equity securities in a public company. It’s essential to monitor holdings and make these filings as needed.
  • Form PF: If you manage private funds, Form PF reporting may be required. This form provides regulators with information about your fund’s assets, strategies and risk exposures.

Keeping clients informed

Transparency is a fundamental principle in the financial industry. You’ll be required to provide clients with clear and comprehensive disclosures about your firm’s operations. Key disclosure requirements include:

Form ADV Part 2A (Appendix 1): This document, often referred to as the “Brochure Supplement,” provides details about the background and qualifications of your firm’s supervised persons who have direct client contact.

Privacy policy: You must also deliver a privacy policy to clients, explaining how their personal information is handled and protected.

Code of Ethics: Disclose your firm’s Code of Ethics to clients, outlining your commitment to ethical conduct.
If you operate in multiple states, you may also be subject to Blue Sky laws, which require registration or notice filings at the state level. Complying with Blue Sky regulations ensures that your firm can operate legally in each state where you have clients.

Preparing for future compliance challenges

Within the first three years of registration, the SEC may conduct a new registrant exam of your firm to assess your compliance with applicable securities laws and regulations. It’s essential to be prepared for this examination, as it can occur at any time during this period. Engaging a compliance consultant with expertise in SEC examinations can help you navigate this process and ensure your firm is well-prepared.

Staying ahead of changes

You might undergo changes in its business operations, personnel or investment strategies in the first few years of operation, meaning you should promptly amend your Form ADV to reflect these. The SEC also requires annual amendments to Form ADV within 90 days of the end of your fiscal year.

Remember, compliance is an ongoing commitment. Engaging a regulatory compliance consultant with expertise in RIA regulations can be invaluable during your first year and beyond. They can help you navigate the intricacies of compliance, conduct annual reviews, ensure accurate reporting, and stay up-to-date with disclosure requirements.

By prioritizing regulatory obligations, conducting thorough annual reviews, meeting reporting requirements and providing transparent disclosures, you can establish a solid foundation for your long-term compliance.

How we can help

If you have any questions or need assistance with regulatory compliance during your first year as an RIA, don’t hesitate to reach out to our team of experts.