Comment: Seven practical insights for effective compliance programs

Now is a particularly apt time to consider practical insights for effective compliance programs. Here are seven considerations to keep in mind: 

 

·      Tailor Compliance Policies and Procedures – Rule 206(4)-7 under the Advisers Act, the “Compliance Program Rule,” requires written policies and procedures to meet applicable Advisers Act requirements. Make sure your compliance program under Rule 206(4)-7 is tailored to your specific organization and the particular compliance risks your firm faces.  An unfortunate mistake firms may make is using “off-the-shelf” procedures that have not been tailored to the firm’s operations. The SEC inspections staff expects firms to adhere to their procedures. When policies and procedures do not reflect a firm’s operations, the SEC will likely identify this as a deficiency and, depending on how misaligned written procedures are to actual practices, may take other actions.   

 

·      Visible Commitment by Management – Make sure to set an overall tone at the top for a culture of compliance. Meeting the other considerations outlined in this article is a solid step in the right direction. Also make sure your Chief Compliance Officer, a requirement under Rule 206(4)-7, is knowledgeable and well-positioned in the organization to have management’s ear to address compliance matters, including compliance resources and violations, when it is important to do so.

 

·      Avoid Absolute Delegations of Responsibilities – The fox should not be watching the hen house. We often see significant compliance issues occur when one individual has substantial authority over particular processes, such as performance calculations, without oversight. This can be a problem in the making, increasing litigation risks, not to mention potential SEC issues.

 

·      Test Procedures and Document Oversight Processes – The SEC inspections staff expects firms to confirm through testing that procedures are operating as intended and that forensic testing (or trend analyses) will be used as part of a firm’s oversight mechanisms. The SEC inspections staff also expects firms to document their compliance monitoring processes to evidence that these processes are occurring. Firms don’t get credit for their oversight processes without this documentation. Perhaps the most important consideration is making sure documented oversight mechanisms are sustainable. This can mean avoiding cumbersome processes, such as written memoranda to memorialize each compliance oversight effort. Some firms find it helpful to use “oversight templates” or sign-offs by, for example, initialing and dating trade allocation spreadsheets to reflect that they have been reviewed.

 

·      Communicate Compliance Requirements Effectively – While it may be easy to advise training – and more training, for training to be effective, it generally needs to be interesting. Seek to be creative in designing training sessions that hold the intended audience’s interest. Training should also not be left to being “periodically” given, but should be regularly scheduled at specific times, such as once or twice a year. Also incorporate other methods, such as compliance acknowledgements and email reminders, to bring the compliance message home.

 

·      Consistent Enforcement – Watch, in particular, any Code of Ethics/personal trading violations. Don’t allow star portfolio managers or founders to get a pass when compliance violations or other issues involving these key players occur.

 

·      Make Changes to Your Compliance Program – Your compliance program should be a living and breathing effort – don’t build it and forget it.

 

An effective compliance program is required under the Advisers Act, expected by your investors and an important way to prevent issues that could cost time and money. By taking the foregoing into consideration, you can maximize the benefits of an effective compliance program and avoid potential pitfalls, which can be significant when the SEC is involved.