Filing the ADV and other registration documents is only the beginning of an RIA’s regulatory obligations. Following registration, RIAs and their representatives become subject to a network of complex compliance obligations. This article touches briefly on a few of the many components of RIA compliance, including: annual license renewals, detailed record keeping, investor disclosure, compliance/ethics manual issues, and preparing for audits. RIAs should work closely with an experienced investment management attorney to maintain compliance with its obligations.
Annual Renewals
SEC and state registered investment advisors are required to annually update their ADV in the form of an annual amendment. Investment advisor representatives are likewise required to renew their state or federal registration. Renewals are processed through the IARD system. An RIA or its representative that fails to timely and properly renew its registration can face significant penalties, including loss of the RIA.
Record Keeping
One of the most important compliance issues for investment advisors is proper record keeping. Detailed records and ledgers must be kept to document client accounts, purchase and sales history, securities recommendations, transactions, advertising and performance claims, personal transactions of advisor representatives, client disclosure, powers of attorney, and many other advisory matters. Record keeping requirements vary depending on the jurisdiction as well as whether the RIA has custody of client assets.
Ongoing Client Disclosure
As a fiduciary, the RIA’s first duty is to act in the best interests of its clients. This involves providing full and adequate disclosure to clients on all matters involving the investment advisor relationship, including potential conflicts of interest. SEC and state regulations require advisors to provide clients with specific disclosures regarding fees, conflicts and procedures. As changes to the RIA’s business occur, it must be diligent in identifying potential disclosure events and make the proper amendments. Legal counsel will then be able to make the appropriate amendments to the Form ADV Part 2 and properly revise client advisory agreements.
Maintenance of Compliance/Ethics Manuals
If an RIA is required to have a compliance manual and/or ethics manual, care must be taken to observe their requirements. When specific procedures are improperly followed, the RIA has a duty to keep a record of violations and record of corrective action taken. Additionally, compliance manuals must be continuously reviewed and revised to keep them updated with current law and in line with business practices and objectives. Boilerplate compliance manuals provided by compliance consultants provide a “kitchen sink” approach to the compliance manuals, often providing overly ambitions procedures that exceed regulatory requirements and subject an RIA to unnecessary liability. An RIA should work closely with legal counsel to provide a custom compliance manual that complies with current regulatory requirements and does not conflict with the ADV disclosures or advisory agreements.
