It seems confusing when executive management listens to SEC speeches, interviews compliance professionals, or reads enforcement actions. Today’s list provides the key characteristics that we examine when assessing a compliance program.
The CCO should have significant (at least five years) Advisers Act regulatory knowledge and experience. Additionally, the CCO should be fully dedicated to the compliance function and not undertake other executive management roles.
The policies and procedures must be specifically tailored to the firm’s business and continually reviewed and updated. An “off-the-shelf” manual is about as useful as internet-based medical advice.
How committed senior management is to compliance can be measured by three key variables: (1) total firm budget allocated to compliance (should be at least 5%); (2) executive time spent on compliance issues (at least quarterly); and (3) discipline for employees who violate compliance policies and procedures.
A good compliance program must ensure that the entire organization has access to compliance information. Recommended practices include ongoing training and communication.
A firm cannot have a good compliance program without requiring its people to follow the rules. Firms must annually test all policies and procedures, record the findings and recommendations in a written report for management, and continually follow up to ensure remediation.
A good compliance calendar will serve as the working project plan of every activity required during the year. It should be written so that any new employee could follow the plan.
Documentation is the hallmark of a good compliance program. Only through well-maintained books and records can a firm log its compliance activities and demonstrate their effectiveness to senior management, clients, and the regulators. If it’s not documented, it didn’t happen.
Very little transpires in an investment management firm without email communications. Email review can unearth issues that annual testing may not. Email review adds “forensic” to testing.
An investment firm’s marketing materials are its “canary in a coal mine,” i.e., if the marketing materials are misleading or omit disclosures, very often the firm has deeper regulatory problems.
The best compliance programs use outside advisers to provide advice and an independent best practices assessment. The regulatory world has become too complicated to go it alone.