A compliance program is nonnegotiable for a registered investment advisory (RIA) firm. Failing to meet regulatory demands can result in costly penalties. It can also affect the firm’s ability to operate and damage its reputation. If you are planning to form an RIA firm, there are four essential elements to building a strong compliance program.
Compliance staff
The foundation of a compliance program starts with having staff focused solely on performing compliance functions. Depending on the firm’s size and complexity, it could employ a full-time chief compliance officer (CCO). Another option is to hire third-party compliance consultants. In addition, the Compliance Program Rule of the Securities and Exchange Commission requires the designation of a CCO to oversee the policies and procedures regarding compliance.
Policies and procedures
An RIA firm must establish written policies and procedures to prevent its staff from violating the Investment Advisers Act and other pertinent rules. These should cover areas such as portfolio management, trading, conflicts of interest, marketing and code of ethics. When the policies and procedures are in place, the firm must review and update them on a regular basis.
Training program
Also, the firm must provide comprehensive training on its compliance policies and procedures to concerned staff. It can reinforce key concepts by holding regular meetings and having documented acknowledgments. Doing these can help forge a strong culture of compliance across the firm.
Annual review process
Finally, an in-depth annual review should assess if the compliance program is adequate and effective. The review can involve testing policies and sampling transactions. It can also include interviewing staff and finding gaps or areas to improve. Moreover, it is crucial to document the annual review thoroughly.
Achieving compliance
Creating an RIA firm is a huge risk that requires strategic leadership and responsibility. With legal support, you may build a robust compliance program in order to protect the future success of your firm.