RIA Compliance Testing. Registered Investment Advisors are required pursuant to Rule 206(4)-7 to perform an annual review of your firm’s policies and procedures to determine applicability to how your investment advisory firm operates. RIA compliance testing is required by investment advisors to ensure your firm’s procedures are appropriate for your current business model and to uncover any risks.
The federal and state regulators give RIA firms quite a bit of latitude in this area and do not specify how firms are to achieve this testing. Rather, they allow for RIA firms to perform testing that best suits how the RIA firm operates.
Performing the testing is one requirement to complete, but the other requirement is to ‘document’ what you have done.
Example of Testing:
For example, if your RIA firm uses Sub-Advisors to manage your client’s portfolio, you need to perform due diligence about that Sub-Advisor before and during the client relationship. Your testing can include any of the following:
- Review of the Sub-Advisor’s Form ADV Part 1, Form ADV Part 2A Brochure and Form ADV Part 2B Brochure Supplement;
- Review of the BrokerCheck and IAPD systems to confirm any disclosures on behalf of the Sub-Advisor or its Investment Advisor Representatives;
- Ask the Sub-Advisor to complete a questionnaire outlining any civil lawsuits, arbitrations, customer complaints, SEC violations, etc. that the firm has been involved in;
- Visit the Sub-Advisor at their office and meet the staff;
- Ask the Sub-Advisor for references;
- Compare services of multiple Sub-Advisors for their fees, services and product offerings;
- Review the Sub-Advisor’s performance information, in detail. What type of investments do they use/what level of risk do they undertake.
- Have a quarterly due diligence call with the Sub-Advisor.
‘Documenting’ any of the above suggestions or more is the requirement of RIA compliance testing. Registered investment advisors will be asked at the time the firm is examined by their regulator to ‘prove’ what you have completed to meet the requirement of Rule 206(4)-7. The more an advisor is able to document their testing requirement, the more this will help during an examination.
Any questions about compliance testing? Contact Registered Advisor Services today for help!