Registering as an investment advisor comes with significant compliance requirements, including submitting an annual compliance letter. This letter demonstrates to regulators that an advisor is properly fulfilling their fiduciary duty. When crafting an investment advisor compliance letter, there are several key requirements advisors must follow. Additionally, utilizing best practices can improve the quality and effectiveness of compliance letters.
Include proper identifying information about the advisor and time period
The compliance letter must clearly state the full legal name of the registered investment advisor firm and the time period covered. This ensures there is no confusion about which entity the letter applies to or what timeframe it covers. Best practice is to include the SEC file number, CRD number, and state registration numbers if applicable.
Summarize compliance policies and procedures
A core component of the letter is an overview of the advisor’s written compliance policies and procedures. This demonstrates what controls the advisor has established to prevent violations of securities laws. Focus areas often covered include portfolio management processes, trading procedures, disclosure requirements, and cybersecurity programs.
Describe testing performed and results
The advisor must describe the compliance testing conducted during the year, such as auditing portfolio allocations or reviewing employee personal trading reports. If material violations were identified, the advisor should explain the corrective actions taken, such as revising policies or disciplining employees.
Provide compliance certifications
Include certifications stating that the advisor has adequate and effective compliance policies established per SEC rules. Certifications should be signed by the Chief Compliance Officer and other senior executives attesting to accuracy. This shifts liability from the advisor to individual executives if violations occur.
Crafting a detailed registered investment advisor compliance letter that meets key requirements is essential for demonstrating fiduciary duty and preventing violations. Following best practices for content and structure can improve effectiveness.