Advisors must document annual compliance review in writing under new SEC rule

Buried deep within a regulation that increases scrutiny of private-fund advisors is a rule that applies to all investment advisors and requires that advisors document their annual compliance review.

The provision can be found on page 302 of the final private-fund-advisor rule and was approved Wednesday by the SEC, 3-2, along with the rest of the measure. It amends the Investment Advisers Act compliance rule to mandate that an advisory firm put in writing its assessment of its policies and procedures for adhering to securities regulations.

In another move Wednesday related to the private-fund-advisor rule, the SEC reopened the public comment period for a proposal to reform rules pertaining to advisors who maintain control of client funds. The SEC released the custody proposal in February and the original comment period ended in May.

The SEC is once again seeking comments thanks to amendments to the Advisers Act that were made by an audit provision of the private-fund-advisor regulation the SEC adopted Wednesday. The next round of comments on the custody rule are due 60 days after it’s been published in the Federal Register.

The Investment Adviser Association voiced many concerns about the custody proposal, which is also known as the “safeguarding proposal.” It welcomed the gathering of more public input.

“We commend the Commission for reopening the safeguarding proposal to allow commenters to assess its interplay with the new audit rule adopted today,” IAA general counsel Gail Bernstein said in a statement. “The new rule will require all private fund advisers to undergo an annual audit under the conditions of the existing custody rule. The IAA has pressed the SEC to consider its current rulemaking activity holistically and cumulatively and also provide meaningful opportunity for public feedback on how the various proposals interact with one another.”

Advisors do not have to add their compliance reviews to their ADV disclosure filed with the SEC, nor do they have to provide it to their clients. But having it on file in writing at the firm will help the SEC determine whether the advisor is maintaining its policies and procedures correctly.

“It makes the annual review easily examined by regulators,” said John Gebauer, chief regulatory officer at Comply, a compliance consulting firm.

During the SEC open meeting Wednesday when the commission approved the private-fund rule, Commissioner Hester Peirce asked SEC staff whether the requirement to put the compliance review in writing would cause concern among advisory firms that they’re giving the agency a “road map” to examinations and enforcement.

“We don’t see that problem you’ve identified so far,” William Birdthistle, director of the SEC Division of Investment Management, told Peirce.