Investment Adviser/Investment Company Annual Review Requirement

Rule 206(4)-7 under the Advisers Act (the “Compliance Rule”) and Rule 38a-1 under the Investment Company Act require registered investment advisers and investment companies to adopt and implement written policies and procedures reasonably designed to prevent a violation of the federal securities laws (including the prevention of a violation of the Advisers Act by the investment adviser and its supervised persons). These Compliance Rules also require registered advisers and funds to review its policies and procedures at least annually to consider any compliance matters that arose during the previous year, any changes in the business activities of the investment adviser or its affiliates, and any changes in the Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures. The investment adviser also must keep records documenting such annual review.

Although the Compliance Rule does not enumerate specific elements that must be included in the required policies and procedures, the Rule’s adopting release enumerates areas that an investment adviser’s policies and procedures should, at a minimum, address:

  • portfolio management processes;
  • trading practices;
  • proprietary trading of the investment adviser and personal trading activities of supervised persons;
  • the accuracy of disclosures made to investors, clients and regulators;
  • safeguarding of client assets;
  • the accurate creation and maintenance of required records;
  • the marketing of advisory services, including the use of solicitors;
  • the process of valuing client holdings and assessing fees based on those valuations;
  • safeguards for the privacy protection of client records and information; and
  • the adoption of a business continuity plan.

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