Year-End Compliance Review Checklist for Advisory Businesses

Advisory businesses and professionals have experienced a lot of changes to regulations this past year, which has made it understandably challenging to remain compliant. With many regulations going into effect in 2024, and regulatory bodies’ commitment to enforcing those regulations, there is no time like the present to undertake a robust and comprehensive year-end review of your compliance program.

The team at Jacko Law Group is committed to assisting in your preparation for a strong year-end. In this month’s Corporate Communications, we have provided a checklist to aid your efforts in setting up your compliance program for a successful 2024.

Here are some areas to focus on:

Advisory Contracts

A comprehensive review of advisory contracts offers an opportunity to consider terms and conditions for your clients, as well as the regulatory guidance that has been provided over the past several months.  An important step in a business’ year-end review is to:

  • Assess adviser-client disclosures closely to confirm they align with new regulatory requirements.
  • Update advisory contracts to reflect any updates made in Form ADV filings
  • Ensure client contracts include disclosure of use of third parties
  • Perform a thorough review of the business’ advisory fee structure to ensure that:
    • Clients’ fees align with the fee disclosure in advisory contracts and form ADV
    • Fee-structures based on assets managed do not exceed limits set by the SEC, unless previously disclosed to the client
  • Review advisory fee disclosures and consider disclosures related to:
    • Who is performing the valuation if fees based on valuation of assets and what is the timing of such valuation
    • Advance billing and rebate of advisory fees upon termination
    • Billing rate changes
    • Definition of “household” for purposes of achieving a tiered fee breakpoint
    • Additional expenses imposed upon client accounts

Corporate Records and Bylaws

As the blueprint of a business, we recommend conducting a thorough review of your corporate records to ensure they are in good order and meet regulatory requirements.

  • Review your Operating Agreement, Partnership Agreement or Bylaws to ensure they reflect changes in the business, including voting rights, new ownership interests and governance structure, with meeting minutes and corporate resolutions up to date
  • Review compliance with state regulations, ensuring that Articles of Organization, tax and annual filings meet jurisdictional requirements.
  • Maintain accurate and updated stock and ownership records, including shareholder information and transfers.

Employee incentives (Stock Options; Phantom Stocks)

Stock Options and Phantom Stock are often rewarded to senior executives and others as a token of appreciation and additional compensation. It is important to periodically review these arrangements, taking into consideration the following:

  • Review stock option plans and other employee incentive programs to ensure these options still align with the business’ goals and meet regulatory requirements.
  • Review vesting schedules and make amendments where necessary, ensuring that employees receive clear and transparent communication about their options.
  • Conduct a thorough review of phantom stock option agreement and make sure that the valuation aligns with the conditions of the agreement.

Record Retention
Review your procedures on maintaining required records and documents. As you perform your compliance review on your recordkeeping protocols, make sure to:

  • Retain required records stipulated by the SEC and/or state(s), including:
    • Advertising and marketing materials
    • Financial records
    • Trade confirmations and transaction records
    • Business communications (including text messages and off-channel communications)
    • Client account statements
    • Email and electronic communications
  • Retain records for the required time period
  • Store records in a safe and assessable manner
  • Have protocols in place to guard against loss and unauthorized access.
  • Retain records of customer complaints, disciplinary or legal actions, examinations, and related records addressing each
  • Record all due diligence efforts on third-party vendors and investments

Regulatory Filings
Review and verify that information on your regulatory filings is accurate and up to date. Important regulatory filings include:

  • Form ADV Part 1: Make sure any required material changes are updated.
  • Form ADV Part 2: Review material changes, taking into consideration conflicts of interest, financial conditions that may impact contractual obligations to clients, services, and fees.
  • Form ADV Part 3: Ensure that the Client Relationship Summary is current and accurate and that all clients have received a copy of it, as necessary, in accordance with the instructions.
  • Form D: For advisers who oversee private placements, ensure your Form D has been updated and that the information is accurate.
  • Corporate Entity Records: Ensure that all relevant forms are filed on time.

Policies and Procedures
Review compliance policies and procedures, making sure to account for all regulatory changes impacting your internal operations. Verify that employees and key personnel have been made aware of policy changes and provide a copy of the updated Policies and Procedures Manual to them. Policies and procedures to review include:

  • Third-Party due diligence
  • Cybersecurity
  • Safeguarding policies
  • Marketing and social media
  • Books and records retention (include text messages and off-channel communications)

Marketing Rule
Play close attention to your marketing practices and collateral to ensure they meet the requirements of the new IA Marketing Rule. Review your marketing materials thoroughly, including the firm’s website, pitchbooks, social media sites and brochures, to assess and substantiate content provided, taking into prohibited actions such as:

  • Misleading or exaggerated investment projections or strategies
  • Misleading comparisons
  • Exaggerated and unsubstantiated performance claims
  • Missing disclosures

This checklist is not exhaustive and serves as a guide for Advisory businesses to work towards mitigating risk and maintaining a strong and robust compliance program. If you have any questions or would like to speak to a member of Jacko Law Group’s legal team, please contact us at 619.298.2880.

Leave a Reply

Your email address will not be published. Required fields are marked *