Institutional LPs will ask for your compliance manual during due diligence. If you do not have one, you are either explaining why or losing the allocation. Written compliance policies document how your firm handles conflicts of interest, personal trading, information barriers, and regulatory obligations. Whether you are a registered investment adviser or an Exempt Reporting Adviser, having a compliance program is a practical necessity.
What to Include
A comprehensive compliance manual should cover every area of your advisory business where rules, conflicts, or risks exist. The core components include:
- Form ADV maintenance. Procedures for preparing, filing, and updating Form ADV, including annual amendments and other-than-annual amendments.
- Portfolio management. Policies governing investment decisions, allocation of investment opportunities, and best execution (where applicable).
- Trading. Procedures for executing trades, including any pre-clearance requirements and restrictions on personal trading.
- Valuation. Methodology for valuing portfolio investments, including the process for determining fair value of illiquid assets and the frequency of valuation updates.
- Code of ethics. Standards of conduct, personal trading policies, gift and entertainment guidelines, and outside business activity reporting.
- Custody. Procedures for satisfying the custody rule, including audit coordination and financial statement distribution timelines.
- Recordkeeping. Policies for creating, maintaining, and retaining books and records in compliance with the Advisers Act.
- Marketing. Procedures for reviewing and approving marketing materials, performance presentations, and investor communications.
- Privacy. Policies for protecting investor personal information, including Regulation S-P compliance for RIAs.
- Business continuity. Plans for maintaining operations during disruptions, including technology failures, natural disasters, and key-person unavailability.
- Cybersecurity. Policies for protecting firm and investor data, including access controls, incident response procedures, and employee training.
In addition to the manual itself, the compliance program should include a designated compliance officer (for RIAs, a Chief Compliance Officer is required) and an annual review of the compliance program's adequacy and effectiveness.
ERA vs. RIA Requirements
The regulatory requirements differ significantly between ERAs and RIAs, but the practical expectations from LPs often converge.
RIA requirements. Registered investment advisers must adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. They must designate a Chief Compliance Officer responsible for administering the compliance program. The program must be reviewed at least annually for adequacy and effectiveness. RIAs must also adopt a code of ethics, maintain specific books and records, comply with the custody rule, and follow the marketing rule.
ERA requirements. Exempt Reporting Advisers face fewer mandatory compliance requirements. There is no regulatory mandate for a written compliance manual, a designated CCO, or a formal annual review. However, ERAs remain subject to the antifraud provisions and fiduciary duties of the Advisers Act. The SEC can and does bring enforcement actions against ERAs for failures in these areas.
Practical recommendation. Build your compliance program as if you were a registered investment adviser, regardless of your current registration status. This approach protects you from antifraud liability, satisfies LP due diligence requirements, and makes a future transition to RIA status significantly easier. The incremental cost of building a proper compliance program from the start is far less than the cost of scrambling to create one when you cross the $150 million threshold or when an institutional LP makes it a condition of investment.
This article is for informational purposes only and does not constitute legal advice. Consult qualified professionals for guidance specific to your situation.