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News March 21, 2011 Issue

Checklist For Your Annual Review

How do you approach the annual review process? Some CCOs consider the annual review to be a "living" process that is part of the firmís daily routines, the results of which are summarized annually. Some CCOs set aside time for a comprehensive review of the firmís compliance program once a year. Still others are someplace in the middle, flagging update items for the compliance program on a quarterly basis, for example.

Core Compliance and Legal Services founder and CEO Michelle Jacko offered up her "top ten" checklist items, however your firm tackles the annual review requirement.

Review past deficiency letters from the SEC, or from your mock audit. Ensure any deficiencies noted have been resolved.

Perform a "gap analysis" using the firmís existing controls. Review any client complaints, red flags on exception reports, and internal audit filings, for example.

Evaluate how your business has evolved over the past year. What products and services are new or no longer offered? Identify conflicts of interest to be mitigated or eliminated, and policies and procedures that need to be created and/or updated.

Review the past yearís regulatory developments Ė rulemakings, guidance, no-action letters, enforcement actions Ė that could impact your policies, procedures and processes and update them accordingly.

Consider having a mock audit performed to see if the firmís risks are managed effectively. The independent review will help provide a non-biased view of the "tone at the top," the strength of the firmís written policies and procedures, and the adequacy of the adviserís testing.

Clearly define employee roles and responsibilities. Analyze current regulatory requirements and prohibitions. Detail how the firm will meet those requirements, who is responsible for them, and what methods will be followed.

Train all personnel once your compliance program is updated and train with respect to defined roles and responsibilities. Training must occur to ensure that associated persons and applicable business units know what they are accountable for in various areas.

Update your disclosures. The adviserís role as a fiduciary is to disclose all material information to clients. Especially related to developments with Form ADV, an adviser should identify and describe conflicts of interest and how they are mitigated or eliminated. Test your firmís internal controls periodically for consistency with those disclosures, or to update the disclosures.

Develop a compliance calendar, and if your firm is large enough, an annual review committee. Track and discuss your assessment of annual review testing and any required enhancements. Leverage resources such as technology applications and outsourcing solutions to strike the right balance between budgetary concerns and an effective compliance program.

Compliance is everyoneís responsibility. Interview personnel for their knowledge of firm policies, practices, and the concerns of senior management. Evaluate the strength of the firmís books and records, controls, and culture of compliance through periodic and forensic testing. Update the annual review process by incorporating developments in the law and regulations.