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News July 4, 2005 Issue

What Are We Supposed to Be Doing?

Hereís a list of sample "to-dos," broken down by category, that you might want to use to jog your memory, spark ideas, and/or give you a sense of what other firms are up to. Note that many of these are not explicitly required by law and are more in the nature of industry best practices. And, of course, this is not a comprehensive list.

Portfolio management

  • Confirm client investment objectives ("conservative growth"), mandates ("no more than 10% foreign"), and restrictions ("no tobacco") (initially for new clients and annually thereafter for all existing clients).
  • Update clientsí investment objectives/mandates/restrictions (as necessary).
  • Provide portfolio managers with a reference list of client investment objectives/mandates/restrictions.
  • Conduct account audits to confirm compliance with investment objectives/mandates/restrictions. This check should be performed by someone other than the accountís portfolio manager.
  • If your firm invests in IPOs, confirm clientsí eligibility under NASD Rule 2790 to participate in "new equity issues" ó initially for new clients and annually thereafter for all existing clients.

Trading

  • Review trading activity on a daily basis.
  • Hold a best execution meeting (ideally, within 45 days of quarter-end).
  • Track soft dollar expenditures (monthly).
  • Approve any new soft dollar products/services.
  • Review any commission recapture reports (monthly).
  • Review broker commission reports (monthly).
  • Review any bunched trades that are reallocated from the allocation determined at the initial placement of the order (the next day, see the SMC Capital no-action letter).
  • Review directed brokerage arrangements (monthly).
  • Review and document any cross/principal trades; confirm that appropriate notice and consent was given and obtained (monthly).
  • Log trade errors.
  • Confirm that firmís ADV and contract disclosure about trading practices comports with reality.
  • Confirm that order tickets meet the requirements in Rule 204-2(a)(3).

Custody

  • Reconcile custodial statements against firm account statements (monthly).
  • Confirm that qualified custodians are being used and proper notice has been provided to clients, as required by Rule 206(4)-2.

Proxies

  • Review proxy voting policy (at least annually).
  • Confirm that actual proxy practices conform to proxy policy and contract and ADV disclosures.
  • Log requests for proxy information.

Anti-Money Laundering

  • Check clients and investments against the OFAC list.
  • Consider developing an anti-money laundering policy (although not yet required for SEC-registered advisers).

Advisory Fees

  • Confirm that advisory fees are being calculated correctly.
  • Confirm that clients paying performance fees are "qualified clients" under Rule 205-3.
  • Confirm that advisory fees collected in advance are returned to terminated clients.

Client Disclosures

  • Provide Part II of Form ADV to new clients.
  • Mail updated Part II of Form ADV to all clients on an annual basis (note: while Rule 204-3(c) requires only an annual "offer," a prudent practice is just to mail the entire updated brochure to all clients).
  • Develop a process for responding to RFPs.
  • Confirm that all material information about the firmís precarious financial condition or past disciplinary history has been disclosed to clients, as required by Rule 206(4)-4 (see the recent case of Colley Asset Management).
  • Forget the Form ADV line items for a minute. Step back and ensure that all of the firmís material conflicts of interest have been disclosed somehow, someway.
  • Log requests for Part II of Form ADV.

IARD Filing

  • Fund IARD account as necessary.
  • Amend Form ADV (both Parts 1A and II) ó see Instruction 4 for what has to be done promptly and what can wait.
  • Update Form ADV on IARD not later than 90 days after fiscal year end (in particular, confirm that information re: assets under management, credentials, and length of time in business is accurate).
  • Replace paper copy of Part II kept in files with updated copy of Part II, after Part II has been updated.

State Notice Filings

  • Determine what states your firm has to notice file in (track locations of clients and employees).
  • Make notice filings (annually).

IAR Registration

  • Determine who your firmís IARs are (first, see if they fit in Rule 203A-3(a), then look at state IAR definition).
  • File Form U-4 IAR registration (annually).

Codes of Ethics and Insider Trading

  • Develop a code of ethics and insider trading policy.
  • Determine who within your firm is an access person.
  • Obtain holdings and transaction reports from access persons as required by Rule 204A-1.
  • Review holdings and transaction reports to confirm compliance with code of ethics and for evidence of insider trading.
  • If your code requires preclearance, compare preclearance forms submitted by employees to transaction reports (or brokerage statements/confirmations).
  • Obtain annual code of ethics certifications from employees.
  • Determine if your firm should adopt a gift policy and keep a gift log.
  • Log any instances of receipt of insider information under the insider trading policy.

Compliance Program

  • Track regulatory developments.
  • Track business developments (new lines of business, new geography, new types of clients).
  • Conduct annual conflicts assessment.
  • Conduct annual risk assessment.
  • Confirm competency, knowledge, and empowerment of CCO.
  • Review the adequacy and effectiveness of compliance program (annual review).
  • Review employee e-mails (periodic sampling).
  • Document any material compliance issues.
  • Develop a disciplinary policy.
  • Follow up on compliance violations with sanctions, training, or escalation as needed.
  • Train new employees on compliance requirements and provide them with copies of procedures.
  • Provide refresher compliance training to all employees on an ongoing basis.
  • Provide employees with updated copies of compliance policies on an ongoing basis.
  • Log client complaints and/or threatened litigation.

Advertising

  • Confirm that advertisements comply with SEC rules/no-action positions.
  • Confirm that copies of ads are being maintained as required by Rule 204-2(a)(7)
  • Confirm that performance backup is being maintained as required by Rule 204-2(a)(16)
  • Update performance statistics on marketing brochures (quarterly).
  • If AIMR compliance is claimed, ensure compliance with AIMR Standards.

Solicitors

  • Confirm that any solicitors used are not disqualified (initially, and annually thereafter) (see Rule 206(4)-3(a)(1)(ii)).
  • Enter into written solicitation agreement, as required by Rule 206(4)-3(a)(2)(iii)(A).
  • Confirm that unaffiliated solicitors are delivering disclosure document described in Rule 206(4)-3(b).
  • Obtain client acknowledgements, as required by Rule 206(4)-3(a)(2)(iii)(B).
  • Keep copies of the solicitation agreement, solicitor disclosure documents, and client acknowledgements as required by Rule 204-2(a)(10) and (15).

Privacy

  • Review and update privacy policy and related disclosures, on an annual basis
  • Provide initial and annual privacy notices, as required by Reg. S-P.

Books and Records

  • Confirm that required books and records are being maintained.

Safeguarding / Disposal

  • Have written safeguarding procedures (see the SECís December 2004 release #34-50781).
  • Confirm compliance with new SEC disposal procedures.

Business Continuity Plan

  • Develop a business continuity plan (not required, but strongly suggested).

13 Gs, Ds, and Fs

  • File Form 13G (over 5 percent ownership of an issuer) or 13D (13G within 45 days after year end, 13D 10 days after acquiring threshold amount).
  • File Form 13F (45 days after end of each calendar quarter).