Anticipating Document Review Deficiencies: A Case For Acting On AdvisorLaw’s Recommendations

The Importance of Document Review

In December 2022, an SEC-registered advisor came to AdvisorLaw for our standard compliance consulting services. As a part of those services, the firm was asked to go through AdvisorLaw’s document review process. This review process has two main priorities.

1. The first priority is to review all firm disclosure and internal compliance documents to ensure that all of the current regulatory requirements are addressed. For example, many firms still have not developed policies and procedures to adhere to the SEC’s “new” marketing rule, which was adopted in November 2022. During this document review, the firm’s AdvisorLaw compliance team reviewed both the new rule and all active marketing materials with the firm, in order to ensure that the regulatory standards were satisfied. 
   
   
2. The second priority is to review all firm disclosure and internal compliance documents to ensure that actual firm practices are consistent with stated firm policies and procedures. For example, it is best practice for investment advisory firms to review emails at least quarterly, depending on the size of the firm, among other factors. However, some firm compliance manuals may dictate that this review be conducted weekly, bi-annually, or annually. During the document review process, we determine the frequency in which each compliance task will be completed, taking into consideration industry best practices and regulatory rules (priority no. 1), and update the stated frequency or stated procedure in the firm’s document to be consistent with actual firm practices. 

Common Document Review Deficiencies

During the most recent SEC National Compliance Seminar, on November 7, 2024, the SEC’s Directors Panel spoke to the priorities of our document review process by stating that examiners continue to focus on compliance with newly revised rules and that there may not be any mismatch between the firm’s policy and practice.

During our document review of this firm, the following deficiencies stood out.

1. Outdated marketing procedures and marketing material that was not in compliance with new marketing rules. For example, this firm’s compliance manual did not explain the current marketing rule, Rule 206(4)-1. As such, the firm did not have the required disclosures for third-party ratings awarded to the firm, nor the required disclosures for testimonials on the website. Further, the firm’s marketing materials that included performance data did not have all of the required elements — rendering it out of accordance with the new rule.
   
   
2. Inconsistent disclosure on the Form ADV. Services, fees, and conflicts of interest disclosed on the Form ADV 1A, 2A brochure and Form CRS were not consistent with actual firm practices. For example, the firm’s existing explanation regarding how its advisory clients would be billed was outdated. The use of testimonials, third-party ratings, and performance data in advertisements was not disclosed on the ADV 1A.
   
   
3. Missing annual review. In 2024 and 2025, the SEC examination division focused on firm annual review methods. On the 2025 SEC Exam Priorities, this focus is restated: “Effectiveness of Advisers’ Compliance Programs Rule 206(4)-7 under the Investment Advisers Act of 1940 (Advisers Act), often referred to as the ‘Compliance Rule,’ requires SEC-registered investment advisers to: (1) adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act and the rules adopted under the Advisers Act by the adviser and its supervised persons; (2) designate an individual as Chief Compliance Officer to be responsible for administering the policies and procedures; and (3) review compliance policies and procedures at least annually for their adequacy and the effectiveness of their implementation. The Division’s assessment of the effectiveness of advisers’ compliance programs is a fundamental part of the examination process. … In addition, examinations on this topic typically include an analysis of advisers’ annual reviews of the effectiveness of their compliance programs, which are a critical element for addressing and monitoring conflicts of interests, including those conflicts stemming from the advisers’ business and compensation arrangements, arbitration clauses, and/or affiliations with certain parties and transactions. In reviewing advisers’ compliance policies and procedures, the Division continues to focus on whether the policies and procedures address compliance with the Advisers Act and the rules thereunder and are reasonably designed to prevent the advisers from placing their interests ahead of clients’ interests.” This particular firm did not have any sort of annual review procedure, nor any evidence that annual reviews had been conducted over the past three years.
   
   
4. Billing inconsistency. As a part of the document review process, our compliance team discovered that the firm had more than ten fee schedules and billing procedures, due to “grandfathered” clients with old fee schedules and advisory agreements. While of course this is allowed, as long as the different fee schedules are consistent with client contracts and disclosed in the Firm ADV, it presents additional and unnecessary risk to firms. First, this likely necessitates that billing review be conducted manually and specific to the client’s fee schedule; and second, the duty of care and duty of loyalty standards require firms to treat all clients equitably. Multiple fee and billing schedules result in more billing errors and steal time away from servicing clients.

The SEC's Focus on Document Review

Throughout and after the document review process was completed, this firm was provided a list of action items (above) that anticipated SEC examination deficiencies. 

In fall 2023, this SEC-registered firm was contacted by the SEC and notified of its upcoming examination. Unfortunately, the firm had not yet addressed the action items that our compliance team had provided them after the document review. The examination findings on the firm’s deficiency letter in July 2024 mimicked the list of action items that our compliance team had identified during the document review process. 

Leveraging AdvisorLaw's Expertise

This is the value of AdvisorLaw’s document review process. We assist our clients so that they may anticipate and address deficiencies before they’re identified in an examination. It is the firm’s responsibility to use the tools that we provide during this process.

Contact our team today to learn more about our compliance services.