United States: Swinging For The Fences Every Time: Benefits Of Periodic Third-Party Compliance Audits

Last Updated: March 22 2016
Article by Eva Carney and Kimberly M. Versace

"You hit home runs not by chance but by preparation." —Roger (61 HRs in '61) Maris

Investors are coming to expect that their investment advisers periodically will engage an independent third-party to review their compliance programs. Investment adviser management teams, in turn, are finding that the benefits of recurrent compliance audits may be considerable.

When an advisory firm periodically brings in an experienced third-party compliance audit team, investors gain a degree of comfort that the advisory firm operates consistently with applicable law and industry standards and, accordingly, that the investors' assets are safe. For their part, the firm and its management team gain (1) an independent evaluation of how the firm's ongoing efforts to address compliance risks stack up against industry standards, best practices and investor and regulators' expectations; (2) an understanding of any current limitations on the firm's ability to produce an appropriate audit trail of its business decision-making and operations; and (3) constructive, tailored and current advice on how best to address any operational, compliance program, or staffing gaps or weaknesses identified in the audit.

Firms that undergo periodic compliance audits typically also find that, when they receive a regulatory inquiry or a call announcing an SEC examination, they are better prepared to produce documentation in a timely fashion and to respond to, and productively engage with, the regulatory staff. Many firms also share the conviction that obtaining periodic third-party input about their compliance programs, and making appropriate enhancements to their programs in response to that input, will foreclose a good deal of time- and labor-intensive probing when an SEC examination team comes knocking.

Below we outline the key components of a compliance audit and expand on our views that periodic compliance audits, when done well, are worth the expense and effort involved.


A standard compliance audit seeks to replicate a full-scale SEC on-site investment adviser examination and for this reason sometimes is referred to as a "mock" audit.

Compliance audits require a significant commitment of advisory personnel's time and attention, though certainly not the many months consumed by the typical SEC examination. Like the SEC examination, a compliance audit will begin with a comprehensive document request letter and include on-site interviews with personnel from the firm's various business functions and follow-up requests for information and records as the audit progresses.

Compliance Program/Business Records Review

Registered investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Investment Advisers Act of 1940. The centerpiece of a registered firm's compliance manual is the code of conduct, which must address how the particular firm handles conflicts of interest and polices personal securities trading by its personnel. The SEC has said that it expects these policies and procedures to be tailored to the business of the particular firm and designed to prevent, detect, and correct violations of the Advisers Act by the firm and its personnel.

The compliance audit team will focus on the firm's key risk areas and will review, among other matters as appropriate, the firm's approach to limiting the risk of insider trading and to identifying circumstances in which advisory personnel may act inconsistently with the firm's fiduciary duties to clients. During the document review process, the audit team, like an SEC examination team, expects prompt delivery of any and all records requested for the review, including the trade blotter, other trade detail, and performance and fees backup.

Interviews of Firm Personnel

The audit team will request interviews of senior firm personnel, business unit leaders and, as appropriate, trading personnel. These interviews are a means of evaluating the extent to which compliance with applicable laws and firm policies, procedures and contractual requirements is a firm-wide priority. The interviews also permit the team to gain a more complete picture of the firm's business and risks than may be evident from documentation alone. Compliance auditors, taking their lead from SEC examination practice, typically also seek interviews with personnel, if any, who have been identified through the records review as repeat offenders of the firm's policies and procedures. The objective will be to make a judgment as to whether these persons pose risk to firm investors such that additional review of the person's firm activities is required. The interviews may also be used to evaluate the extent and effectiveness of any retraining received or remediation to which those interviewed have been subject once the firm identified their missteps.

Feedback and Reporting

As their review process progresses, the audit team will make suggestions for modifications and enhancements to the compliance program. If this is not the advisory firm's first compliance audit, the team's feedback also will encompass the sufficiency of any program or staffing changes made to address issues identified in previous engagements.

Examiner feedback is a critical part of the compliance audit process. It may prove highly valuable, whether it flags program deficiencies, staffing weaknesses, or training needs, or reflects the reviewers' efforts to share best practices or alternative approaches to a process or issue. At the same time, it is important to note that if a third-party compliance audit firm is engaged directly by an advisory firm, the communications and evaluation that follow may need to be shared directly with investors and regulators. To maintain the communications and evaluations as privileged, advisory firms will want to engage outside counsel to lead the compliance audit. Counsel then can engage the third party compliance consultant to perform the work, with the written agreement between the audit firm and the adviser's outside counsel reflecting that the audit firm is conducting its work under counsel's direction, in order to facilitate counsel's provision of legal advice to counsel's client. This approach will accord the protections of the attorney-client privilege to the work and communications, fostering full and frank discussion about any program deficiencies or staffing gaps or weaknesses and robust exchanges with respect to recommended modifications and enhancements.

After completing their audit work, compliance auditors typically will offer to prepare, as part of the engagement, a comprehensive report detailing the issues identified during the audit. Due to concerns that such reports may carry more weight with an SEC examination team than may be warranted, we typically advise against receiving a comprehensive written report from the audit team. Instead, we typically suggest getting a verbal report of the team's findings and recommendations, followed by a short, non-privileged writing that outlines the scope of the examination – i.e., who staffed the mock audit, how long it lasted, and the areas that were examined. The advisory firm then may include that document in its (nonprivileged) compliance files and share it with the SEC without having to address potential waivers of privilege, should an SEC examination ensue at a later time.


Admittedly, investing the time and effort to undergo a compliance audit and to follow through with recommended enhancements puts pressure on senior management, supervisory personnel and Compliance and Operations resources, but the potential benefits are worth the effort. A well-staffed and appropriatelytailored compliance audit that is conducted at outside counsel's direction will provide a firm with an independent, expert view of its compliance program. Undertaking an audit periodically will keep the firm current as the audit will provide insight into the effectiveness of the firm's current supervisory system and compliance staff, and into whether the firm's compliance program has kept up with regulatory developments and any changes in the firm's business and operations. Periodic compliance audits also will expose the advisory firm to the current thinking about compliance risks, regulatory "hot button" topics and industry best practices.

Of course, obtaining full value from any audit – whether it is the firm's first or its fifth – requires full cooperation and investment of time and effort from all affected advisory personnel. Put another way, advisory firms get the most out of third-party compliance audits when they give the audit team the same level of cooperation that they would give an examination team from the SEC.

The exercise of identifying and gathering all of the documents requested by the compliance audit team requires dedication of significant Compliance and Operations resources. If completed diligently, however, the exercise will alert the firm to record maintenance and even documentation gaps, if those exist.

Likewise, ensuring that the "right" personnel make themselves available for interviews by the team may tax the schedules and patience of some personnel. These efforts nonetheless will assist the chief compliance officer and senior management in evaluating the implementation of the compliance program across the firm and identifying any gaps in personnel's understanding of and adherence to policies and procedures. In addition, mock interviews will give those who participate in them valuable experience and a more nuanced understanding of what will be expected during an SEC formal examination than any compliance training session might. A firm can anticipate that its personnel who have recent compliance audit interview experience are more likely to approach SEC staff interviews calmly and competently.

Comprehensively and timely addressing any program weaknesses identified during the compliance audit process, and making enhancements to compliance infrastructure and processes as appropriate, will require expenditure of personnel and budget resources. The result, however, will be a more robust compliance program and a firm that is better prepared to address investor inquiries about its compliance risks. Moreover, remediation and program and process strengthening may remove the identified issues from the potential list of deficiencies that could be cited by the SEC staff at the conclusion of a formal examination of the firm. Indeed, enhancements implemented in response to issues identified in a compliance audit may help to foreclose what would otherwise have been a time-consuming, deep dive by SEC examiners into those issues. These actions also may make for a smoother formal examination, should the SEC staff pay a visit, since the firm may present a different, lower risk profile to the SEC examiners than if it had not made the changes. In our experience, a firm's proactive engagement of compliance auditors typically resonates with the SEC examination staff, and increases the likelihood of a good examination outcome.

As the new year begins, we urge advisory firms to make plans for a third-party audit of their compliance program, whether this will be their first mock audit or just one in an ongoing series.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.