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As Chief Compliance Officer, are you truly asking the right questions when it comes to your advisor’s compliance program? Registered investment advisors are required to review on at least an annual basis the adequacy of their policies and procedures and the effectiveness of their implementation. Regardless of whether this review is conducted throughout the year or at the end of the year, Chief Compliance Officers should be constantly questioning how their compliance program can be improved. In doing so, CCOs can determine whether there are any gaps with their current policies and procedures and ultimately make the annual review process more effective. As a starting point, here are eight questions to consider.

1) When implementing new compliance policies and procedures, are you taking into account generally recognized concepts of internal controls? One such principle is having a separation or segregation of duties, such as requiring two signatures for certain functions potentially subject to abuse. Alternatively, advisors can break down these functions into separate steps with each step assigned to a different person. Other key concepts Chief Compliance Officers should consider include clearly assigning responsibilities, employee training, and documenting and reporting exceptions.

2) Are your firm’s current policies and procedures reasonably designed to prevent and identify breaches. For example, if a portfolio manager wanted to purchase a security that was prohibited by a client’s investment restrictions, would your policies and procedures identify the potential breach before the trade was placed and executed? Similarly, is your advisor able to promptly detect breaches after they have occurred so that they can be corrected and addressed promptly?

3) Is your process for adding new compliance policies and procedures likely to identify and address new material risks that arise over time? Communication is key here as your compliance department should be aware of, and actively involved in, the launch of any new products or strategies that could introduce new risks to the firm.

4) Is there a matrix or inventory of all material risks that could potentially result in a compliance breach? It is a good practice to document the various controls in place, the employees and/or departments responsible, and any testing conducted for each risk area.

5) How effective is your firm’s process for identifying conflicts of interest and other arrangements and activities that could cause a breach? Employees, for instance, should be required to obtain approval from the compliance department before entering into any kind of arrangement that could potentially cause a conflict of interest. Another step Chief Compliance Officers can take is to incorporate a number of questions in your quarterly Code of Ethics certifications that require employees to identify any new conflicts or potentially problematic arrangements. For instance, would you know if a family member of one of your portfolio managers or traders recently accepted a position at a broker-dealer that could potentially execute transactions on your firm’s behalf?

6) Are compliance breaches and any corrective actions documented adequately? Does such documentation demonstrate that the firm’s policies and procedures are being implemented effectively? It is a good practice to document breaches and any corrective and disciplinary actions in checklists or other reports?

7) Is your forensic testing program targeting the highest risk areas and activities of your advisor? One red flag to regulators is if you are conducting the same tests year after year even though significant changes have occurred at your firm over that time period.

8) Another question relating to forensic testing is whether the tests that were conducted during the year provide corroborating evidence that no issues were found or, if issues were found, that adequate corrective action was taken.

Asking these questions will help make the annual review of your compliance program more effective and help you answer some of the questions you will likely be getting from examiners the next time the SEC or state administrator is in your office.

Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc. She has 20 years of regulatory and industry experience and received a national award from the SEC for outstanding service.