As 2025 comes to an end, Registered Investment Advisers (RIAs) must ensure that they identify, mitigate, or eliminate conflicts of interest. Under SEC Rule 206(4)-7, RIAs must conduct and document an annual compliance review of their program's effectiveness, with a specific focus on conflicts of interest.
Firms registered with the states are obliged to do the same as well.
Essential Year-End Reviews
- Conflict Assessment: Proactively review all business aspects, including trading practices, affiliated services, and proprietary product recommendations to identify potential bias.
- Compensation and Revenue: Scrutinize arrangements with third parties for indirect or direct compensation that could influence objective advice.
- Fiduciary Focus Areas: Evaluate risks associated with high-cost, illiquid, or unconventional assets, as well as those sensitive to interest rate fluctuations.
- Emerging Technologies: Review and document the use of artificial intelligence (AI) and automated investment tools to ensure digital advice aligns with client profiles and that disclosures match actual operations.
- Vendor and Third-Party Risks: Assess the oversight of third-party products and IT resources, particularly those used without formal IT approval, to ensure data security.
Mandatory Documentation for 2025
- Annual Compliance Review Report: Document the results of your assessment, including identified material weaknesses and remediation plans.
- Conflicts Log: Maintain a central risk assessment or matrix that lists all material conflicts, how they were disclosed, and specific steps taken to address them.
- Updated Form ADV Part 2A: Ensure your firm's brochure contains clear, "plain English" disclosures of all current conflicts and explains how they are managed or mitigated.
- Employee Records: Document annual compliance training and monitor employee personal trading through pre-clearance logs and conducting periodic reviews.
- Books and Records (Rule 204-2): Maintain accurate records of client communications, including those on "off channel" platforms, and ensure they are organized for potential regulatory examination.
2025 Action Items
- Map Incentives: Conduct an internal audit to identify where partnerships or relationships might create decision-making bias.
- Modernize Policies: Remove generic template language from your compliance manual and align procedures with current operations.
- Check Filing Deadlines: Prepare for the Annual ADV Update, due by March 31 for firms with a December 31 fiscal year-end.
- Confirm Books and Records: Verify that required books and records are readily available, current, and properly maintained.
