Complete Guide to Conducting Your 2025 Annual RIA Compliance Review Under SEC Rule 206(4)-7

The annual compliance review isn't just another regulatory checkbox. It's your firm's most critical defense against enforcement actions that cost the industry billions annually. In 2024, the SEC ordered financial companies to pay $8.2 billion in fines and penalties, a 67% increase from 2023 (Luthor). For the 15,870 SEC-registered advisers managing $144.6 trillion in assets, a well-executed annual review can mean the difference between smooth operations and costly violations (Luthor).

Rule 206(4)-7 explicitly prohibits an adviser from operating without written policies and procedures reasonably designed to prevent violations of the Advisers Act (Luthor). But the rule goes further, requiring an annual review of those policies and procedures to ensure they remain adequate and effective. With the SEC's October 2024 examination priorities emphasizing marketing rule compliance, cybersecurity, and ESG disclosures, your 2025 review needs to be more thorough than ever.

This guide provides a month-by-month work plan that maps directly to the SEC's latest examination priorities. We'll show you how to leverage AI-driven tools to reduce review time from weeks to about 40 hours while producing board-ready documentation that satisfies regulatory requirements.

Understanding the SEC Rule 206(4)-7 Annual Review Requirement

Rule 206(4)-7 mandates that every SEC-registered investment adviser adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. The rule specifically requires an annual review of these policies and procedures to determine their adequacy and effectiveness.

The annual review serves multiple purposes. First, it ensures your compliance program evolves with changing regulations and business practices. Second, it identifies gaps before they become violations. Third, it demonstrates to regulators that you're taking compliance seriously. State regulators report the most common deficiencies include registration lapses (23% of issues), incomplete books and records (17%), and inadequate supervision/compliance procedures (16%) (Luthor).

Your review must be documented and comprehensive. The SEC expects to see evidence that you actually tested your procedures, not just read through them. This means examining transaction records, reviewing marketing materials, testing supervisory controls, and validating that your written procedures match actual practices.

SEC's 2024 Examination Priorities: What to Focus On

The SEC's October 2024 examination priorities provide a roadmap for your annual review. Regulators will focus heavily on marketing rule compliance, particularly around performance advertising and testimonials. They're also scrutinizing cybersecurity preparedness, ESG disclosure accuracy, and fee calculation practices.

Marketing rule violations topped the list of examination findings in 2024. The rule's complexity around substantiation requirements, hypothetical performance, and third-party ratings caught many firms off guard. Your annual review must include a comprehensive audit of all marketing materials created in the past year, with particular attention to social media posts, website content, and client presentations.

Cybersecurity remains a top priority following several high-profile breaches. The SEC expects firms to have incident response plans, regular penetration testing, and employee training programs. Your review should test these controls and document any improvements needed.

ESG-related disclosures face increased scrutiny as the SEC cracks down on "greenwashing." If your firm makes any ESG claims, your annual review must verify that investment processes actually align with stated ESG criteria.

Month-by-Month Work Plan for Your 2025 Annual Review

January: Planning and Preparation

Start your annual review by assembling your review team and establishing the scope. Designate a lead reviewer (typically the CCO) and identify subject matter experts for each compliance area. Create a project timeline that allows adequate time for testing, documentation, and remediation.

Gather all relevant materials from the past year, including policies and procedures, training records, examination reports, client complaints, and regulatory correspondence. Organize these materials in a central repository for easy access during the review process.

Develop testing matrices for each compliance area. These matrices should map specific testing procedures to regulatory requirements and identify the evidence needed to demonstrate compliance. The matrices become your roadmap for the entire review process.

February: Marketing Rule Compliance Review

Begin with a comprehensive review of all marketing materials created or used in the past year. This includes websites, brochures, social media posts, presentations, and any third-party content. A 2023 sweep of state-registered advisers found books and records deficiencies in 17% of exams, making it the second most frequent compliance issue identified (Luthor).

Test your substantiation procedures for performance claims. Review the underlying data supporting any performance advertisements and verify that calculations comply with the marketing rule's requirements. Document any instances where substantiation was inadequate and implement corrective measures.

Examine your testimonial and endorsement procedures. Verify that all testimonials include required disclosures and that any compensation arrangements are properly documented. Review social media monitoring procedures to ensure compliance with the marketing rule's oversight requirements.

March: Investment Advisory Services Review

Review your investment advisory processes, starting with client onboarding procedures. Test a sample of new client files to ensure that suitability determinations are properly documented and that investment objectives align with recommended strategies.

Examine your portfolio management procedures, including trade allocation practices, best execution policies, and performance calculation methods. Verify that your actual practices match your written procedures and that any deviations are properly documented and justified.

Review your proxy voting procedures if applicable. Test a sample of proxy votes to ensure they align with your stated policies and that any conflicts of interest are properly managed.

April: Books and Records Compliance

Conduct a comprehensive review of your books and records maintenance procedures. Test record retention schedules to ensure compliance with Rule 204-2 requirements. Verify that electronic records are properly backed up and accessible.

Review your trade blotter, client account records, and correspondence files. Ensure that all required information is captured and that records are organized in a manner that facilitates regulatory examination.

Test your procedures for handling client complaints and regulatory inquiries. Verify that all complaints are properly logged, investigated, and resolved in accordance with your written procedures.

May: Cybersecurity and Information Security Review

Evaluate your cybersecurity program against the SEC's expectations and industry best practices. Test your incident response procedures through tabletop exercises and document any areas for improvement.

Review your data protection measures, including encryption standards, access controls, and employee training programs. Verify that sensitive client information is properly protected and that access is limited to authorized personnel.

Examine your vendor management procedures, particularly for technology service providers. Ensure that third-party agreements include appropriate security requirements and that vendor security practices are regularly assessed.

June: Fee and Expense Review

Conduct a detailed review of your fee calculation and billing procedures. Test a sample of client bills to ensure accuracy and compliance with advisory agreements. Verify that any fee increases were properly disclosed and consented to by clients.

Review your expense allocation procedures if you manage multiple client accounts or pooled investment vehicles. Ensure that expenses are allocated fairly and in accordance with your written policies.

Examine your procedures for handling fee disputes and refunds. Verify that any fee adjustments were properly documented and that clients received appropriate notifications.

July: Code of Ethics and Personal Trading Review

Review your code of ethics and personal trading procedures. Test compliance with pre-clearance requirements, holding period restrictions, and reporting obligations. Verify that all access persons have submitted required reports and that any violations were properly addressed.

Examine your procedures for identifying and managing conflicts of interest. Review any new business relationships or investment opportunities that may create conflicts and ensure they're properly disclosed to clients.

Test your gift and entertainment policies to ensure compliance with regulatory limits and internal controls. Review any exceptions or approvals granted during the year.

August: Client Communication and Disclosure Review

Review all client communications sent during the year, including newsletters, market commentaries, and regulatory disclosures. Ensure that communications are accurate, not misleading, and comply with the marketing rule requirements.

Examine your Form ADV updating procedures. Verify that all material changes were properly disclosed within required timeframes and that annual updates were filed on schedule.

Review your client agreement templates and any amendments made during the year. Ensure that all required disclosures are included and that terms are clearly explained.

September: Supervision and Training Review

Evaluate the effectiveness of your supervisory procedures. Review supervisory reports, exception reports, and any disciplinary actions taken during the year. Verify that supervision is adequate for your firm's size and complexity.

Review your employee training program, including initial training for new hires and ongoing training for existing staff. Test training effectiveness through assessments or practical exercises.

Examine your procedures for background checks and ongoing monitoring of employee regulatory status. Verify that all required disclosures have been made and that any regulatory actions involving employees were properly handled.

October: Business Continuity and Disaster Recovery Review

Test your business continuity plan through simulated disruption scenarios. Document the results and identify any areas where the plan needs updating or improvement.

Review your data backup and recovery procedures. Test your ability to restore critical systems and data within acceptable timeframes. Verify that backup systems are regularly tested and maintained.

Examine your procedures for communicating with clients during business disruptions. Ensure that contact information is current and that communication methods are reliable.

November: Documentation and Remediation

Compile all testing results and document any deficiencies identified during the review. Develop remediation plans for each deficiency, including responsible parties and target completion dates.

Update policies and procedures based on review findings. Ensure that any regulatory changes or business developments are reflected in your written procedures.

Prepare your annual review report for board or senior management presentation. The report should summarize testing procedures, findings, and remediation efforts.

December: Board Presentation and Implementation

Present your annual review findings to the board of directors or senior management. Discuss any significant deficiencies and the steps being taken to address them.

Implement approved remediation measures and establish monitoring procedures to ensure ongoing compliance. Update your compliance calendar with any new requirements or deadlines.

Begin planning for the following year's annual review, incorporating lessons learned and any new regulatory developments.

Leveraging AI-Driven Evidence Gathering with Luthor

Traditional compliance reviews are time-intensive and prone to human error. AI-powered platforms like Luthor can dramatically reduce review time while improving accuracy and completeness. Luthor is an AI-powered compliance firm that provides outsourced Chief Compliance Officer (CCO) services for Registered Investment Advisors (RIAs) and broker-dealers (Luthor).

Luthor's automated policy gap-analysis feature compares your current policies against regulatory requirements and industry best practices. The system identifies potential gaps and suggests specific language updates, reducing the time needed for manual policy review from days to hours.

Real-time surveillance logs capture compliance events as they occur, creating an audit trail that supports your annual review testing. Instead of manually reviewing months of records, you can query the system for specific compliance events and generate reports instantly.

The platform's AI-driven workflows streamline compliance processes, ensuring firms remain SEC and FINRA compliant (Luthor). This includes automated monitoring of marketing materials, trade surveillance, and exception reporting that feeds directly into your annual review documentation.

Template Testing Matrices and Sample Attestations

Effective annual reviews require systematic testing procedures documented in testing matrices. These matrices map specific testing steps to regulatory requirements and identify the evidence needed to demonstrate compliance.

Marketing Rule Testing Matrix

Testing AreaRegulatory RequirementTesting ProcedureEvidence RequiredFrequencyPerformance AdvertisingRule 206(4)-1(a)(5)Review substantiation filesCalculation worksheets, source dataAnnualTestimonialsRule 206(4)-1(b)(1)Verify disclosure complianceTestimonial agreements, disclosure documentsAnnualSocial MediaRule 206(4)-1(a)(1)Test monitoring proceduresMonitoring reports, approval recordsQuarterlyThird-Party RatingsRule 206(4)-1(a)(5)Verify rating criteriaRating methodologies, disclosure documentsAnnual

Books and Records Testing Matrix

Testing AreaRegulatory RequirementTesting ProcedureEvidence RequiredFrequencyTrade BlotterRule 204-2(a)(1)Sample trade reviewTrade confirmations, blotter entriesAnnualClient RecordsRule 204-2(a)(3)File completeness reviewAccount opening documents, agreementsAnnualCorrespondenceRule 204-2(a)(7)Email archive testingEmail samples, retention logsAnnualFinancial RecordsRule 204-2(a)(4)Trial balance reviewFinancial statements, general ledgerAnnual

Sample Annual Review Attestation

"I, [Name], Chief Compliance Officer of [Firm Name], hereby attest that I have conducted the annual review of the firm's policies and procedures as required by Rule 206(4)-7 of the Investment Advisers Act of 1940. This review covered the period from [Start Date] to [End Date] and included testing of all material compliance areas.

Based on my review, I have identified [Number] deficiencies that require remediation. Corrective action plans have been developed for each deficiency, with target completion dates established. I will monitor the implementation of these corrective actions and report progress to senior management.

The firm's policies and procedures are generally adequate and effective in preventing violations of the Advisers Act, subject to the implementation of the remediation measures identified in this review."

Checklist Cross-Referenced to Marketing Rule Risk Alerts

The SEC's marketing rule risk alerts from 2024 examinations highlight common deficiencies that should be prioritized in your annual review:

Performance Advertising Checklist:

• [ ] All performance claims are substantiated with underlying data

• [ ] Hypothetical performance includes required disclosures

• [ ] Model performance reflects actual investment strategies

• [ ] Performance periods are not cherry-picked

• [ ] Gross and net performance are clearly distinguished

Testimonial and Endorsement Checklist:

• [ ] All testimonials include required disclosures

• [ ] Compensation arrangements are properly documented

• [ ] Testimonials are not misleading or unrepresentative

• [ ] Social media testimonials are monitored and compliant

• [ ] Third-party endorsements meet regulatory requirements

General Marketing Compliance Checklist:

• [ ] All marketing materials are pre-approved

• [ ] Substantiation files are maintained for all claims

• [ ] Marketing materials are regularly reviewed and updated

• [ ] Social media monitoring procedures are effective

• [ ] Client communications comply with marketing rule requirements

Producing Board-Ready Reports in 40 Hours or Less

Traditional annual reviews can consume hundreds of hours across multiple staff members. By leveraging AI-driven tools and systematic procedures, you can reduce this time to approximately 40 hours while producing higher-quality documentation.

The key is automation and standardization. Use AI tools to automate routine testing procedures, such as policy gap analysis and transaction monitoring. Standardize your testing matrices and documentation templates to eliminate redundant work.

Focus your human resources on high-value activities like analyzing test results, developing remediation plans, and preparing management presentations. Let technology handle the data gathering and initial analysis.

Your board-ready report should include an executive summary, detailed findings by compliance area, remediation plans with timelines, and recommendations for policy updates. The report should be concise but comprehensive, providing board members with the information they need to fulfill their oversight responsibilities.

Common Pitfalls and How to Avoid Them

Many firms approach their annual review as a perfunctory exercise, simply reading through policies without conducting meaningful testing. This approach fails to identify real compliance gaps and provides little value to the organization.

Another common mistake is conducting the review too late in the year, leaving insufficient time for remediation before the next examination cycle. Start your review early and allow adequate time for corrective actions.

Don't rely solely on management representations or self-assessments. Conduct independent testing of key controls and verify that actual practices match written procedures. The SEC expects to see evidence of actual testing, not just management assertions.

Avoid the temptation to focus only on areas that were cited in previous examinations. Regulatory priorities change, and new risks emerge constantly. Your annual review should be comprehensive and forward-looking.

Technology Integration and Automation Benefits

The market for RegTech is projected to reach USD 21 billion by 2027, according to Deloitte (Luthor). This growth reflects the increasing recognition that technology is essential for effective compliance management.

RIA compliance software refers to specialized online platforms that help registered investment advisory firms manage and automate their regulatory compliance tasks (Luthor). These platforms can dramatically reduce the time and effort required for annual reviews while improving accuracy and completeness.

The biggest advantage of leveraging technology in compliance is that it automates monitoring and reporting (Luthor). Instead of manually reviewing months of records, compliance officers can query systems for specific events and generate reports instantly.

Automated surveillance systems can monitor trading activity, marketing materials, and client communications in real-time, flagging potential issues before they become violations. This proactive approach is far more effective than traditional periodic reviews.

Regulatory Trends and Future Considerations

The regulatory landscape continues to evolve rapidly. Half of advisory firms expect new SEC rules to push their annual compliance costs to $100,000 or more (Luthor). This trend underscores the importance of efficient compliance processes and the value of technology solutions.

57% of wealth managers increased their tech budgets specifically to boost efficiency through compliance solutions (Luthor). Firms that invest in compliance technology now will be better positioned to handle future regulatory changes.

Emerging areas of regulatory focus include cryptocurrency investments, artificial intelligence in investment management, and climate-related disclosures. Your annual review should consider these emerging risks and ensure your compliance program is prepared to address them.

The SEC's enforcement activity shows no signs of slowing. The SEC's Enforcement Division pursued over 130 actions against investment advisers and their personnel in 2024 alone (Luthor). A robust annual review process is your best defense against enforcement actions.

Implementation Timeline and Resource Allocation

Successful annual reviews require careful planning and resource allocation. Start planning your 2025 review in December 2024 to ensure adequate preparation time. Assign specific responsibilities to team members and establish clear deadlines for each phase of the review.

Allocate approximately 40% of your review time to testing and evidence gathering, 30% to analysis and documentation, 20% to remediation planning, and 10% to management reporting. This allocation ensures adequate time for each phase while maintaining focus on the most critical activities.

Consider engaging external resources for specialized areas or to provide independent validation of your testing procedures. External reviewers can provide valuable perspective and help identify blind spots in your compliance program.

Document your review procedures and maintain them as templates for future years. This standardization reduces preparation time and ensures consistency across review cycles.

Final Thoughts

Conducting an effective annual compliance review under SEC Rule 206(4)-7 requires systematic planning, comprehensive testing, and thorough documentation. The stakes are high, with 83% of firms reporting having been examined in the past 5 years (Luthor). But with the right approach and tools, you can complete your review efficiently while strengthening your compliance program.

The month-by-month work plan outlined in this guide provides a roadmap for success. By mapping your testing procedures to the SEC's examination priorities and leveraging AI-driven tools for evidence gathering, you can produce a board-ready report in about 40 hours while ensuring comprehensive coverage of all compliance areas.

RIA compliance software is needed to tame this rising complexity, by automating routine checks and flagging issues before they become violations (Luthor). The investment in compliance technology pays dividends through reduced review time, improved accuracy, and better regulatory outcomes.

Remember that your annual review is not just a regulatory requirement but an opportunity to strengthen your compliance culture and protect your firm's reputation. Approach it with the seriousness it deserves, and you'll be well-positioned for whatever regulatory challenges lie ahead.

If you're looking to streamline your annual compliance review process and reduce the time burden on your team, consider exploring AI-powered compliance solutions. Luthor's platform offers real-time risk detection, automated policy drafting, and continuous monitoring to keep clients audit-ready (Luthor). With the right technology partner, you can transform your annual review from a dreaded annual exercise into a strategic advantage that strengthens your compliance program year-round.

Frequently Asked Questions

What is SEC Rule 206(4)-7 and why is the annual compliance review mandatory for RIAs?

SEC Rule 206(4)-7 requires all registered investment advisers to adopt and implement written policies and procedures designed to prevent violations of the Advisers Act. The rule mandates an annual review of these policies and procedures to ensure they remain adequate and effective. This isn't just a regulatory checkbox - it's your firm's most critical defense against enforcement actions, especially given that the SEC ordered financial companies to pay $8.2 billion in fines and penalties in 2024, a 67% increase from 2023.

How can AI-driven evidence gathering techniques improve my compliance review process?

AI-driven evidence gathering automates the collection and analysis of compliance data across your firm's operations, significantly reducing the time required for your annual review. Modern compliance platforms can automatically populate testing matrices, identify potential violations, and generate comprehensive reports. This technology allows CCOs to complete board-ready compliance reviews in approximately 40 hours instead of the traditional weeks-long process, while improving accuracy and coverage.

What are the SEC's latest examination priorities that should be addressed in my 2025 compliance review?

The SEC's 2025 examination priorities focus heavily on cybersecurity preparedness, ESG disclosure accuracy, fee transparency, and digital asset compliance for advisers dealing with crypto investments. Additionally, the SEC is scrutinizing marketing rule compliance, particularly around performance advertising and testimonials. Your annual review should specifically test controls in these areas and document remediation efforts for any identified deficiencies.

What testing matrices should be included in a comprehensive RIA compliance review?

A comprehensive testing matrix should cover all key compliance areas including investment advisory services, marketing and advertising, custody and safekeeping, fee billing accuracy, conflicts of interest management, and regulatory filings. Each matrix should define specific testing procedures, sample sizes, expected outcomes, and documentation requirements. The matrix should also align with your firm's risk assessment and include enhanced testing for high-risk areas identified in previous reviews or regulatory guidance.

How does RIA compliance software streamline the annual review process?

RIA compliance software centralizes all compliance activities into a single platform, automating routine tasks like deadline tracking, document management, and testing workflows. These platforms can automatically generate compliance calendars, populate testing matrices with real-time data, and create comprehensive reports for board presentation. Modern solutions trusted by leading firms managing billions in AUM can reduce review time by up to 70% while improving accuracy and regulatory coverage.

What should be included in a board-ready compliance review report?

A board-ready report should include an executive summary of findings, detailed testing results by compliance area, identification of any material weaknesses or deficiencies, remediation plans with timelines, and recommendations for policy updates. The report should also address regulatory developments affecting your firm, benchmark your compliance program against industry standards, and provide metrics on the effectiveness of your compliance controls throughout the year.