Investment Adviser Compliance Manual Template for Trading Platforms

Rule 206(4)-7 Compliance Program Requirements

Rule 206(4)-7 under the Investment Advisers Act requires every SEC-registered investment adviser to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules the SEC has adopted under it.

For trading platforms, algorithmic advisers, and fintech RIAs, your compliance manual is not just a regulatory checkbox—it's your operational blueprint for managing regulatory risk, protecting client assets, and demonstrating to the SEC that you take your fiduciary duties seriously.

Required Compliance Program Elements

At a minimum, your compliance program must address:

• Portfolio management processes - including allocation of investment opportunities and consistency with client investment objectives
• Trading practices - including best execution, soft dollars, and trade errors
• Proprietary trading and principal/cross transactions
• Code of Ethics and personal trading - including access person reporting
• Accuracy of disclosures - Form ADV, client communications, and marketing materials
• Safeguarding client assets - custody rules and account statement delivery
• Valuation of client holdings - particularly for illiquid or hard-to-value assets
• Fee calculations and billing - accuracy and disclosure compliance
• Books and records compliance - retention and accessibility
• Marketing and advertising - including performance claims and testimonials
• Review and testing - annual compliance review and ongoing monitoring

Chief Compliance Officer Designation

Rule 206(4)-7 requires you to designate a Chief Compliance Officer (CCO) who is competent and empowered with authority and resources to develop and enforce appropriate policies and procedures.

Compliance Manual Structure & Sections

An effective compliance manual for a trading platform should be organized logically, written clearly, and tailored to your specific operations. Below is a comprehensive 25-section outline designed for algorithmic advisers and trading platforms.

Code of Ethics Policies

Rule 204A-1 requires every investment adviser to adopt a written code of ethics. For trading platforms where employees have access to trading systems or client account information, this is particularly critical.

Required Code of Ethics Elements

Who Is an "Access Person"?

The rule defines access persons broadly. For trading platforms, this typically includes:

• All supervised persons with access to nonpublic information regarding client securities transactions
• All supervised persons with access to nonpublic information regarding portfolio holdings
• Anyone with discretionary authority over client accounts
• Portfolio managers and traders
• Research analysts who make recommendations to portfolio managers
• Software engineers and developers who have access to trading algorithms or client data
• Data scientists and quants who develop trading models
• Executives and directors
• Any supervised person with regular access to nonpublic holdings information

Personal Trading & Access Person Rules

Implementing an effective personal trading compliance program requires both clear policies and technology systems to monitor compliance.

Quarterly Transaction Report Requirements

Access persons must report, no later than 30 days after the end of each calendar quarter:

• All securities transactions in which they had any direct or indirect beneficial ownership
• Transaction date
• Title and exchange ticker symbol or CUSIP number
• Number of shares and price
• Name of broker, dealer, or bank with or through which the transaction was effected
• Nature of any beneficial ownership (direct, indirect, or none)

Annual Holdings Report Requirements

Access persons must report, annually (typically within 45 days after year-end):

• Title, number of shares, and principal amount of each security in which they had any direct or indirect beneficial ownership
• Name of broker, dealer, or bank with which they maintained an account in which any securities were held for their direct or indirect benefit

Exceptions to Reporting Requirements

The following do not need to be reported:

• Direct obligations of the U.S. Government
• Bankers' acceptances, bank certificates of deposit, commercial paper, and high-quality short-term debt instruments
• Shares of registered open-end mutual funds (unless the adviser or a control affiliate is the investment adviser)
• Transactions effected pursuant to an automatic investment plan

Automated Compliance Solutions

For trading platforms with technical teams classified as access persons, manual quarterly reporting can be burdensome. Consider:

• Integration with brokerage APIs to pull transaction data automatically
• Compliance platforms like ComplySci, StarCompliance, or MyComplianceOffice
• Internal tool development for automated transaction feeds and approval workflows
• Restricted list management systems that automatically flag prohibited securities

Algorithm Governance Framework

For algorithmic trading platforms and automated advisers, algorithm governance is the cornerstone of your compliance program. The SEC expects you to have robust controls over how trading algorithms are developed, tested, deployed, monitored, and modified.

Algorithm Development Lifecycle Controls

Kill Switch and Risk Controls

Your algorithm governance must include automated and manual controls to prevent runaway algorithms or erroneous trades:

• Position Limits: Maximum position sizes per security and aggregate exposure limits
• Velocity Controls: Limits on trading frequency and order rate
• Loss Limits: Daily loss thresholds that trigger automatic halt
• Manual Kill Switch: Immediate halt capability accessible to compliance/risk personnel
• Automated Kill Switch: System-level halt triggered by abnormal behavior patterns
• Pre-Trade Risk Checks: Order size validation, available capital verification, restricted list checks

Algorithm Documentation Requirements

The SEC expects comprehensive documentation of your algorithms. At a minimum, maintain:

• Investment strategy description and economic rationale
• Data sources and inputs used by the algorithm
• Trading logic and decision-making process
• Risk management parameters and limits
• Testing methodology and results (including backtesting assumptions and limitations)
• Version history and change log
• Performance monitoring procedures and metrics
• Known limitations, risks, or failure modes

Marketing & Advertising Review Process

The SEC's Marketing Rule (Rule 206(4)-1, effective November 2021) modernized advertising and performance regulations for investment advisers. For trading platforms promoting algorithmic returns or automated strategies, compliance is particularly important.

Marketing Rule Core Prohibitions

An advertisement may not:

• Include any untrue statement of material fact or omit material facts that would make it misleading
• Include material statements of fact that cannot be substantiated
• Include information that would reasonably be likely to cause an untrue or misleading implication
• Discuss potential benefits without giving equal prominence to material risks or limitations
• Reference specific investment advice without providing relevant material facts
• Include or exclude performance results in a manner that is not fair and balanced
• Present performance information that is not based on actual results or does not reflect deduction of fees

Performance Advertising Requirements for Trading Platforms

Hypothetical and Backtested Performance

For algorithmic platforms, showing backtested results is common. The Marketing Rule allows this but requires prominent disclosure that:

• The performance results are hypothetical and not actual results
• Backtested performance has inherent limitations
• Results do not represent actual trading and may not reflect impact of material market and economic factors
• Hypothetical results may be prepared with benefit of hindsight
• Backtested performance may not account for all costs (slippage, commissions, fees)
• Past performance (even backtested) does not guarantee future results

Marketing Review and Approval Process

Establish a written process for reviewing and approving all advertising and marketing materials:

1. Pre-Approval Requirement: All marketing materials must be approved by CCO or designee before use
2. Substantiation: All factual claims must be supported by documentation maintained in compliance files
3. Performance Review: All performance claims must be verified against actual account records or backtesting documentation
4. Risk Disclosure Review: Ensure material risks are disclosed with equal prominence to benefits
5. Books and Records: Maintain copies of all advertisements for 5 years after last use

Custody & Safeguarding Procedures

The Custody Rule (Rule 206(4)-2) requires advisers with custody of client assets to comply with specific safeguarding requirements. For trading platforms, understanding whether you have custody and what it requires is critical.

What Constitutes Custody?

You have custody if you:

• Hold client funds or securities
• Have authority to obtain possession of client funds or securities
• Have authority to withdraw funds or securities from client accounts (including via power of attorney)
• Act as trustee or general partner with client assets
• Have the ability to deduct advisory fees directly from client accounts

Custody Rule Compliance Options

Avoiding Custody Status

If you want to avoid custody (and the annual surprise examination requirement), consider these structures:

• Read-Only API Access: Connect to client brokerage accounts with read-only credentials; require clients to manually execute recommended trades
• Limited Power of Attorney: Use trading authorization that gives you discretion but not withdrawal authority
• Third-Party Fee Billing: Have custodian deduct fees based on your invoice (rather than you having deduction authority)
• No Client Funds Handling: Never accept checks or transfers from clients; require all funds go directly to qualified custodian

Surprise Examination Requirements

If you have custody beyond just fee deduction, you must undergo an annual surprise examination by an independent public accountant. The examination must verify client assets by:

• Confirming all client securities and funds with qualified custodians
• Verifying that client holdings match adviser records
• Reviewing physical possession of any securities (if applicable)
• Issuing a report on examination findings within 120 days of year-end

Cybersecurity & Data Protection Policies

The SEC has made cybersecurity a top examination priority. For trading platforms handling sensitive client data and operating trading algorithms, robust cybersecurity policies are essential.

SEC Cybersecurity Rule Requirements

Under the SEC's Safeguards Rule (part of Regulation S-P), you must adopt written policies and procedures reasonably designed to:

• Ensure the security and confidentiality of customer records and information
• Protect against anticipated threats or hazards to the security or integrity of customer records
• Protect against unauthorized access to or use of customer records that could result in substantial harm or inconvenience to customers

Core Cybersecurity Policy Elements

Incident Response Plan Components

Your cybersecurity policies must include a written incident response plan covering:

1. Detection: How incidents are identified (monitoring tools, employee reports, client notifications)
2. Assessment: Procedures for determining severity and scope of incident
3. Containment: Steps to isolate affected systems and prevent further compromise
4. Notification: Who to notify internally and externally (SEC, clients, law enforcement if applicable)
5. Investigation: Forensic investigation procedures and documentation requirements
6. Remediation: Steps to eliminate vulnerabilities and restore secure operations
7. Post-Incident Review: Process for reviewing incident, updating procedures, and implementing lessons learned

Business Continuity Planning

While not explicitly required by federal securities law for investment advisers (unlike broker-dealers), the SEC expects advisers to have business continuity and disaster recovery plans as part of a reasonably designed compliance program, especially if you provide continuous or automated services.

Business Continuity Plan Elements

An effective BCP for a trading platform should address:

• Critical Operations Identification: What functions are essential to continue serving clients?
• Backup Systems: Redundant infrastructure for critical trading and communication systems
• Data Backup: Regular backups of all client data, trading records, and algorithm code
• Alternative Work Locations: Ability for key personnel to work remotely or from backup sites
• Communication Plans: How to communicate with clients, vendors, regulators during disruption
• Recovery Time Objectives (RTO): Target time to restore each critical system
• Recovery Point Objectives (RPO): Maximum acceptable data loss for each system
• Vendor Reliance: Plans for vendor failures (broker outages, data feed disruptions, cloud provider failures)
• Testing Schedule: Annual or more frequent testing of BCP procedures

Trading Platform-Specific BCP Considerations

Annual Compliance Review Process

Rule 206(4)-7 requires your CCO to conduct an annual review of the adequacy of your compliance policies and procedures and the effectiveness of their implementation. This is not optional—it's a specific regulatory requirement.

Annual Review Scope

Your annual review must assess:

• Whether policies and procedures remain reasonably designed to prevent violations
• Whether policies and procedures have been effectively implemented
• Whether any material compliance matters occurred during the review period
• Whether any changes to business operations or regulatory requirements necessitate policy updates
• Testing results for key compliance controls
• Recommendations for policy enhancements or remediation

Testing and Sampling Methodology

The annual review should include testing of key controls, such as:

Annual Review Report

Document your annual review in a written report that includes:

1. Review Period: The period covered by the review
2. Review Scope: What was reviewed and what testing was performed
3. Findings: Any deficiencies, weaknesses, or compliance matters identified
4. Remediation: Steps taken or planned to address findings
5. Policy Updates: Any changes made to compliance policies and procedures
6. Recommendations: Suggestions for enhancements or additional controls
7. Sign-Off: CCO certification and management acknowledgment

Timing and Frequency

While the rule requires an "annual" review, best practice is to:

• Complete the review within 12 months of the prior review (not just calendar year-end)
• Schedule the review at a consistent time each year
• Complete the review within the first quarter of each year (covering the prior year)
• Provide the written report to senior management or board for review and acknowledgment
• Maintain the annual review report in your compliance records for at least 5 years

Compliance Calendar Template

A compliance calendar helps you track recurring compliance obligations throughout the year. Below is a sample calendar for an SEC-registered investment adviser operating a trading platform.

CCO Designation Requirements

Rule 206(4)-7 requires every registered investment adviser to designate a Chief Compliance Officer who is competent and empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm.

CCO Qualifications

The SEC does not specify formal credentials, but your CCO must have:

• Knowledge: Understanding of the Advisers Act, SEC rules, and industry practices relevant to your business
• Experience: Sufficient background to understand your operations and regulatory obligations
• Competence: Ability to design, implement, and assess compliance policies and procedures
• Independence: Sufficient independence from conflicts that might impair compliance judgment

CCO Authority and Resources

The SEC expects your CCO to have real authority and adequate resources:

• Direct Access to Senior Management: CCO should report directly to CEO, board, or senior management (not buried in organizational hierarchy)
• Budget Authority: Adequate budget to hire staff, engage consultants, purchase compliance technology, and obtain training
• Decision-Making Authority: Power to implement policies, conduct investigations, and require remediation of deficiencies
• Independence from Business Pressures: Compensation structure that does not create conflicts with compliance duties (e.g., not based primarily on firm revenue or AUM growth)
• Access to Information: Unrestricted access to all firm records, systems, and personnel necessary to perform compliance duties

Small Firm Considerations

For small advisory firms (including many trading platform startups), the following approaches are permissible:

• Founder/CEO as CCO: Common for startups; acceptable if the individual has adequate compliance knowledge
• Outsourced CCO: Retain an external compliance consultant to serve as CCO (must be identified by name on Form ADV)
• Part-Time CCO: Acceptable if the individual has sufficient time to fulfill CCO duties given firm size and complexity
• Dual Roles: CCO can have other responsibilities (e.g., CFO, General Counsel) if no conflicts and adequate time for compliance

Implementation Roadmap

Building a compliance manual is only the first step. Implementing and maintaining an effective compliance program requires ongoing commitment.

90-Day Implementation Plan

Common Implementation Pitfalls to Avoid

• Generic Templates: Copying a generic manual without tailoring to your business
• Shelf Documents: Creating policies that look good but are never actually followed
• Inadequate Resources: Failing to invest in compliance technology, training, or staff
• Form Over Substance: Checking boxes without genuine commitment to compliance culture
• Stale Policies: Never updating the manual after initial creation
• No Testing: Failing to test controls or verify that policies are being followed
• Poor Recordkeeping: Not maintaining documentation to evidence compliance