How Effective Internal Controls Can Mitigate Risks

As firms enter a new year, internal controls, such as policies and procedures, compliance technologies and AI processes should be reviewed for effectiveness, particularly as it relates to mitigating risk.

Ambiguity in internal policies can lead to compounding operational and regulatory issues. When expectations are unclear, responses become inconsistent, supervisory systems can collapse, timelines slip, and risk exposure increases.

This month’s Corporate Communication focuses on a simple checklist for protecting your firm from risks through having strong internal controls.

This checklist can be used to measure the strength of your compliance program and addresses the core factors necessary to maintain strong internal protocols.

Protocols as a Business Safeguard

1) Written Policies & Procedures

• Document comprehensive written policies and procedures tailored to your business operations and cover key functional areas (such as trading, portfolio management, fees, marketing, etc.) and address regulatory risks.
• Ensure they are reasonably designed to prevent, detect, and correct violations of applicable laws

2) Designation of a Chief Compliance Officer (CCO)

• The CCO should be qualified and have clear authority and direct access to senior management.
• Require the CCO to produce periodic compliance reports to leadership with findings and remediation actions.

3) Risk Assessments

• Perform a firm-wide risk assessment identifying internal and external risks (e.g., business changes, new regulations, cybersecurity threats).
• Document the review and any changes made to controls or procedures, and use in conjunction with the Annual Review to demonstrate how the firm mapped risks to internal controls.

4) Safeguarding Client Assets

• Establish controls for custody of client funds/securities where applicable, and ensure independent custody audits are performed per rule requirements.
• Maintain procedures to verify custodial reporting to clients.

5) Trade Order & Portfolio Controls

• Monitor trade allocations, best execution practices, and protect against preferential treatment of proprietary or personal accounts.
• Centralize trade monitoring.

6) Recordkeeping & Documentation

• Maintain accurate, complete books and records of all compliance-related activities.
• Ensure records substantiate the firm’s supervisory control effectiveness (for use in audits and regulatory exams)

7) Training & Communication

• Provide periodic compliance training to all personnel on policies, procedures, and new regulatory obligations.
• Ensure staff know how to report issues and escalate concerns appropriately.

8) Business Continuity & Disaster Recovery

• Maintain a Business Continuity Plan (BCP) that addresses operational disruptions and protects client service capability.
• Test and update the BCP regularly.

9) Marketing & Disclosure Oversight

• Review advertising, disclosures, Form ADV updates, and client communications for accuracy and consistency with actual practices.

10) Cybersecurity & Data Protection

• Implement technical, administrative, and physical safeguards for client information privacy and cybersecurity, include regular risk assessments and updates.
• Although not strictly SEC-prescriptive, strong cyber controls reduce risk of data breach and regulatory scrutiny

Adequate internal protocols must have clear escalation paths and defined ownership. These enable firms to act consistently under pressure and demonstrate good-faith compliance efforts when scrutiny arises.

For more information, including how JLG can assist with performing risk assessments and mock SEC exams, please contact us at 619.298.2880 or email [email protected].

Jacko Law Group assists clients with developing and implementing Policies and Procedures built around strong internal protocols that identify, protect and mitigate against internal and external business threats.

However, if safeguards fail, and disputes escalate to litigation, Jacko Law Group Corporate and Securities Litigation practice will aggressively represent our clients’ best interests.

Learn more about the JLG Litigation Services