The association of state securities reagulators, the North American Securities Administrators Association (NASAA), earlier this week issued a release listing the five most common deficiencies regulators find at Registered Invetsment Advisers. They can serve as a guide to advisors to minimize the risk of regulatory violations.
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NASAA’s list was developed after a review of the results of coordinated examinations of 825 investment advisors by 45 different state and Canadian provincial securities examiners revealed a pattern in problem areas--compliance hot spots. (Download the report.)
NASAA’s report should serves as a roadmap to the areas you can expect examiners to focus on. Advisers should take time to review the NASAA report to prepare for a regulatory exam.
According to NASAA, the top five categories with the greatest number of deficiencies involved registration; books and records; unethical business practices; supervision; and advertising. More specifically, the examinations indicated certain very specific problem areas, including:
- Inconsistencies between parts I and 2 of firms’ Form ADV
- Failing to amend Form ADV in a timely manner
Books and Records Issues:
- Not maintaining client suitability information
- Failing to safeguard client records and data
- Not backing up computerized data properly
Unethical Business Practice Issues:
- Client contracts missing from files
- No contract executed by the client
- Altered documentation
- Clients signing blank documents
- Inadequate or absent supervisory/compliance procedures
- Incomplete supervision of personal trading by IARs
- Improper remote location supervision
- Improper advertising on firm websites
- Misleading statements in correspondence
- Misleading credentials and statements on business cards
- Misuse of the RIA designation when not warranted
Based on the results of the 2011 coordinated exams, NASAA has issued a “Best Practices” guide to assist advisers to develop compliance practices and procedures. These include:
- Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.
- Review and update all contracts.
- Prepare and maintain all required records, including financial records.
- Back-up electronic data and protect records.
- Document all forwarded checks.
- Prepare and maintain client profiles.
- Prepare a written compliance and supervisory procedures manual relevant to the type of business to include business continuity plan.
- Keep accurate financials. File timely with the jurisdiction.
- Maintain surety bond if required.
- Calculate and document fees correctly in accordance with contracts and ADV.
- Review all advertisements, including website and performance advertising, for accuracy.
- Implement appropriate custody safeguards, if applicable.
- Review solicitor agreements, disclosure, and delivery procedures.
Consider where your own recordkeeping and practices may not be up to par, and develop a coordinated plan to address them quickly.
Having been given the answers to your next “quiz,” there is no excuse not to pass.