State Regulators Issue Guidance On The Five Most Common Deficiencies Of Investment Advisors Hot

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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:
Registration Issues:
  • 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 

Supervision Issues:
  • Inadequate or absent supervisory/compliance procedures
  • Incomplete supervision of personal trading by IARs
  • Improper remote location supervision
Advertising Issues:
  • 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.
  • Prepare and distribute a privacy policy initially and annually.
  • 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.


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