NASAA Report on Common Investment Adviser Deficiencies

October 02, 2015

The North American Securities Administrators Association (NASAA) released a new report revealing a reported number of state registered investment adviser compliance regulation deficiencies. Every two years, state securities examiners voluntarily report sample data from their investment adviser examinations to NASAA’s Investment Adviser Operations Project Group. State examiners reported 4,983 deficiencies in 22 areas of compliance in 2015. The last time NASAA conducted this report in 2013 state examiners reported 6,482 deficiencies in 20 areas of compliance.

The report found that the biggest problem area for investment adviser compliance is books and records maintenance. Specifically, many investment advisers do not maintain client suitability documentation and order memorandum. The other leading deficiency areas were:

  • Top contracts deficiencies: fees not explained and not having all contracts in writing.
  • Top registration deficiencies: Form ADV inconsistencies between Part 1 and Part 2 and the timely filing of amendments.
  • Top fee deficiencies: fee charged does not match contract or ADV and unreasonable or excessive charges.
  • Top custody deficiencies: improper client invoice for direct fee deduction and dual invoicing of client and custodian for direct fee deduction.

Though these areas were responsible for many of the reported compliance deficiencies, deficiencies were commonly reported in: advertising, privacy, fees, compliance/supervision, financial matters, brochure delivery, and pooled investments.

The NASAA Report offers the following best practices to help investment advisers remain in compliance with securities regulations:

  • Prepare and maintain all required records, including financial records. Back-up electronic data and protect records.
  • Prepare and maintain client profiles or other client suitability information.
  • Review and update all contracts. Make sure all fees are clearly noted and adequately explained in the contract.
  • Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.
  • File amendments in a timely manner.
  • Prepare and distribute an initial and annual privacy policy
  • Calculate and document fees correctly in accordance with contracts and ADV.
  • Implement appropriate custody safeguards, paying attention to direct fee deduction if applicable.
  • Review all advertisements, including website and performance advertising, for accuracy.
  • Provide disclosure brochure to clients initially, and then provide updates and offers to deliver afterwards as required.
  • Prepare a written compliance and supervisory procedures manual relevant to the type of business to include a business continuity plan.
  • Review solicitor agreements, disclosures, and delivery procedures.

Though a good place to start, NASAA’s list of best practices is in no way exhaustive. There are many areas and strata of compliance regulations with which investment advisers need to comply. Different states have different compliance requirements so investment advisers must make sure to comply with the appropriate regulations of the states in which they are registered and different states have different compliance requirements. RIA Compliance Consults can help your investment adviser firm address these compliance concerns. We have services that can address investment adviser Form ADVs, client brochures, wrap programs, solicitor disclosures, compliance policies and procedures, advertising reviews, compliance assessments and more.  If you would like more information regarding these or any of our compliance support services, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our consultants if you have not previously worked with RIA Compliance Consultants.

Posted by Bryan Hill
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