Internal Controls - Supervision
A recent administrative complaint filed by the State of Massachusetts against a broker/dealer provides another reminder of the importance of strong internal compliance and supervision policies and procedures. In the complaint, Massachusetts is alleging that the named firm instituted weak internal supervisory programs that have enabled its registered representatives to conduct investment advisory activities without being licensed as investment advisor representatives, which in turn led to unsuitable sales of equity-indexed annuities.
The overriding allegation cited in the complaint is the firm's lack of sufficient supervision and internal controls; and while the complaint is against a broker/dealer, it provides an important lesson for investment advisor firms. Investment advisors need to have established and implemented effective internal controls that are specific to the firm's operating and business procedures.
While there are many ingredients to an effective compliance program, this recent regulatory action by Massachusetts highlights at least three areas of focus. First, advisor firms should establish a system that requires advisor representatives and employees to disclose outside business activities. The firm needs to review, approve/reject, and monitor all outside business activities. Not only must outside activities be disclosed on the Form U4, but depending on the type of outside activity and the employee, it may also need to be disclosed on the Form ADV. In addition, an employee's outside activity may potentially come into conflict with the firm's code of ethics or insider trading policy. An outside activity could also cause potential or real conflicts of interest between the advisor representative and his clients. Advisor firms that do not establish effective policies to review outside business activities and then take appropriate actions based on such reviews are running the risk of future regulatory issues.
A second vital part of any compliance program is having an effective supervision and review program of client accounts to ensure a client's investment objectives are being met. This includes requiring advisor representatives to only provide services and advice with respect to products that are approved by the firm. Furthermore, it necessary to ensure that those products/services, such as outside money managers, are subject to effective due diligence.
A final component to a good compliance program is conducting on-going monitoring and training of advisory services and annual audits. Advisor firms need to ensure their representatives and employees have a complete and accurate understanding of the firm's policies and procedures and all applicable regulatory requirements. One of the best ways to accomplish this is by having an annual face-to-face audit each year coupled with on-going training and monitoring procedures.
Has your firm instituted effective compliance and supervisory procedures dealing with outside business activities, unsuitable sales practices, client suitability, supervision, and monitoring of wholesalers and third-party vendors. Do you feel confident your financial advisors are properly supervised and your firm has established an effective compliance program? Or has your firm's compliance programs grown stagnant? Maybe you need objective advice from a third-party to help improve your internal controls. Is so, give us a call or send us an e-mail. Our goal is to identify deficiencies in your firm's compliance programs before trouble arises.
The overriding allegation cited in the complaint is the firm's lack of sufficient supervision and internal controls; and while the complaint is against a broker/dealer, it provides an important lesson for investment advisor firms. Investment advisors need to have established and implemented effective internal controls that are specific to the firm's operating and business procedures.
While there are many ingredients to an effective compliance program, this recent regulatory action by Massachusetts highlights at least three areas of focus. First, advisor firms should establish a system that requires advisor representatives and employees to disclose outside business activities. The firm needs to review, approve/reject, and monitor all outside business activities. Not only must outside activities be disclosed on the Form U4, but depending on the type of outside activity and the employee, it may also need to be disclosed on the Form ADV. In addition, an employee's outside activity may potentially come into conflict with the firm's code of ethics or insider trading policy. An outside activity could also cause potential or real conflicts of interest between the advisor representative and his clients. Advisor firms that do not establish effective policies to review outside business activities and then take appropriate actions based on such reviews are running the risk of future regulatory issues.
A second vital part of any compliance program is having an effective supervision and review program of client accounts to ensure a client's investment objectives are being met. This includes requiring advisor representatives to only provide services and advice with respect to products that are approved by the firm. Furthermore, it necessary to ensure that those products/services, such as outside money managers, are subject to effective due diligence.
A final component to a good compliance program is conducting on-going monitoring and training of advisory services and annual audits. Advisor firms need to ensure their representatives and employees have a complete and accurate understanding of the firm's policies and procedures and all applicable regulatory requirements. One of the best ways to accomplish this is by having an annual face-to-face audit each year coupled with on-going training and monitoring procedures.
Has your firm instituted effective compliance and supervisory procedures dealing with outside business activities, unsuitable sales practices, client suitability, supervision, and monitoring of wholesalers and third-party vendors. Do you feel confident your financial advisors are properly supervised and your firm has established an effective compliance program? Or has your firm's compliance programs grown stagnant? Maybe you need objective advice from a third-party to help improve your internal controls. Is so, give us a call or send us an e-mail. Our goal is to identify deficiencies in your firm's compliance programs before trouble arises.
Labels: Compliance Program
posted by bhill at 4:03 PM
Preliminary IARD Renewal Statements
Beginning Monday, November 21, 2005, investment advisor firms can access their 2006 Preliminary Renewal Statements via their IARD account. The Preliminary Renewal Statement must be paid, in full, by Wednesday, December 14, 2005. Because it takes approximately two days for payment to post to the IARD account, the funds should arrive no later than Monday, December 12, 2005, to ensure the money is posted to your IARD account by the 14th.
It is important to note that the NASD does not mail the renewal statements to advisor firms. It is each advisor firm's responsibility to electronically retrieve the renewal statement, review it to confirm its accuracy, and submit payment by the deadline. The entire amount of the Preliminary Renewal Statement must be paid by the 14th even if the statement contains inaccuracies. If the Preliminary Renewal Statement does appear to contain errors, you should contact the IARD Hotline at 240-386-4848 or the state. Any adjustments to the renewal statement will be reflected on the Final Renewal Statement which will be posted on January 2, 2005. Adjustments that reflected on the Final Renewal Statement will also include advisor representatives approved and/or terminated from now until the end of the year. New state registrations/notice filing approvals and withdraws made from now until the end of the year will also be reflected on the Final Renewal Statement.
If the NASD receives only partial payment of the amount due or if payment is received after the December 14 deadline, all advisor representatives with your firm will be automatically terminated. In addition, the majority of states will automatically terminate a firm's notice filing/registration status if full payment is not received. Therefore it is imperative that full payment for the Preliminary Renewal Statement is posted to your IARD Account by the required deadline.
It is important to note that the NASD does not mail the renewal statements to advisor firms. It is each advisor firm's responsibility to electronically retrieve the renewal statement, review it to confirm its accuracy, and submit payment by the deadline. The entire amount of the Preliminary Renewal Statement must be paid by the 14th even if the statement contains inaccuracies. If the Preliminary Renewal Statement does appear to contain errors, you should contact the IARD Hotline at 240-386-4848 or the state. Any adjustments to the renewal statement will be reflected on the Final Renewal Statement which will be posted on January 2, 2005. Adjustments that reflected on the Final Renewal Statement will also include advisor representatives approved and/or terminated from now until the end of the year. New state registrations/notice filing approvals and withdraws made from now until the end of the year will also be reflected on the Final Renewal Statement.
If the NASD receives only partial payment of the amount due or if payment is received after the December 14 deadline, all advisor representatives with your firm will be automatically terminated. In addition, the majority of states will automatically terminate a firm's notice filing/registration status if full payment is not received. Therefore it is imperative that full payment for the Preliminary Renewal Statement is posted to your IARD Account by the required deadline.
posted by bhill at 7:29 PM
NASAA Report on State Investment Advisor Exams
Back in September, the North American Securities Administrators Association (NASAA) released a series of recommended best practices for state advisor firms' compliance programs. The best practices are a result of a NASAA sweep and subsequent report completed and released this year. According to a NASAA press release, the following are recommended best practices:
1) Review and revise Form ADV and the disclosure brochure annually to reflect current and accurate information;
2) Review and update all advisory contracts;
3) Prepare a written supervisory procedures manual relevant to the advisor's business;
4) Prepare and distribute a privacy policy initially and annually;
5) Prepare and maintain all required records;
6) Maintain a surety bond, if required;
7) Prepare and maintain client profiles;
8) Calculate and document fees correctly;
9) Review and revise all advertisements, including performance and advertisements and websites; and
10) Implement appropriate custody safeguards, if applicable.
In addition to the best practice recommendations, a review of the report's most common regulatory deficiencies are quite revealing. The most common deficiency cited relates to registration issues, particularly inaccurate information on the Form ADV, failing to provide clients with a copy of the firm disclosure brochure in a timely manner, and failing to provide or offer to provide a copy of the updated disclosure brochure each year. Other common deficiencies include inadequate supervisory programs and failing to provide a customer privacy statement to all clients. To read the entire NASAA report click here.
RIA Compliance Consultants is focused on helping advisor firms, of all sizes, establish well-run, customized compliance policies and procedures. Our firm specializes in conducting mock SEC and state audits that are focused on identifying and correcting deficiencies. Has your firm implemented NASAA's recommended best practices? Are you confident your firm would pass the scrutiny of a regulator? If you are interested in discussing ways to improve your compliance programs and better prepare your firm for a regulatory review, give us a call.
1) Review and revise Form ADV and the disclosure brochure annually to reflect current and accurate information;
2) Review and update all advisory contracts;
3) Prepare a written supervisory procedures manual relevant to the advisor's business;
4) Prepare and distribute a privacy policy initially and annually;
5) Prepare and maintain all required records;
6) Maintain a surety bond, if required;
7) Prepare and maintain client profiles;
8) Calculate and document fees correctly;
9) Review and revise all advertisements, including performance and advertisements and websites; and
10) Implement appropriate custody safeguards, if applicable.
In addition to the best practice recommendations, a review of the report's most common regulatory deficiencies are quite revealing. The most common deficiency cited relates to registration issues, particularly inaccurate information on the Form ADV, failing to provide clients with a copy of the firm disclosure brochure in a timely manner, and failing to provide or offer to provide a copy of the updated disclosure brochure each year. Other common deficiencies include inadequate supervisory programs and failing to provide a customer privacy statement to all clients. To read the entire NASAA report click here.
RIA Compliance Consultants is focused on helping advisor firms, of all sizes, establish well-run, customized compliance policies and procedures. Our firm specializes in conducting mock SEC and state audits that are focused on identifying and correcting deficiencies. Has your firm implemented NASAA's recommended best practices? Are you confident your firm would pass the scrutiny of a regulator? If you are interested in discussing ways to improve your compliance programs and better prepare your firm for a regulatory review, give us a call.
Labels: Compliance Program, Regulatory Inspections
posted by bhill at 4:11 PM
Qualifications for IAR
As a follow-up to our previous entry, we thought we would discuss the general licensing qualifications that state regulators impose for investment advisor representatives. The following are the standard licensing requirements that states will accept as a qualification for investment advisor representative licensing:
1. Series 65, NASAA Uniform Investment Adviser Law Examination, or
2. Series 7, NASD General Securities Representative Examination, and Series 66 NASAA Uniform Combined State Law Examination, or
3. One of the following professional designations:
a. Certified Financial PlannerT, CFP®
b. Chartered Financial Analyst, CFA
c. Chartered Financial Consultant, ChFC
d. Personal Financial Specialist, PFS
e. Chartered Investment Counselor (CIC)
Many states accept additional qualifications, exemptions, and waivers. It is always best to refer to a specific state's regulations to determine its requirements. Some states do not even license advisor representatives. Currently, Michigan and Minnesota do not license advisor representatives; however, each state may require an advisor firm to disclose associated persons acting in an advisory capacity. New York does not license advisor representatives either; however, it does require state registered firms to report their advisor representatives and provide proof of qualification. A final state to note, Wyoming, does not regulate advisors at all. Advisor firms in Wyoming must be registered with the SEC.
1. Series 65, NASAA Uniform Investment Adviser Law Examination, or
2. Series 7, NASD General Securities Representative Examination, and Series 66 NASAA Uniform Combined State Law Examination, or
3. One of the following professional designations:
a. Certified Financial PlannerT, CFP®
b. Chartered Financial Analyst, CFA
c. Chartered Financial Consultant, ChFC
d. Personal Financial Specialist, PFS
e. Chartered Investment Counselor (CIC)
Many states accept additional qualifications, exemptions, and waivers. It is always best to refer to a specific state's regulations to determine its requirements. Some states do not even license advisor representatives. Currently, Michigan and Minnesota do not license advisor representatives; however, each state may require an advisor firm to disclose associated persons acting in an advisory capacity. New York does not license advisor representatives either; however, it does require state registered firms to report their advisor representatives and provide proof of qualification. A final state to note, Wyoming, does not regulate advisors at all. Advisor firms in Wyoming must be registered with the SEC.
Labels: IAR Licensing, Registration
posted by bhill at 10:31 PM
IAR Licensing
As the 2006 IARD renewals season quickly approaches, it is a good time to examine which associated persons of an investment advisor firm need to be licensed as investment advisor representatives.
SEC Rule 203A-3(a) of the Investment Advisers Act defines an investment advisor representative ("IAR") as a supervised person who has more than five clients who are natural persons and more than 10 percent of whose clients are natural persons. The IAR licensing responsibility has been given to the individual states which can impose registration, licensing, or other qualification requirements on associated persons that fall under the SEC definition of investment advisor representative and who have a place of business in the state or hold themselves out as advisor representatives in the state. In other words, under the Advisers Act, and the far majority of state regulations as explained below, an investment advisor representative of an SEC registered firm can have an unlimited number of clients in a state, without being licensed, as long as the advisor firm is notice filed in the state and the advisor representative does not have a place of business within the state.
Of course, these licensing/registration rules under the Investment Advisers Act of 1940 apply to only SEC registered firms. State registered firms must look to each state’s specific registration requirements to determine which associated persons must be licensed. In general, if an advisor firm is registered in a state, at least one associated person must license as an advisor representative. According to the NASAA web site, “most states follow a definition of investment adviser representative (IAR) similar to that in the Uniform Securities Act. An IAR generally is a person who, for compensation (1) makes any recommendations or otherwise renders advice regarding securities; (2) manages accounts or portfolios of clients; (3) determines which recommendation or advice regarding securities should be given; (4) solicits, offers, or negotiates for the sale of or sells investment advisory services, or (5) supervises employees who perform any of the foregoing.”
This notice is written based on the general industry licensing requirements. Of course, not all states follow these general guidelines, and many have implemented their own unique requirements or do not even license IARs. Whenever an advisor firm begins to conduct business in a state, it is imperative for the firm to have a specific understanding of the state’s licensing requirements. If you are unsure as to which of your associated persons should be registered or need clarification on a particular state’s licensing requirements, please give us a call.
SEC Rule 203A-3(a) of the Investment Advisers Act defines an investment advisor representative ("IAR") as a supervised person who has more than five clients who are natural persons and more than 10 percent of whose clients are natural persons. The IAR licensing responsibility has been given to the individual states which can impose registration, licensing, or other qualification requirements on associated persons that fall under the SEC definition of investment advisor representative and who have a place of business in the state or hold themselves out as advisor representatives in the state. In other words, under the Advisers Act, and the far majority of state regulations as explained below, an investment advisor representative of an SEC registered firm can have an unlimited number of clients in a state, without being licensed, as long as the advisor firm is notice filed in the state and the advisor representative does not have a place of business within the state.
Of course, these licensing/registration rules under the Investment Advisers Act of 1940 apply to only SEC registered firms. State registered firms must look to each state’s specific registration requirements to determine which associated persons must be licensed. In general, if an advisor firm is registered in a state, at least one associated person must license as an advisor representative. According to the NASAA web site, “most states follow a definition of investment adviser representative (IAR) similar to that in the Uniform Securities Act. An IAR generally is a person who, for compensation (1) makes any recommendations or otherwise renders advice regarding securities; (2) manages accounts or portfolios of clients; (3) determines which recommendation or advice regarding securities should be given; (4) solicits, offers, or negotiates for the sale of or sells investment advisory services, or (5) supervises employees who perform any of the foregoing.”
This notice is written based on the general industry licensing requirements. Of course, not all states follow these general guidelines, and many have implemented their own unique requirements or do not even license IARs. Whenever an advisor firm begins to conduct business in a state, it is imperative for the firm to have a specific understanding of the state’s licensing requirements. If you are unsure as to which of your associated persons should be registered or need clarification on a particular state’s licensing requirements, please give us a call.
Labels: IAR Licensing
posted by bhill at 10:14 PM
SEC Re-Considering Advisor Exams
Recently there have been several reports in various industry publications such as The Wall Street Journal and the Compliance Reporter discussing changes the SEC is making to its risk-based approach for advisor firm audits. While the SEC has not finalized the changes, it appears they are close to implementing an approach that would more actively monitor “low-risk” firms. Currently, the SEC divides advisor firms into “high-risk” v. “low-risk” firms with high-risk firms visited on a more frequent and regular basis. According to comments from the SEC, they would randomly select a sampling of low-risk firms each year as opposed to visiting low-risk firm once every five years. Depending on the type and severity of deficiencies found at the low-risk firms, the SEC may move away from visiting high-risk firms more frequently and audit all firms on a more balanced approach.
No matter what type of exam cycle the SEC selects, an advisor firm needs to be prepared for a regulator to show up on any day without prior warning. In other words, take the approach to always be ready for a regulatory examination whether it is an initial audit, a follow-up audit or part of an industry sweep. The best compliance programs are those that are not afraid of an SEC examination. By continually monitoring and supervising compliance procedures, well-run compliance programs are always prepared and actually welcome a regulatory examination. Is your firm ready for an examination? Could you survive the SEC? If you need help creating a compliance and supervisory program that is always ready for the SEC, give us a call today.
No matter what type of exam cycle the SEC selects, an advisor firm needs to be prepared for a regulator to show up on any day without prior warning. In other words, take the approach to always be ready for a regulatory examination whether it is an initial audit, a follow-up audit or part of an industry sweep. The best compliance programs are those that are not afraid of an SEC examination. By continually monitoring and supervising compliance procedures, well-run compliance programs are always prepared and actually welcome a regulatory examination. Is your firm ready for an examination? Could you survive the SEC? If you need help creating a compliance and supervisory program that is always ready for the SEC, give us a call today.
Labels: Regulatory Inspections
posted by bhill at 1:33 PM
