During a regulatory exam, your investment adviser firm is required to produce its books and records and the regulators will conduct interviews with your firm’s management and employees.  The purpose of these exams is to test your investment adviser’s compliance with the applicable securities regulations and to ensure client assets are properly protected.  According to the SEC, the most common issues found during exams are the “misappropriation of client funds, conflicts of interest, breach of fiduciary duty, misrepresentations to investors, valuation issues, offering unregistered/fraudulent securities, and material compliance program deficiencies and books and records concerns.”

To address these issues, RIA Compliance consultants is hosting a webinar, “Preparing for a Regulatory Exam,” on Thursday, September 15, 2011 from 12:00 p.m. to 1:00 p.m. Central.  During this webinar, RIA Compliance Consultants will provide an overview of the regulatory examination process. One of our consultants will discuss the different types of examinations; the information and documentation that will likely be requested during an examination; and some of the common regulatory deficiencies found during the examination process. We will also provide you with some general guidance and tips for preparing for and getting through the examination.  To register for this webinar, click here.

Books and records requirements should be covered in an investment advisor’s written compliance policies and procedures.  Each time there are changes to the rules under the Advisers Act, it is likely that Rule 204-2 will be affected.  A registered investment advisor should review and determine how those changes affect Rule 204-2 and should update its written policies and procedures accordingly.  Investment advisor’s books and records will be reviewed as part of a regulatory examination.  It is important for all investment advisors to periodically review and test to ensure that they are maintaining accurate and current books and records.

The SEC recently adopted new rules and amendments to existing rules under the Advisers Act to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  Regulators have indicated that one of the expected results of these rule changes will be increased regulatory oversight of investment advisors.  One of the changes resulting from the Dodd-Frank Act is the reallocation of regulatory oversight to the state securities authorities for certain smaller investment advisors.  Investment advisors with between $25 million and $100 million of assets under management (“mid-sized investment advisors”) will now be required to register with the states, if they are subject to an examination by state securities authorities.  Many investment advisors that are currently registered have not had a regulatory exam for a number of years, if at all.  It is expected that the reallocation of regulatory oversight will result in more frequent examinations for both SEC and state registered investment advisors.  Investment advisors should make sure that they are prepared for a regulatory examination by reviewing and testing their written policies and procedures to make sure that they reflect the current practices of the investment advisor and that they are consistent with the books and records requirements of the appropriate regulatory authority.

For more information and guidance on maintaining the appropriate books and records for your investment advisor, please register to attend our webinar, “Maintaining Investment Advisor Books and Records.” The webinar will be presented on July 14, 2011 at 12:00 pm CDT for a fee of $59.95.  To register now click here.

Maintenance of books and records is something that should be covered in an investment advisor’s compliance program.  It is not enough just to know what you need to maintain, an investment advisor should perform periodic testing to make sure that it is maintaining and can provide the appropriate documents.  One effective method of doing this is to have a mock examination performed of your investment adviser.  Take the list of required books and records and test to whether you are prepared to present all required documents and if you can do so in a timely manner.  This is something that can be performed by an investment advisor’s own Compliance Department or you can hire RIA Compliance Consultants to perform this service for you.

The following are some examples of common books and records deficiencies that we find during mock examinations of investment advisors:

• Not maintaining an order memorandum or not maintaining complete information in the order memorandum as outlined in Rule 204-2(a)(3) the Advisers Act;
• Not maintaining current financial or complete financial records;
• Not maintaining proper documentation to support performance advertising figures;
• Not maintaining a list of all access persons for the past five years;
• Not maintaining access person holdings reports;
• Not maintaining records to support the firm’s duty of best execution;
• Not maintaining or unable to locate contracts the firm has executed with service providers, sub-advisors, or solicitors;
• Not able to easily or timely produce copies of requested email records; and
• Not having complete or adequate written compliance programs or having written compliance programs that are not consistent with what the firm is actually doing.

For more information and guidance on maintaining the appropriate books and records for your investment advisor, register for the Maintaining Required Books and Records webinar that will be presented by RIA Compliance Consultants on July 28, 2010.

A recent example where the SEC has initiated a disciplinary action as a result of a periodic record inspection is In the Matter of Diane M. Keefe.  In this regulatory enforcement action, the SEC brought an action against Diane Keefe, an employee of a registered investment adviser, when the SEC, while conducting a period examination, discovered that Keefe did not maintain accurate records.

Diane Keefe, a former employee of Pax World Management Corp., a registered investment adviser, was found to have willfully violated Section 34(b) of the Investment Company Act for failure to maintain accurate books and records.  Section 34(b) of the Investment Company Act prohibits investment advisors from making any untrue statement of material fact in a document that is required for record keeping pursuant to Section 31(a) of the Investment Company Act.

Keefe served as the portfolio manager of the Pax World High Yield Fund (“Fund”).  The Fund’s filed registration statements state that an Investment Committee was responsible for overseeing the Fund’s investments.  Keefe created handwritten notes that falsely represented that the Investment Committee was overseeing the investments of the Fund.  However, the Fund’s board had never even assembled the Investment Committee.

The administrative law judge suspended Keefe for twelve months from association with a registered investment adviser or broker-dealer.  Keefe has appealed her suspension and the case has been remanded for further fact-finding determinations.

On July 28, 2010 RIA Compliance Consultants will be conducting a webinar on the topic of  maintaining investment adviser required books and records pursuant to SEC Rule 204-2 issued under the Investment Advisers Act.   Individuals can register for this webinar, or any of our other upcoming webinars, by clicking here.