Common Investment Advisor Exam Deficiencies

March 12, 2013

Reading time : 6 minutes

With the implementation last year of some of the new laws resulting from the required changes mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), investment advisors should make sure that they are ready for a regulatory examination.  Many investment advisors had to change their registration status, most changes were from registration with the U.S. Securities and Exchange Commission (“SEC”) to registration with one or more state securities regulator, and some private fund managers that were previously exempt from investment advisor registration were required to become registered with the SEC.  One anticipated outcome from all of these changes is that investment advisors will receive more frequent regulatory examinations.  For some investment advisors this may mean that the investment advisor will be audited by a securities regulator for the first time.

Inaccurate, out of date, or incomplete Form ADV disclosures is one of the most common exam deficiencies that we see noted by securities regulators or when we are conducting a review of an investment advisor.  Each registered investment advisor must review and update the Form ADV at least annually to make sure all information is current and accurate.  Some revisions may require more frequent updates to the Form ADV.  There are several questions asked in the Form ADV Part 1 that are similar to the questions or required disclosures in Form ADV Part 2.  An investment advisor needs to make sure that the Form ADV Part 1 and Part 2 are consistent.  Once the investment advisor has determined that all information in the Form ADV is current and accurate the investment advisor should review its other documents (e.g., investment advisory client agreements, wrap-fee brochures, written policies and procedures/compliance manual, advertising or marketing materials) to make sure that disclosure is consistent across all documents of the investment advisor.

The following are some other common regulatory examination deficiencies of investment advisors:

  • Books and records violations (e.g., financial records, client suitability information, safeguarding records and data);
  • Investment advisory client agreement violations (e.g., not having or being able to locate an agreement, investment advisory fee formula inconsistencies or errors, hedge clauses, lack of written discretionary authority);
  • Advertising or marketing violations (e.g., performance advertising violations, lack of website disclosures, misuse of “RIA”, use of client testimonials);
  • Custody rule violations (e.g., inadvertent custody, surprise exam requirement violations, qualified custodian requirement violations);
  • Written supervisory policies and procedures violations (e.g., no written policies and procedures, inadequate policies and procedures, didn’t follow procedures);
  • Registration violations (i.e., investment advisor not  properly registered or notice filed with the applicable state securities regulator); and
  • Investment adviser representative licensing issues (i.e., investment adviser representatives not licensed at all or not licensed with required state securities regulators).

An investment advisor must make sure that it is ready for a regulatory examination at all times so that the investment advisor is not caught off guard when an SEC or state securities examiner shows up.  An investment advisor should not be thinking in terms of “if” an audit will take place, rather, an investment advisor should always be thinking in terms of “when” an audit will take place.  An investment advisor can develop internal checklists and conduct periodic testing and internal audits to help with preparing for a regulatory examination.  For example, a compliance calendar checklist is a good tool for all investment advisors.  To develop this checklist an investment advisor should review and determine all of the investment advisor’s ongoing compliance requirements.  This should include those requirements that relate to regulatory requirements as well as the ongoing compliance requirements resulting from the investment advisor’s internal policies and procedures.  As the investment advisor identifies the requirements, the investment advisor should place each requirement on the compliance calendar checklist as an ongoing, monthly, quarterly, or annual requirement.  The investment advisor can then use the checklist to assign tasks and set-up calendar reminders.  RIA Compliance Consultants has prepared a sample Compliance Calendar Checklist that an investment advisor can purchase for only $25.  An investment advisor can customize this sample Compliance Calendar Checklist specific to the investment advisor’s own requirements.    As part of an investment advisors internal audit process, an investment advisor should make sure that it can promptly provide all documents, files, and reports that may be requested by the securities regulator as part of an examination.  RIA Compliance Consultants has developed a sample Books and Records Documentation Log and Suggested List of Compliance Files and Reports that an investment advisor can purchase for only $25 to assist with this part of an internal audit. Click here to access our online store for more information or to purchase our sample forms. Additionally, if an investment advisor is unsure where to start or how to being the process of performing an internal compliance review RIA Compliance Consultants has developed a cost effective tool, RIA Express – Compliance Review, to assist an investment advisor with performing its own internal compliance review. RIA Express – Compliance Review is our online compliance tool that helps guide you through the process of reviewing the effectiveness of your investment advisor’s compliance program.  To learn more about RIA Express – Compliance Review, click here to schedule a time to speak with one of our consultants.

For more information on how to help your investment advisor prepare for a regulatory examination, register to attend a complimentary webinar, “Preparing for a Regulatory Exam,” that RIA Compliance Consultants will be conducting on March 21, 2013 at 12:00 p.m. CDT.  During this webinar, we will provide an overview of the regulatory examination process for an investment advisor. Our consultants will discuss a variety of topics related to the investment advisor examination process like changes that have taken place over the past couple years; different types of investment advisor examinations, including the new “presence exams” for newly registered investment advisors; the type of information and documentation that may be requested during an investment advisor examination; and some of the common deficiencies found during the investment advisor examination process. Click here to register for this complimentary webinar.

RIA Compliance Consultants can assist your investment advisor with many of your compliance needs.  We have a variety of services like Form ADV updates, drafting or updating written supervisory procedures, or different types of compliance reviews or testing to help your investment advisor make sure that it is staying on top of its ongoing compliance requirements.  Click here to schedule a time to speak with one of our consultants about how RIA Compliance Consultants can assist your investment advisor with its compliance needs.



Posted by Bryan Hill
Labels: Common Deficiencies, Compliance Program, Examination, Webinar