Slew of Advisor Violations Found by State Regulators

Top five categories for deficiencies: registration, books and records, unethical business practices, supervision and advertising

More On Legal & Compliance

from The Advisor's Professional Library
  • Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isn’t just a recommended best practice— it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firm’s strategy is proprietary.
  • Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.

A series of coordinated examinations of 825 investment advisors by 45 state and provincial securities examiners between Jan. 1 through June 30 of this year uncovered 3,543 deficiencies in 13 compliance areas, according to the North American Securities Administrators Association (NASAA).

A series of similar coordinated exams of 458 advisors in 2009 found 1,887 deficiencies in 13 compliance areas.

As state securities regulators get ready to assume increased oversight next year of investment advisors managing less than $100 million in assets, NASAA also released an updated series of best practices that advisors should use to minimize the risk of compliance violations.

Jack HersteinJack Herstein (left), NASAA’s newly christened president and assistant director of the Nebraska Banking and Finance Department, Bureau of Securities, said in a release announcing the compliance findings that NASAA’s “goal in identifying deficiencies and recommending best practices is to help investment advisers strengthen their internal compliance programs and improve the services they provide to clients.”

The 2011 examinations were conducted under the guidance of NASAA’s Investment Adviser Operations Project Group.

The top five categories with the greatest number of deficiencies were:

  1. registration,
  2. books and records,
  3. unethical business practices,
  4. supervision, and
  5. advertising.

The examinations revealed that:

  • The top registration deficiencies were inconsistencies between parts I and II of form ADV and failing to amend form ADV in a timely manner.
  • In the area of preparing and maintaining current and accurate books and records, the top deficiencies included not maintaining client suitability information, not properly safeguarding client records and data, and not backing up data.
  • The leading unethical business practice deficiencies involved missing or no contracts and other contract-related issues, altered documentation and signing blank documents.
  • The most common supervision deficiencies were inadequate or no supervisory/compliance procedures, supervision over personal trades, and remote location supervision.
  • Common advertising deficiencies included issues involving websites, correspondence, business cards and the misuse of “RIA” (Registered Investment Advisor).

Other areas in which investment advisors faced compliance challenges included privacy, fees, custody, investment activities and solicitors.

Among hedge fund advisers, the top deficiencies included valuation of holdings, cross trading, preferential treatment, registration-exemption issues, non-accredited investors issues and non-disclosed conflicts of interest, Herstein said.

Based on the results of the 2011 coordinated exams, NASAA recommends the following “Best Practices” as a guide to assist advisors develop compliance practices and procedures.

  • 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.
Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.