More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
An increasingly litigious society makes it harder for investments advisors to maintain a spotless record. A new report from New York-based Diligence Review Corp. illustrates the problem.
The report, “Red-Yellow-Green: Report on All SEC-Registered Investment Advisors,” finds that with 11,622 investment advisors registered with the SEC collectively managing $50 trillion in assets, only 10% of those assets were held by firms on the “green list,” indicating a clean compliance record. That list comprised 46% of advisors.
The authors define investment advisors as those firms that offer mutual funds, ETFs, pooled and separate account management arrangements. As they note, U.S. investment advisory firms that manage $100 million in assets or more are required to register with the U.S. Securities and Exchange Commission (“SEC”) via Form ADV. The firm downloaded the SEC Form ADV data on July 2 for its review.
The authors note investment advisors include many private fund advisors, including hedge fund and private equity fund advisors. Venture capital advisors, foreign private advisors and small private fund advisors (those who manage less than $150 million) are currently classified by the SEC as “exempt” advisors. Data relating to exempt advisors are not included in the report.
Key Findings: A total of 11,622 investment advisors were registered with the SEC as of July 2. These advisors had total regulatory AUM of $49,446,235,716,391. In other words, they manage nearly $50 trillion.
Red List: Of the 11,622 registered advisors, the report identified 1,315 advisors (11.31%) that answered “yes” to one or more questions that constitute a “significant adverse regulatory event” in Form ADV. Red List firms manage more than $23 trillion, or 46% of all assets managed by SEC-registered investment advisors.
Yellow List: The report identified 4,970 advisors (42.76%) that had a “yellow flag” uncovered in the review of their Form ADV. Yellow List firms manage more than $21 trillion dollars, or 44% of all assets managed by SEC-registered investment advisors. Many yellow flags relate to a firm’s organizational structure, although some yellow flags relate to adverse regulatory events disclosed on Form ADV that do not rise to the level of a red flag. Some Red List firms also have yellow flags.
Green List: The Green List contains firms that have no significant adverse items on Form ADV. In other words, these are the firms that do not have red or yellow flags. Of the 11,622 registered investment advisors, the report identified 5,337 advisors (45.92%) that meet these criteria. Green List firms manage more than $4.7 trillion, or approximately 10% of all assets managed by SEC-registered investment advisors.
An alphabetical list of firms and their violations can be found at the end of the report.