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Nationwide NASAA Exams Reveal Advisor Deficiencies

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The North American Securities Administrators Association (NASAA) has released a list of best practices advisors should use after coordinated exams by 43 state and provincial securities examiners revealed deficiencies in a number of areas.

Of the 418 exams of advisors conducted between January 1, 2007 and May 31, 2007, 2,135 deficiencies were uncovered in 13 compliance areas, NASAA says in a release.

The 2007 examinations, conducted under the guidance of NASAA’s Investment Adviser Operations Project Group, found a 12% and 19% increase, respectively, in advisors with registration and books and records deficiencies. A slight increase in advisors with supervisory deficiencies was also noted, NASAA says, while the number of advisors with custody deficiencies dropped by 6%.

The top five categories with the greatest number of deficiencies identified in the examinations involved registration, unethical business practices, books and records, supervisory/compliance, and privacy, according to NASAA.

The Deficiencies

The examinations revealed that:

  • 298 advisors had 504 deficiencies related to registration issues. The top three deficiencies in this category were inconsistencies between parts I and II of form ADV, failing to amend form ADV in a timely manner, and failing to provide or offer to provide the disclosure document to clients annually.
  • 198 advisors had 318 unethical business practice deficiencies, including contract deficiencies, unsuitable recommendations, excessive fees, and misrepresenting qualifications, services, or fees.
  • 189 advisors had 384 deficiencies in the area of preparing and maintaining current and accurate books and records. Not maintaining suitability data and financials were noted as the top two deficiencies in this area.
  • 152 advisors had 174 supervisory/compliance deficiencies. The most common deficiency was failure to have any written supervisory/compliance procedures.
  • 115 advisors had 142 privacy deficiencies. The most common were failure to create a privacy policy and failure to provide privacy notices initially and annually.

Other areas with deficiencies included the preparation and maintenance of financial records, advertising, fees, custody, investment activities, solicitors, performance reporting, and hedge funds.

Best Practices Suggested

Based on the results of the 2007 coordinated exams, NASAA says it recommends the following “Best Practices” as a guide to assist advisors in the development of compliance practices and procedures.

  • Review and revise the 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.
  • Prepare and maintain client profiles which show suitability information.
  • Prepare a written compliance and supervisory procedures manual relevant to the type of business.
  • Prepare and distribute a privacy policy initially and annually.
  • Keep accurate financials. File timely with the appropriate jurisdiction. Maintain surety bond if required.
  • Calculate and document fees correctly in accordance with contracts and the ADV.
  • Review and revise all advertisements, including Web site and performance advertising, for accuracy.
  • Implement appropriate custody safeguards, if applicable.
  • Review solicitor agreements, disclosure, and delivery procedures.


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