‘Big Switch’ RIAs Now Regulated by States Exhibit Similar Deficiencies on Exams: NASAA

The top five deficiencies found among advisors with more than $30 million in AUM—which included 411 advisors (36.8%)–involved books and records, registration, contracts, advertising and fees.

The top deficiencies in the various categories were:

• Books and records: suitability documentation, missing client contracts, and trial balance/financial statements.
• Registration: Form ADV— Part 1 vs. Part 2, fee structures, and services provided.
• Contracts: improper execution, fees and fee formula.
• Privacy: annual delivery of privacy policies, initial delivery of privacy policies, no privacy policy.
• Brochure delivery: annual offerings, update/material change, and initial deliveries.

Every two years, state securities examiners voluntarily report sample data from their advisor exams to NASAA’s Investment Adviser Operations Project Group. “Using this sample data helps NASAA identify common regulatory deficiencies and recommend best practices that investment advisers should consider to minimize the risk of regulatory violations,” said Abshure (who also blogs regularly for ThinkAdvisor).

NASAA said that deficiencies were also found in advertising, fees, supervision, custody, financials, investment activities and unethical practices.

Based on the 2013 sample data, NASAA said that it recommends the following “Best Practices” to help newly switching advisors:

• Prepare and maintain all required records, including financial records. Back-up electronic data and protect records. Document checks forwarded.
   
• Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.
   
• Review and update all contracts.
   
• Prepare and distribute a privacy policy initially and annually.
   
• Deliver disclosure brochure initially and annually as required.
   
• Review all advertisements, including website and performance advertising, for accuracy.
   
• Calculate and document fees correctly in accordance with contracts and ADV.
   
• Prepare a written compliance and supervisory procedures manual relevant to the type of business to include business continuity plan. Assess and update periodically.
   
• Implement appropriate custody safeguards, as applicable. Pay close attention to direct fee deduction invoices.
   
• Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
   
• Make sure clients’ investment policy and suitability information are current.
   
• Disclose soft dollars or benefits received.
   
• Prepare and maintain current client profiles.
   
• Review solicitor agreements, disclosure, and delivery procedures.