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Books and Records Infractions Still Big Problem for State-Registered Advisors

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While the total number of deficiencies uncovered during advisor exams conducted by state securities regulators dropped 30% in 2015 from those reported in 2013, state-registered advisors’ biggest infractions continue to be in keeping their books and records.

According to data released Monday by the North American Securities Administrators Association, the 1,170 reported state examinations uncovered 4,983 deficiencies in 22 compliance areas, down 30% from the 6,482 deficiencies in 20 compliance areas reported in 2013.

State securities examiners voluntarily report sample data every two years from their investment advisor exams to NASAA’s Investment Adviser Operations Project Group.

The 2015 sample examination data was provided by 42 jurisdictions between January and June 2015.

Books and records continue to be the most problematic compliance area for state-registered investment advisors, accounting for more than twice as many deficiencies found by state examiners as the next highest problem area, which involved contracts.  

William Beatty, NASAA president and Washington Securities Director, noted in releasing the findings that the exam results suggest state-registered investment advisors “should pay closer attention to their books and records practices.”

Rounding out the top five problem areas for state-registered investment advisors were: contracts, registration, fees and custody.

The following were the leading problem areas found within the five deficiency categories as reported by state securities regulators.

  • Top books and records deficiencies: not maintaining client suitability documentation and order memorandum.
  • Top contracts deficiencies: fees not explained and not having all contracts in writing.
  • Top registration deficiencies: Form ADV inconsistencies between Part 1 and Part 2 and the timely filing of amendments.
  • Top fee deficiencies: fee charged does not match contract or ADV and unreasonable or excessive charges.
  • Top custody deficiencies: improper client invoice for direct fee deduction and dual invoicing of client and custodian for direct fee deduction.

“The data suggests a robust state examination program and adherence to NASAA’s recommended best practices has helped investment advisors focus on remediating problem areas, which in turn reduces the risk of regulatory violations,” Beatty said.  

About 2,100 midsize investment advisors with assets under management between $30 million and $100 million switched from federal to state oversight in 2013 as mandated by the Dodd-Frank Act.

Of the 823 investment advisors included in the 2015 coordinated examinations, 232 had assets under management between of $30 million and $100 million and 591 had assets under management of less than $30 million, NASAA said.


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