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Top State Investment Adviser Exam Deficiencies

Tuesday, October 6 2015

Every two years state securities examiners provide sample data from their investment adviser examinations to NASAA. Using that data NASAA recently released a report on common Investment Adviser (“IA”) deficiencies.

The data shows a 30% decrease in deficiencies from the 2013 report but the following are still the top 5 common areas of deficiency:

  • 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.

Some additional areas with deficiency were advertising, privacy, fees, and compliance/supervision. The following is a list of “best practices” recommended by NASAA:

  • Prepare and maintain all required records, including financial records. Back-up electronic data and protect records.
  • Prepare and maintain client profiles or other client suitability info.
  • Review and update all contracts. Make sure all fees are clearly noted and adequately explained in the contract.
  • Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information. File amendments in a timely manner.
  • Prepare and distribute a privacy policy initially and annually.
  • Calculate and document fees correctly in accordance with contracts and ADV.
  • Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
  • Implement appropriate custody safeguards, paying attention to direct fee deduction if applicable.
  • Review all advertisements, including website and performance advertising, for accuracy.
  • Provide disclosure brochure to clients initially, then provide updates and offers to deliver afterwards as required.
  • Prepare a written compliance and supervisory procedures manual relevant to the type of business to include a business continuity plan.
  • Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
  • Review solicitor agreements, disclosures, and delivery procedures.

To see the full report click here.

If you find yourself overwhelmed or out of time give us a call. We are here to help keep you compliant while allowing you to focus on growing your business.