NASAA Issues Reports on Common Investment Adviser Deficiencies

September 28, 2015

The North American Securities Administrators Association (NASAA) issued a report on compliance by investment advisers with laws and regulations. State securities regulators have regulatory oversight responsibility for investment advisers with assets under management of less than $100 million. The report stated that books and records continue to be the most problematic compliance area for state-registered investment advisers, accounting for more than twice as many deficiencies found by state examiners as the next highest problem area. The report noted that the number of total deficiencies uncovered declined from the previous series of state coordinated examinations.
Every two years, state securities examiners voluntarily report sample data from their investment adviser examinations to NASAA’s Investment Adviser Operations Project Group. 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.
The following were the leading problem areas.
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 report noted that deficiencies also were found in advertising, privacy, fees, compliance/supervision, financial matters, brochure delivery, and pooled investments as well as other compliance areas.
NASAA recommended the following “Best Practices” as a guide to assist investment advisers in developing compliance practices and procedures.
• 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 information.
• 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.
• 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.
Click here to access the release announcing the report.


Investment Advisers