Recently, the North American Securities Administrators Association (“NASAA”) released its 2021 Investment Adviser Coordinated Examinations Report. This report is released on a biannual basis and analyzes the findings from state-registered investment adviser (“RIA”) examinations. As RIA compliance consultants, we recommend that the Chief Compliance Officer (“CCO”) of all investment advisory firms review the regulatory exam summary report to determine if any changes should be implemented at their firm as a result of NASAA’s findings.
This study is based on 1,206 routine investment adviser examinations conducted by NASAA from January through July 7, 2021. Additional statistics of the advisory firms examined are as follows:
- 289 firms were examined by the state for the first time
- 73% of US-based RIA firms had regulatory assets under management (“AUM”) greater than $0
- 62.8% had AUM greater $30 million
- 37.2% had AUM less than $30 million
- 68.4% of RIAs examined had 1 investment adviser representative (“IAR”)
- 60 of the firms examined were affiliated with a broker dealer firm
- 23 of the firms audited advised a pooled investment vehicle
- 177 of the firms offered financial planning services
- 77 IAs solely acted as solicitors for other advisers
- 24 of the firms audited payed solicitors for referrals
- Most exams were conducted remotely
The chart below depicts the percentage of RIA firms that had at least one regulatory deficiency from 2007 to 2021 across this year’s ten most common categories:
Source: 2007, 2009, 2011, 2013, 2015, 2017, 2019, and 2021 NASAA Investment Adviser Coordinated Examinations Reports. Note that some past reports do not contain all categories as depicted (e.g. cybersecurity prior to 2017, etc).
As shown above, the top five categories for regulatory deficiencies in the newly released 2021 report are:
- Registration (44% of firms with AUM)
- Books and Records (41.75% of firms with AUM)
- Contracts (30.5% of firms with AUM)
- Supervision and Compliance (29.5% of firms with AUM)
- Advertising (19.7% of firms with AUM)
The top regulatory trouble areas for 2021 somewhat mirror the 2019 results however, there is a decline in deficiencies across each regulatory area with the exceptions of compliance and supervision, advertising and custody. In 2021 29.5% of firms examined had a compliance and supervision-related regulatory deficiency compared to 16.5% of firms in 2019. Compliance and supervision deficiencies reported in 2021 represent the largest deficiency category increase compared to 2019. In addition, a new deficiency category, Senior/Vulnerable Persons, with just over 15% of exams noting at least one deficiency in the category of US investment advisers with AUM greater than 0.
Be sure to check back soon for more detailed information as we will be breaking down each compliance category with additional blog posts in the coming weeks.