In 2015, members of the North American Securities Administration Association (NASAA) performed coordinated state exams in which examiners uncovered the top registered investment adviser (RIA) compliance deficiencies in 42 jurisdictions. In total, 1,170 examinations were conducted and 4,983 deficiencies were reported. Previously, we discussed the most common regulatory compliance deficiencies related to RIA firms acting as solicitors focusing particularly on proper disclosure to prospective clients.
In this latest update, we once again focus on solicitor-related regulatory compliance deficiencies. It is a common practice for an RIA firm to use a third party solicitor in order to attract clients. When utilizing a solicitor, firms must remain in compliance with the relevant SEC and state regulations. In the most recent 2015 investment adviser examination report, NASAA noted that 15.0% of all RIA firms using third party solicitors had at least one deficiency as it relates to paying solicitors for referrals. This is a significant decrease from the 2013 report which noted 25.0% of advisors utilizing solicitors had solicitor-related deficiencies. The table below highlights the changes in deficiency frequency beginning with the 2011 to the most recent 2015 study:
In 2015, the top deficiencies as it relates to paying solicitors were:
- Solicitor not providing its solicitor disclosure document to prospects (16.7%)
- Solicitor disclosure document: No written document (16.7%)
- Solicitor agreement: Compensation arrangement (16.7)
- Solicitor agreement: No written agreement with each solicitor (16.7%)
- Solicitor disclosure document: Clause for any additional advisory fees charged to compensate the solicitor (8.3%)
In 2013, the top deficiencies as it relates to paying solicitors were:
- Solicitor agreement: No written agreement with each solicitor (17.4%)
- Solicitor not providing the adviser’s Form ADV Part 2/disclosure brochure to prospects (8.7%)
- Solicitor not providing its solicitor disclosure document to prospects (8.7%)
- Solicitor disclosure document: Terms and description of solicitor’s compensation (8.7%)
- Solicitor disclosure document: No written document (8.7%)
It should also be noted that the 2011 NASAA exam report drew attention to the large number of regulatory deficiencies related to RIA firms not properly disclosing all of the firm’s solicitors.
As RIA compliance consultants, we continue to see more investment advisory firms consider acting as or utilizing the services of a third party solicitor. When considering a solicitor relationship, there are clear established guidelines related to proper disclosure to the prospective client and documentation of the financial arrangement that need to be followed. We strongly encourage the Chief Compliance Officer (CCO) of each RIA firm involved in a solicitor relationship to ensure that none of the frequent compliance issues related to the use of solicitors noted above are present. When utilizing a third party solicitor, it is the responsibility of the firm paying the solicitor to ensure that the solicitor is being properly supervised and that all relevant regulatory requirements are being met.