In 2013, coordinated state exams conducted by members of the North American Securities Administration Association (NASAA) uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories. Last week we discussed the deficiencies in custody, specifically in direct fee deduction, invoicing, and safekeeping.
In this week’s installment we’ll cover another common RIA compliance deficiency category: Financials. The 2013 NASAA investment adviser examination report contains results from 1,130 investment advisory firms examined. In the financials category, of all RIA firms examined, 13.0% of audits noted at least one deficiency. This is a slight decrease compared to 19.8% of firms examined in 2011 which had at least one financials-related compliance deficiency according to the 2011 NASAA investment advisor report.
According to the 2013 report, 15.1% of firms with greater than $30 million in assets under management (AUM) had financials-related deficiencies, compared to 10.6% of investment advisory firms with less than $30 million in AUM. Just under 20% of RIA firms examined for the first time had financials-related deficiencies compared to around 15% of firms that had previously been audited.
As previously stated, 13.0% of investment advisory firms examined according to the 2013 NASAA report had financials-related deficiencies. The top financials-related deficiencies in 2013 were:
- Inadequate net worth (for discretion) (15.9%)
- Poor financial condition (11.8%)
- Commingling IA records with outside business or personal accounts (7.6%)
- Inadequate net worth (for custody) (7.1%)
- Inadequate net worth (normal) (6.5%)
In 2011, the top financials-related RIA regulatory compliance deficiencies were:
- Inaccurate financials (~34%)
- Other: not GAAP, commingling records, CPA independence (~25%)
- Insufficient net worth (~14%)
- Inaccurate net worth (~12%)
- Poor financial condition (~9%)
Although the percentage of RIA firms with compliance deficiencies in financials has decreased from 2011 to 2013, investment advisory firms need to remain focused on staying in compliance with the relevant state or SEC statutes. As RIA compliance consultants, we encourage the Chief Compliance Officer (CCO) of the investment advisory firm to follow NASAA’s guide to ensure the firm is keeping accurate financials, filing financials timely with the jurisdiction, and maintaining a surety bond if required.