Coordinated state exams conducted by members of the North American Securities Administration Association (NASAA) for 2015 uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories. Recently, we discussed deficiencies related to supervision including failure to have procedures to prevent the misuse of material nonpublic information, failure to periodically assess and update the compliance program, and failure to follow compliance procedures.
In this week’s installment, we tackle another common investment adviser regulatory compliance deficiency category: financials. The latest 2015 NASAA report reveals that of the 1,170 investment advisory firms examined in 2015, 11.9% of all firms with regulatory assets under management (AUM) examined had at least one financials-related regulatory deficiency. This figure has slightly decreased compared to the 13.0% cited in the 2013 report and has significantly decreased compared to the 19.8% reported in the 2011 NASAA investment adviser examination report. The table below depicts the deficiency frequency over the years:
According to the 2015 report, about 13% of RIA firms with AUM less than $30 million had at least one such deficiency. This is only slightly higher than the roughly 11% of RIA firms with AUM of less than $30 million. Also notable, roughly 12% of firms with only one investment adviser representative (IAR) had at least one financials-related deficiency compared to around 11% of firms with more than one IAR that had at least one such deficiency.
The Chief Compliance Officer (CCO) of investment advisory firms of all sizes should be aware of the top financials-related compliance deficiencies. In 2015, the top issues related to financial matters were:
- Inadequate net worth (for discretion) (34.9%)
- Commingling investment adviser records with outside business or personal accounts (13.2%)
- Inadequate net worth (for custody) (12.3%)
- Inadequate net worth (no discretion & no custody) (10.4%)
- Insufficient bond (9.4%)
In 2013, the top issues were:
- Inadequate net worth (for discretion) (15.9%)
- Poor financial condition (11.8%)
- Commingling investment adviser records with outside business or personal accounts (7.6%)
- Inadequate net worth (for custody) (7.1%)
- Inadequate net worth (normal) (6.5%)
Although the percentage of RIA firms with financials-related compliance deficiencies has consistently decreased in recent years, investment advisory firms need to remain focused on staying in compliance with the relevant state or SEC statutes. In particular, as RIA compliance consultants, we recommend that firms keep regularly updated financial records that clearly reflect sufficient net worth values when required. In addition, we encourage all investment advisory firms to follow NASAA’s guidance in regards to keeping accurate financials, filing financials timely with the jurisdiction, and maintaining a surety bond if required.