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 investment activities focusing on proper disclosure of soft dollars, inconsistent investment activity, and unsuitable recommendations.
In this latest update, we focus on solicitor-related regulatory compliance deficiencies. It is a common practice for an RIA firm to act as a solicitor for a third party firm in order to help that third party firm attract clients. When acting as 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 5.7% of all RIA firms that act as a solicitor had at least one deficiency as it relates to acting as a solicitor. This is a significant decrease from the 2013 report which noted 24.1% of advisors that acted as solicitors having 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 solicitor-related deficiencies for firms acting as solicitors were:
- Solicitor not providing its solicitor disclosure document to prospects (37.5%)
- Solicitor not providing the third party adviser’s Form ADV Part 2/disclosure brochure to prospects (25.0%)
- Solicitor disclosure document: Name of the third party adviser (25.0%)
- Solicitor disclosure document: No written document (12.5%)
In 2013, the top solicitor-related deficiencies for firms acting as solicitors were:
- Solicitor agreement: No written agreement with third party adviser (17.9%)
- Solicitor agreement: Description of solicitor’s activities (14.3%)
- Solicitor agreement: Compensation arrangement (10.7%)
- Solicitor not providing the third party adviser’s Form ADV Part 2/disclosure brochure to prospects (7.1%)
- Solicitor agreement: Provision requiring solicitor to deliver third party adviser’s disclosure brochure (7.1%)
Similarly, in the 2011 NASAA report, NASAA noted that one of the most common deficiencies for firms acting as solicitors was failure to properly deliver the Form ADV Part 2/disclosure brochure to prospective clients.
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 listed above are present.