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. Last week, we discussed the most common types of RIA compliance deficiencies related to financials including a firm having inadequate net worth or commingling investment adviser financial records with an outside business.
The most recent 2015 NASAA investment adviser examination report revealed a number of common deficiencies as it relates to investment advisory firms advising a pooled investment vehicle (PIV). Pooled investment vehicles may include a hedge fund, private equity fund, or other type of vehicle. When comparing deficiencies of advisory firms that manage a PIV compared to firm that do not, the 2015 results show that advisers to private funds tend to have higher frequency of regulatory deficiencies in the books and records, registration, privacy, custody, and financials categories. For example, approximately 82% of RIA firms that advise a pooled investment vehicle had at least one books and records-related compliance deficiency compared to roughly 73% of firms that do not advise such investments.
In total, 23.7% of all RIA firms that advise a private fund or pooled investment vehicle had at least one deficiency as it relates to the pooled investment. This figure has decreased since the 26.0% reported in 2013. The table depicts the change in deficiency frequency over the past two reports:
The top pooled investment-related deficiencies in 2015 were:
- Suitability questionnaires for each investor (21%)
- Custody created by adviser serving as a general partner/manager member of the fund (21%)
- Independent CPA performs annual audit (if required) (14%)
- Fund fees not consistent with subscription agreement and offering document (14%)
- Performance fees miscalculated/inaccurate (overcharged) (7%)
The top pooled investment-related deficiencies in 2013 were:
- Custody as general partner of the fund (20.6%)
- Independent CPA performs annual audit (8.8%)
- Violation of offering exemption (8.8%)
- Suitability questionnaires for each investor (8.8%)
- Offering document doesn’t contain adequate advisers disclosure information (5.9%)
As RIA compliance consultants, we strongly encourage the Chief Compliance Officer (CCO) of each investment advisory firm that advises pooled investments to review the latest 2015 audit report to ensure that all common compliance deficiency areas are being properly addressed. In particular, investment advisers that advise private funds need to be aware of any potential custody issues that can trigger additional regulatory compliance requirements.