Coordinated state exams conducted by members of the North American Securities Administration Association (NASAA) in 2015 uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories. Previously, we discussed the most common regulatory compliance deficiencies related to pooled investment vehicles focusing on suitability, custody, and independent audit issues.
The most recent 2015 NASAA investment adviser examination report revealed that unethical practices are once again a top category for regulatory compliance deficiencies. Of the 1,170 investment advisory firms examined, around 6% of all RIA firm audits resulted in at least one unethical practices-related deficiency. This mirrors the 6.2% figure reported in the 2013 NASAA investment adviser examination report. This figure is also particularly notable given that unethical practices-related deficiencies were found in 36.8% of the 825 state-registered RIA firms audited as part of the 2011 NASAA investment adviser report.
However, the comparison to 2011 examination results may not be an “apples to apples” comparison as it appears that NASAA re-categorized a number of items beginning in its 2013 report that were previously categorized under the unethical practices category. In particular, beginning in its 2013 report, NASAA introduced the contracts-related deficiency category which captured a number of the deficiencies that were previously listed in the 2011 report under the unethical practices-related deficiency category. The table below highlights the changes in deficiency frequency beginning with the 2007 to the most recent 2015 study:
The details of unethical practices-related deficiencies were not specified in the 2015 report. However, according to the 2013 report, 6.1% of firms with less than $30 million in regulatory assets under management (AUM) had unethical practices-related deficiencies, compared to 6.6% of investment advisory firms with more than $30 million in AUM. Around 6% of RIA firms audited for the first time in 2013 had unethical practices-related deficiencies compared to around 4% of firms that had been examined previously.
While NASAA did not rank the top unethical business compliance deficiencies in its 2013 or 2015 reports, it did previously rank the top deficiencies in its 2011 report. In 2011, the top unethical practices issues were:
- Contract: conflict with Form ADV, not updated, etc. (~29%)
- Contract: none or missing (~17%)
- Contract: hedge clause (~6%)
Even though there was an apparent decrease in regulatory compliance deficiencies related to unethical practices from 2011 to 2015, as RIA compliance consultants, we still advise that RIA firms remain vigilant on this topic. In particular, we recommend that the Chief Compliance Officer (CCO) of every investment adviser firm take a step back at a high level and ensure that the proper culture of compliance has been established.