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 unethical practices focusing on contract-related issues and the need to establish a culture of compliance.
The most recent 2015 NASAA investment adviser examination report revealed that investment activities-related compliance deficiencies are once again a top area of trouble for investment advisory firms. Of the 1,170 investment advisory firms examined, approximately 5% of all RIA firm audits resulted in at least one investment activities-related deficiency. This demonstrates a slight decrease compares to the 7.1% figure reported in the 2013 NASAA investment adviser examination report. However, the 2015 report’s 5% figure is still a bit higher than the 3.9% figure reported in the 2011 NASAA investment adviser report.
The table below highlights the changes in deficiency frequency beginning with the 2007 to the most recent 2015 study:
The details of investment activities-related deficiencies were not specified in the 2015 report. However, according to the 2013 report, 6.6% of firms with less than $30 million in regulatory assets under management (AUM) had investment activities-related deficiencies, compared to 7.8% of investment advisory firms with more than $30 million in AUM. Around 10% of RIA firms audited for the first time in 2013 had investment activities-related deficiencies compared to approximately 5% of firms that had been examined previously.
While NASAA did not rank the top investment activities-related deficiencies in the 2015 report, it did previously rank the top deficiencies in its 2013 report. In 2013, the top investment activities issues were:
- Disclosure of soft dollars (19.8%)
- Inconsistent activity with client’s investment policy or contract (18.5%)
- Unsuitable recommendations (13.6%)
- Inconsistent activity with adviser’s stated philosophy or brochure (9.9%)
- Unauthorized discretion (6.2%)
Given the increase in investment activities-related deficiencies from 2011 to 2015, it is evident that RIA firms need to take a step back and ensure they are meeting the requirements to stay in compliance with the relevant state and SEC statutes. In the 2013 report’s suggest best practices, NASAA strongly recommends that firms “disclose soft dollars or benefits received.” As RIA compliance consultants, we encourage the Chief Compliance Officer (CCO) of every investment advisory firm to do the following:
- Ensure that any soft dollars or benefits received are properly disclosed. Failure to disclose this significant and common conflict of interest can result in serious regulatory issues.
- Review the firm’s Form ADV and all client investment policies and/or contracts to ensure that the service being provided to each client matches what has been articulated.
- Before investment discretion is exercised on any client account, check to ensure proper discretionary authority is on file.