Last October, the North American Securities Administrators Association (“NASAA”) released its 2017 Investment Adviser Coordinated Examinations Report. The biannual report is a must read for registered investment adviser (“RIA”) firms. We recommend that the Chief Compliance Officer (“CCO”) of all investment advisory firms review the regulatory exam summary report to determine if any compliance changes need to be implemented at their firm.
In this week’s installment of our break-down of the new 2017 report, we focus on one of NASAA’s most common RIA regulatory compliance deficiency categories: supervision. Of the 1,227 investment advisory firms examined in 2017, 14.4% of all firms examined with regulatory assets under management (“AUM”) had at least one supervision-related regulatory deficiency. In total, there were 118 supervision-related deficiencies cited across all firms which were audited.
Compared to 2015, the frequency of supervision-related deficiencies has marginally decreased from 16.0% to 14.4%. Since 2007, the frequency of supervision-related deficiencies have varied quite dramatically. The table below highlights the changes over the last 10 years of reports:
In 2017, the top 5 supervision-related deficiencies were:
- Failure to follow compliance / supervisory procedures (34.7%)
- Other Issues: Personal trading review, identifying client “insiders”, remote office reviews, outsourced compliance functions (26.3%)
- Failure to periodically assess and update compliance / supervisory program (21.2%)
- Failure to have procedures to prevent the misuse of material non public information (UBP) (15.3%)
- Failure to avoid or mitigate conflicts of interest (2.5%)
In 2015, the top supervision-related deficiencies were:
- Failure to have procedures to prevent the misuse of material nonpublic information (38.9%)
- Failure to periodically assess and update compliance / supervisory program (31.0%)
- Failure to follow compliance / supervisory procedures (27.4%)
An important first supervision-related step for all investment advisory firms is to ensure that the firm has a written compliance and supervision procedures manual that is not only specific to the firm, but also regularly reviewed and updated. However, simply having a manual is not enough, especially as firms grow and expand across multiple branch offices, it becomes vitally important that the firm have the proper procedures and systems in place to ensure that all firm staff members are properly supervised. As RIA compliance consultants, we strongly encourage the CCO of the investment advisory firm to review all of the firm’s policies and procedures manual and to perform the proper testing to ensure the firm’s policies and procedures are working as envisioned.
Be sure to also check out our past blog post on the top investment adviser supervision compliance deficiencies from the 2015 NASAA report.
RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.