Gerald Rome Securities Commissioner. Gerald Rome Securities Commissioner.
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Colorado Division of SecuritiesDepartment of Regulatory Agencies
March 13, 2015
David B. SwaffordChief Examiner
Financial Planning Associationof Colorado
The Examination:To Fear Or Not to Fear
Gerald RomeSecurities Commissioner
The Examination:To Fear
Gerald RomeSecurities Commissioner
The Examination:Or Not To Fear
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination begins?
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
Licensing
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
Licensing, like Examinations is a
Process
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Process reconciles:ADV Part 1 A & B
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Process reconciles:ADV Part 1 A & BADV Part 2 A & B
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Process reconciles:ADV Part 1 A & BADV Part 2 A & B
Contracts (or offering Documents)
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Process reconciles:ADV Part 1 A & BADV Part 2 A & B
Contracts (or offering Documents)Interview
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:Selection
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:Selection
Notification
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:Selection
NotificationCollection and Analysis of Documents
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:Selection
NotificationCollection and Analysis of Documents
Close the Examination
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Selection:Risk Based and Cyclical
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Selection:Risk Based and Cyclical…..….and For Cause
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Notification:Letter and Phone call
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Notification:Letter and Phone call………..or We Show Up
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Collection and Analysis of Documents:Initial Document Request
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Collection and Analysis of Documents:Initial Document Request
An Interview
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Collection and Analysis of Documents:Initial Document Request
An InterviewFollow-up Document Requests
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Collection and Analysis of Documents:Initial Document Request
An InterviewFollow-up Document Requests
Follow-up Questions
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Close the Examination:Deficiency Letter with Instructions
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Close the Examination:Deficiency Letter with Instructions
Deficiency Letter with Agreed Upon Consequences
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
The Examination is a Process:
Close the Examination:Deficiency Letter with Instructions
Deficiency Letter with Agreed Upon ConsequencesReferral to Enforcement
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
What can you do to be prepared for when not if?
Gerald RomeSecurities Commissioner
NASAA 2013 Coordinated Investment Adviser Examinations
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
Investment Adviser Operations Project Group
NASAA Investment Adviser SectionOctober, 2013
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
NASAA’s Coordinated Exams Program is a biennial initiative conducted to identify common investment adviser deficiencies.
The data draws from a sample of state-level investment-adviser examinations, reported by states.
States report examinations on a voluntary basis.
The number and types of exams reported by each state varies year-to-year and is at the discretion of each state.
The goal of NASAA’s Coordinated Exam Initiative is to draw from sample data to identify common regulatory deficiencies and develop best practices to avoid regulatory violations
2013 Reported Examinations
1,130 advisers between Jan. 1, 2013 and June 30, 2013*
183 advisers (16.2%) were affiliated with a BD
126 advisers (11.2%) used or acted as solicitors
74 advisers (6.5%) managed pooled investments
712 advisers (63%) had one IAR only
65 advisers (5.8%) had only financial planning clients
411 advisers (36.8%) had AUM >$30MM
* In some instances, exams conducted in late Summer and Fall of 2012 were counted if the state had performed the majority of their exams prior to January 1, 2013.
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
Who Conducted the Exams?
Securities examiners from 44 jurisdictions including Alberta, British Columbia, Ontario and Quebec, Canada
What Was Found?
6,482 deficiencies in 20 categories
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
• Books and Records• Financials• Registration
– ADV, U4, Firm, IARs, ADV Delivery
• Fees• Contracts• Advertising
– Ads, Websites, Business Cards, Seminars,
• Privacy• Supervisory/
Compliance– Supervisory
Procedures, Compliance Procedures
• Investment Activities– Adherence to
Investment Policy, Fairness, Conflicts
• Performance Advertising
• Performance Reporting
• Custody• Acting as Solicitor• Paying Solicitors• Pooled Investment
Vehicles (Hedge Fund)
• Custodial Arrangements
• Unethical Practices• Brochure Delivery• Financial Planning• IA/BD Crossover
The Categories
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
Percentage of Exams With Category Deficiencies
All Advisers with AUM > 0
% of Exams noting at least one deficiency in the category
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
Books and Records Deficiencies (1,783)
No WSP/Compliance Manual
Advertising File
Order Memorandum
General/Aux Ledgers
Changes to Disclosure Brochure
Disclosure Brochure
WSP-Business Continuity Plan
Trial Balance/Fin'l Statements
Missing Client Contracts
Suitability Documentation
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
2.9%
3.0%
3.1%
3.2%
3.2%
4.6%
4.9%
7.1%
8.5%
10.8% 68.2% of all adviserswith AUM > 0
Form ADV - Discretion
Form ADV - Overstated AUM
Form ADV - Affiliations
Form ADV - Personnel
Form ADV - Conflicts of interest
Timely filing of amendments
Form ADV - Business description
Form ADV - Services provided
Form ADV - Fee structure
Form ADV - Part 1 vs. Part 2
-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
2.9%
3.6%
4.0%
4.8%
4.8%
6.9%
7.5%
9.3%
9.5%
13.5%
Registrations Deficiencies (1,211)
58.5% of all adviserswith AUM > 0
Contracts Deficiencies (791)
44.0% of all adviserswith AUM > 0
Refund of pre-paid fees
Capital gains compensation
Services
Discretionary authority
Not updated
48 hour rescission clause
In writing
Hedge clauses
Fee formula
Fee
Not properly executed
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
4.3%
4.3%
4.6%
5.1%
5.3%
5.4%
6.4%
9.0%
10.4%
10.5%
10.9%
Suggested Best Practices
Prepare and maintain all required records, including financial records. Back-up electronic data and protect records. Document checks forwarded.
Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.
Review and update all contracts.
Prepare and distribute a privacy policy initially and annually.
Deliver disclosure brochure initially and annually as required.
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
Suggested Best Practices
Review all advertisements, including website and performance advertising, for accuracy.
Calculate and document fees correctly in accordance with contractsand ADV.
Prepare and maintain written compliance and supervisory procedures relevant to the type of business to include business continuity plan. Assess and update periodically.
Implement appropriate custody safeguards, as applicable. Pay close attention to direct fee deduction invoices.
WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002
Suggested Best Practices
Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
Make sure client’s investment policy and suitability information are current.
Disclose soft dollars or benefits received.
Prepare and maintain current client profiles.
Review solicitor agreements, disclosure, and delivery procedures.
The Examination:To Fear Or Not To Fear
Bottom Line:
Once a year (Annual Updating Amendment) look at your ADV Part 1 A&B, compare it to your
ADV Part 2 A & B, compare it to yourContracts (or offering Documents), and compare it to
what you actually do.
60% to 75% of deficiencies on an Examination
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
Then check the Colorado Division of Securities website for your books and records requirements
Gerald RomeSecurities Commissioner
The Examination:Or Not To Fear
Gerald RomeSecurities Commissioner
The Examination:To Fear
Gerald RomeSecurities Commissioner
The Examination:To Fear Or Not To Fear
Resources:
Colorado Division of Securities: www.dora.colorado.gov.dos Colorado Division of Securities IA Books & Records Requirements:
51-4.6(IA)NASAA : www.nasaa.org
U.S. Securities and Exchange Commission: www.sec.govInvestment Adviser Public Disclosure (IAPD): www.adviserinfo.sec.gov
Financial Industry Regulatory Authority: www.finra.org
David B. Swafford: david.swafford@state.co.us303-894-2835
Gerald RomeSecurities Commissioner
Colorado Division of SecuritiesDepartment of Regulatory Agencies
On behalf of Commissioner Rome and the Department of Regulatory Agencies, Division of Securities,
we
Thank You!
Gerald RomeSecurities Commissioner
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