2009 COORDINATED INVESTMENT ADVISER EXAMS North American Securities Administrators Association
Feb 09, 2016
2009 COORDINATED INVESTMENT ADVISER EXAMS
North American Securities Administrators Association
Who Was Examined?
458 State-level advisers, of which...
100 advisers (21.8%) were affiliated with a BD
76 advisers (16.6%) used or acted as solicitors
42 advisers (9.2%) managed pooled investments
Who Conducted the Exams?
Securities examiners from 35 jurisdictions including British Columbia, Ontario, Nova Scotia, Quebec, and Saskatchewan, Canada
What Was Found?
1887 total deficiencies in 13 categories
The Categories
• Books and Records• Financials• Registration
– ADV, U4, Firm, IARs, ADV Delivery
• Fees• Advertising
– Ads, Websites, Business Cards, Seminars,
• Privacy• Supervisory/Compliance
– Supervisory Procedures, Compliance Procedures, Policies
• Investment Activities– Adherence to Investment
Policy, Fairness, Conflicts
• Performance Reporting• Custody• Solicitors• Pooled Investment
Vehicles (Hedge Fund)• Unethical Business
Practices– 21 from NASAA Model
Rule 120(a)(4)-1• Unsuitable
Recommendations• Contracts• Unauthorized trades• Excessive Fees• Borrowing from client• Etc...
1
7.5
47
IARs Assets UnderManagement
(millions)
Accounts
The "Average" Adviser
Averages do not include advisers which had “0” Accounts and “0” Assets Under Management because they were:
Financial Planners Only
Solicitors Only
New Advisers
Averages do not include Canadian Provinces due to no maximum Assets Under Management
2009 Deficiencies by Category Exams with at Least One Deficiency in the Category
3.9%
12.2%
15.9%16.6%16.8%18.6%
27.7%
37.8%
41.7%
60.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Regis
tratio
n
Books
& R
ecord
s
Uneth
ical
Pra
ctic
es
Super
visi
on
Finan
cials
Privac
y
Adver
tisin
gFee
s
Custo
dy
Inve
stm
ent A
ctiv
ities
Comparing 2009 and 2007 DeficienciesExams with at Least One Deficiency in the Category
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
Regis
tratio
n
Books
& R
ecor
ds
Uneth
ical
Pra
ctic
es
Super
visi
on
Fina
ncia
ls
Privac
y
Adver
tisin
gFe
es
Custo
dy
Inve
stm
ent A
ctiv
ities
2009 2007
0%
10%
20%
30%
40%
50%
60%
70%
Registra
tion
Books & R
ecords
Unethical P
ractic
es
Supervis
ory
Financials
Privac
y
Advertis
ing
Fees
Custody
Inve
stment A
ctiviti
es
Independent IA (358)
BD Affiliated (100)
Comparison of Independent IA and BD Affiliated Advisers
Exams with at least One Deficiency in the Category
0%
10%
20%
30%
40%
50%
60%
70%
1 IAR (349)
>1 IAR (109)
Comparing Advisers with 1 IAR to Those with More than 1 IAR
Exams with at least One Deficiency in the Category
0%
10%
20%
30%
40%
50%
60%
70%
Non-Hedge Fund Advisers (416)
Hedge Fund + IA Business (25)
Hedge Fund Only (17)
Comparing Hedge Fund Advisers to Non-Hedge Fund Advisers
Exams with at least One Deficiency in the Category
Registration475 Deficiencies
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%
Other ADV Delivery
Unregistered IAR
Initial ADV Delivery
Business Descript
Affiliate Disclosure
Services Provided
Fee Structure
Annual ADV Offer
Assets Under Mgmt.
Other ADV
Inconsistency between Parts I and II
Updates to ADV not made timely
60% of all advisers had at least one deficiency.
Books and Records380 Deficiencies
0.00% 5.00% 10.00% 15.00% 20.00%
Bills, Receipts, Invoices
Cancelled Checks, Statements
Correspondence File
Advertising File
Cash - Securities Disburse. log
Complaint File
Journals - Ledgers
Trial Balance, Fin'l Stmts
Other B&R
Suitability Info
41.7% of all advisers had at least one deficiency.
Safeguarding Records and Data
Backup Data
Checks Forwarded Log
Unethical Practices291 Deficiencies
0.00% 5.00% 10.00% 15.00% 20.00%
Contract Non-assign
Other Unethical Practice
Contract-Recission Language
Contract-Refund of P'paid
Non-Public Info Policy
Contract-Not Executed
Qualifications, Svcs, Fees
Contract-Other
Contract-Hedge Clause
Contracts-None or Missing
37.8% of all advisers had at least one deficiency.
Other
Conflict with ADV
Not Updated
Unethical Business Practices 291 Deficiencies
• Advisory Contracts– 153 exams (33.4%) noted
at least one contract deficiency*
– 214 (73.5%) of the 291 UBP deficiencies
• Other Unethical Practices– 60 exams (13.1%) noted at
least one non-contract unethical practice deficiency*
– 77 (26.5%) of the 291 UBP deficiencies
173 exams (37.8%) noted at least one unethical business practice deficiency
* Some advisers had both contract and other unethical practice deficiencies
Two Types
0%
25%
50%
75%
Contracts Other UBP
37.8% of all advisers had at least one unethical
business practice deficiency
Unethical Business Practices
291 Total Deficiencies
No/Missing Contract: 26%
Hedge Clause: 17.8%
Other: 15.9% (info, not updated)
Not Executed: 7.5%
Pre-Paid Refund: 6.5%
Rescission: 5.6% (48hr lang.)
Non-Assignment: 5.1%
Fee Formula: 4.2%
Discretion: 3.3%
Term: 2.8%
Qualifications/Services: 23.4%
NPI Policy: 19.5%
Other: 14.3%
Conflicts: 11.7%
Excessive Fee: 5.2%
214 Contract Deficiencies
77 “Other” Deficiencies
Supervisory/Compliance140 Deficiencies
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Didn't FollowProcedures
Other
InadequateProcedures
No Procedures
27.7% of all advisers had at least one deficiency.
Personal Trades
Remote Location Supervision
Business Continuity
Financials122 Deficiencies
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Insufficient Bond
Poor Financial Condition
No Bank Reconciliations
Inaccurate Net Worth
Other
Insufficient Net Worth
Inaccurate Financials
Not GAAP
CPA Independence
Commingling Accts.
18.6% of all advisers had at least one deficiency.
Privacy115 Deficiencies
0.00% 10.00% 20.00% 30.00% 40.00%
Other
Deficient Policy
No InitialDelivery
No AnnualDelivery
No PrivacyPolicy
16.8% of all advisers had at least one deficiency.
Advertising114 Deficiencies
0.00% 10.00% 20.00% 30.00%
Seminar
Performance Ads
Ads -Correspondence
Other - Ads
Misuse of "RIA"
Business Card
Website
Services
Designations
Indexes
Regulator
“Gratuities”
16.6% of all advisers had at least one deficiency.
Fees107 Deficiencies
0.00% 5.00% 10.00% 15.00% 20.00% 25.00%
Different Fees - Same Service
Fee Invoices
Billing Errors
Fees vs ADV
Other - Fees
Fees vs. Contract
Fee Calculation
Undisclosed Fees
15.9% of all advisers had at least one deficiency.
Custody75 Deficiencies
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Trustee for Relative
Signatory
Physical Custody
General Power of Attorney
Non-disclosed Custody
General Partner
Trustee
Other - Custody
Inadvertent Custody
Direct Fee Deduction
>$500, >6 months fees
Annual Audit of PIV
Notice to Administrator
PIN to Client Account
12.2% of all advisers had at least one deficiency.
Investment Activities19 Deficiencies
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%
Soft Dollars
Conflicts withADV/Contract
Other
Cross-Trades
Aggregate Orders
Proxy Voting
3.9% of all advisers had at least one deficiency.
Solicitors28 Deficiencies
0.00% 10.00% 20.00% 30.00% 40.00%
No Screening
Other - Solicitor
ADV Delivery
IA-Solicitoragreement
SolictitorDisclosure
Undisclosed Solicitors
20 of 76 advisers (26.3%) who used solicitors or acted as solicitors had at least one deficiency.
0%
10%
20%
30%
40%
50%
Hedge Fund Deficiencies
Hedge Fund + IA Business (25)
Hedge Fund Only (17)
Comparing Hedge Fund Advisers
Exams with at least One Deficiency in the Category
10 of 25 (41.6%) of hedge fund advisers
who also had a regular IA practice had at least one deficiency in this
category.
1 of 17 (5.9%) of hedge fund advisers who had no other clients had at
least one deficiency in this category.
Hedge Funds13 Deficiencies
0.00% 15.00% 30.00% 45.00%
Non-disclosed Conflicts
Other - PIV
Registration-ExemptionIssues
Non-accredited InvestorIssues
Back-testing
Order Tickets
10 of 25 (41.6%) of hedge fund advisers who
also had a regular IA practice had at least one
deficiency in this category.
1 of 17 (5.9%) of hedge fund advisers who had no other clients had at least one deficiency in
this category.
Performance Reporting8 Deficiencies
0.00% 10.00% 20.00% 30.00% 40.00%
Other
InaccurateResults
MisleadingPresentation
Best Practices for Investment Advisers• Review and revise Form ADV and disclosure brochure annually
to reflect current and accurate information.• Review and update all contracts.• Prepare and maintain all required records, including financial
records. Back-up electronic data and protect records.• Prepare and maintain client profiles.• Prepare a written compliance and supervisory procedures manual
relevant to the type of business.• Prepare and distribute a privacy policy initially and annually.• Keep accurate financials. File timely with the jurisdiction.
Maintain surety bond if required• Calculate and document fees correctly in accordance with
contracts and ADV.• Review all advertisements, including website and performance
advertising, for accuracy.• Implement appropriate custody safeguards, if applicable.• Review solicitor agreements, disclosure, and delivery procedures.