NASAA Examination Sweep Results

The United States members of North American Securities Administration Association (NASAA) completed 683 routine examinations of state-covered investment advisers from January 1 -July 31, 2023. To review the results from a proper perspective, 72% of the of the advisers had one Investment Adviser Representative (IAR).  580 of the locations had assets under management of $50 million or less, provided financial planning, acted as a solicitor, were a new RIA, or were out of business. The report discussed typical examination violations found in the following categories:

Registration

• 22.75% examinations had Registration violations
• Form ADV – Inaccuracies and inconsistencies between ADV Parts 1 and Part 2
• Form U4 – Inaccuracies and undisclosed businesses

Books & Records

• 17.09% examinations had Books and Records violations
• Client suitability information
• ADV Part 2 (Brochures) amendments and revisions
• All written client agreements

Supervision & Compliance

• 16.35% examinations had Supervision and Compliance violations
• No/inadequate protection of vulnerable clients
• Not current/up-to-date
• No/inadequate maintenance supervisory/compliance procedures
• No/inadequate Business Continuity Plan

Client Contracts

• 12.38% examinations had Client Contract violations
• Not properly executed (signatures and dates)
• Contains impermissible hedge clause(s)
• Not in writing
• Fee formula/fee is not clearly stated

Fees

• 6.40% examinations had Fee violations
• Fee charged doesn’t match contract or Form ADV
• Charging miscalculated fees

Advertising (found in websites, business cards and stationary, social networking sites and newsletters)

• 2.54% examinations had Advertising violations
• Untrue or misleading statements or omissions-qualifications, services or fees
• Misuse of “RIA” or “IAR”
• Insufficient website disclaimer

Other violations occurring with higher frequency

• Lack of written information regarding the firm’s information security policy
• Failure to evidence the annual delivery of the firm’s privacy policy

NASAA offered the following recommendations:

• Review and revise Form ADV and disclosure brochure (at least) annually to reflect current and accurate information.
• Review and update all contracts. Be aware of e-communications hedge clauses.
• Prepare and maintain all required records, including financial records. Back-up electronic data and protect records. Document checks forwarded.
• Prepare and maintain client profiles or other client suitability information. Maintain due diligence file for recommended products or strategy.
• Prepare a written compliance and supervisory procedures manual relevant to the type of business to include the Business Continuity Plan and information security policies/procedures. The policies/procedures should be written, identify persons(s) responsible; identify the area of responsibility; identify how often a review occurs and how the review is documented.

Oyster Consulting’s compliance experts have extensive experience in assisting both state- and SEC-registered investment advisers navigate the requirements of creating and enforcing written supervisory procedures, conducting testing and providing training to sales and operations staff.

Today’s industry demands a modern, efficient compliance program to protect your firm and clients. Oyster Solutions compliance management software provides visibility and tracking for compliance tasks, procedures, trade monitoring, portfolio monitoring, suitability and risk scoring.  Oyster Solutions automated workflows ensure your policies and procedures are being followed and enforced.