As state securities regulators prepare to assume increased regulatory oversight of investment advisors managing under $100 million in assets, the North American Securities Administrators Association (NASAA) Tuesday released an updated series of recommended best practices that investment advisors should consider to minimize the risk of regulatory violations.
The goal of this updated series of best practices, says Jack Herstein, NASAA president and assistant director of the Nebraska Banking and Finance Department, Bureau of Securities, is help investment advisors strengthen their internal compliance programs and improve the services they provide to clients. NASAA is an international organization devoted to investor protection.
Herstein says the best practices were developed from a series of coordinated examinations of investment advisors by 45 state and provincial securities examiners that revealed a number of significant problem areas. Examinations of 825 investment advisors conducted between Jan. 1 and June 30 uncovered 3,543 deficiencies in 13 compliance areas, compared to 1,887 deficiencies in 13 compliance areas identified in a similar 2009 coordinated examination of 458 investment advisors.
Conducted under the guidance of NASAA's Investment Adviser Operations Project Group, the exams indicated five categories with the greatest number of deficiencies: Registration, books and records, unethical business practices, supervision and advertising.
In addition, the examinations revealed that the other areas where investment advisors faced compliance challenges include: privacy, fees, custody, investment activities and solicitors. Among hedge fund advisors, the top deficiencies included valuation of holdings, cross trading, preferential treatment, registration-exemption issues, non-accredited investors issues and non-disclosed conflicts of interest.
Based on the 2011 exams, NASAA recommends the following "Best Practices:" 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; document all forwarded checks; prepare and maintain client profiles; and prepare a written compliance and supervisory procedures manual relevant to the type of business and include a business continuity plan.
Other NASAA recommendations include: 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 Web site and performance advertising, for accuracy; implement appropriate custody safeguards, if applicable; and review solicitor agreements, disclosure and delivery procedures.
Jim McConville