Books and record deficiencies led the list of problems uncovered by state securities regulators during 1,227 state examinations of investment advisors during 2017, according to a report released by the North American Securities Administrators Association (NASAA) at its 2018 Public Policy Roundtable in Washington, D.C.
Books and records deficiencies were found in 64.6 percent of inspections, followed by deficiencies in registration (54.3 percent), contracts (45.4 percent), fees (27.2 percent) and custody (27.2 percent), according to reports by state securities regulators from 38 jurisdictions on exams performed from January to June 2017, NASAA said.
The vast majority of state investment advisors are state-licensed investment advisor representatives (15,395), followed by state-licensed insurance agents (6,521) and registered representatives (2,997), NASAA said.
To step up oversight, NASAA groups are working to develop new tools for examiners that will zero in on advisor businesses for better assessment of unethical business practices, fiduciary duty and advertising. There is also a focus on the need for more guidance regarding supervision, compliance, ethics and cybersecurity, the organization said. “The Project Group will continue to work on these projects during 2018 with the goal to improve regulation of the state-registered investment adviser industry,” NASAA said in a release.
Portfolio management is the primary service offered by 82 percent of state investment advisors and main street investors are their focus, said NASAA. State advisors also offered financial planning (63 percent), advisor selection (27 percent) and business/private investment vehicles (25 percent).
Innovative service and fee models are emerging, but most state advisers still charge their clients a fixed percentage of the AUM as their fee, NASAA said. Over half also charge clients on an hourly basis for core or supplementary advisory services, while few charge a commission or a fixed fee, the association said.
NASAA announced late last year that state regulators found almost 700 cybersecurity-related deficiencies during 1,200 examinations of state-registered investment advisors, with the top five issues being no or inadequate cybersecurity insurance, no testing for potential cybersecurity vulnerabilities, inadequate procedures with securing or limiting access to devices, failure to retain an IT or technology consultant, and inadequate procedures related to hardware/software upgrades.