Nearly 59% of state-registered investment advisors don’t have policies or procedures in place to address financial exploitation of seniors or vulnerable persons, state regulators found based on 1,206 advisor exams across the country earlier this year.
“The results of this multi-state coordinated initiative show that investment advisers must make improvements in recognizing and reporting cases of suspected abuse,” Lisa A. Hopkins, president of the North American Securities Administrators Association (NASAA), said in a prepared statement yesterday. “Our hope is that this data will foster greater and earlier detection and reporting of suspected financial exploitation of older Americans.”
The exam results indicate advisors “must add policies and procedures to protect seniors and vulnerable persons which should include training of personnel,” the report said.
State regulators conducted the coordinated exams in 42 U.S. jurisdictions between January and July. Of those examined, some 68% were one-person firms and 289 were being examined for the firt time, NASAA said.
State regulators found that 44% of advisors had registration deficiencies, 41.7% had books and records deficiencies and 30.5% had contracts deficiencies. Gaps in supervision and compliance (29.5%), as well as advertising (19.7%) rounded out the top five leading areas of advisor deficiencies.
Deficiencies related to cybersecurity significantly declined to 5.3% in 2021 from 26% in 2019, the last time the examinations were conducted.
“I believe the investment adviser industry is getting the message of how important cybersecurity is and is starting to implement policies and practices as well as taking advantage of the free cybersecurity checklist offered by NASAA to help assess their cybersecurity practices,” Michael Huggs, Mississippi Securities Division director, said in a prepared statement. “Cybersecurity has been a priority for NASAA, and we are pleased to see the decrease in deficiencies in this category."
State securities regulators have regulatory oversight responsibility for investment advisors with assets under management of $100 million. Of the asset-managing investment advisers included in this year’s coordinated examinations, 67% had assets under management between of $30 million and $100 million and 33% had assets under management of less than $30 million.
State securities examiners do sweep exams every two years and report the results voluntarily to NASAA's Investment Adviser Operations Project Group.
NASAA recommended the following "best practices" for advisors:
• Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information. Some 20.5% of advisors had discrepancies between their Form ADV Part 1 and 2, examiners found.
• Review and update all contracts. Regulators found that 20.5% of advisors did not collect client suitability information.
• 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 business continuity plan and information security policies/procedures.
• Prepare and distribute a privacy policy initially and annually. Be aware of confidential information transmitted via unsecure means.
• Keep accurate and current financials. File timely with the jurisdiction. Maintain a surety bond if required.
• Calculate and document fees correctly in accordance with contracts and ADV.
• Review all advertisements, including website and social media for accuracy.
• Implement appropriate custody safeguards, especially for direct fee deduction. Prepare and send appropriate fee invoices to clients.