NASAA Sweep Identifies Investment Adviser Problems

State Securities Regulators Also Propose Best Practices

MINNEAPOLIS, MINNESOTA (September 13, 2005) – The North American Securities Administrators Association (NASAA) at its annual conference here today announced a series of recommended best practices for investment advisers to consider in order to improve their compliance practices and procedures.

NASAA President Patricia D. Struck said the best practices were developed after a nationwide sweep of investment advisers by state and provincial examiners in 33 NASAA jurisdictions in the United States and Canada revealed a significant number of problem areas.

NASAA Investment Adviser Section Chair and District of Columbia Securities Bureau Director Theodore A. Miles said 367 examinations of investment advisers were conducted between March 2005 and May 2005. Of these exams, 323 revealed at least one deficiency.

Overall, the examinations found 2,068 deficiencies in 18 compliance areas, compared with 588 deficiencies in 15 compliance areas in the previous sweep, conducted in 2003. The greatest number of deficiencies identified in the 2005 sweep involved registration, followed by contracts, supervision, privacy, and books and records. Miles said the top 10 deficiencies remained the same between the two sweeps, although the order changed. Most notably, supervision deficiencies ranked 10th in 2003 and third in 2005. The exams conducted in 2005 also found a higher percentage of advisers with deficiencies in each of the top 10 categories than in 2003.

Complete results of the sweep are available here.

The three most common registration deficiencies in 2005 involved inaccurate disclosures on the Form ADV, failing to provide or offer to provide an updated Form ADV to clients, and filing to provide this disclosure to clients and prospective clients in a timely manner. In the area of contracts, the most common deficiencies concerned the failure to maintain contracts, failing to disclose the terms of the contract, and failing to disclose advisory fees.

The most common deficiencies found in the area of supervision focused primarily on failure to have written supervisory procedures. Examiners found deficiencies among advisers who failed to create a privacy policy and failed to provide privacy notices initially and annually. The top problems in the books and record area involved a failure to maintain ledgers, complaint files and journals. Additional deficiencies identified by the sweep included: financial matters, investment activities, fees, advertising, and custody issues.

Based on the sweep results, NASAA recommended a series of 10 “Best Practices” to help advisers develop compliance practices and procedures. The best practices include:

1) Review and revise Form ADV and the disclosure brochure annually to reflect current and accurate information.
2) Review and update all advisory contracts.
3) Prepare a written supervisory procedures manual relevant to the type of business.
4) Prepare and distribute a privacy policy initially and annually.
5) Prepare and maintain all required records.
6) Maintain a surety bond, if required.
7) Prepare and maintain client profiles.
8) Calculate and document fees correctly.
9) Review and revise all advertisements, including performance and advertisements and websites.
10) Implement appropriate custody safeguards, if applicable.

“These recommended best practices are designed to promote the better understanding of compliance challenges among regulators and advisers,” Struck said. “With this information, advisers can develop compliance programs to reduce the potential for regulatory violations and, in turn, build investor confidence in their activities.”

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, the provinces and territories of Canada, and Mexico.

For more information
Bob Webster, Director of Communications
202-737-0900

2005 Headlines, Newsroom