NASAA Sweep Identifies Most Common Problems With Investment Advisers

State Securities Regulators Propose Best Practices to Help Advisers Develop Compliance Practices and Procedures

SCOTTSDALE, ARIZONA (October 1, 2004)– The North American Securities Administrators Association (NASAA) at its annual conference here today announced a series of recommended best practices that investment advisers should consider in order to improve their compliance practices and procedures. 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, Canada, and Mexico.

NASAA Investment Adviser Section Chair and Wisconsin Securities Administrator Patricia Struck said the best practices were developed after a nationwide sweep of investment advisers by state examiners in 26 states revealed a significant number of problem areas. Struck said 257 examinations of investment advisers were conducted between March 2003 and May 2003. Of these exams, 200 revealed at least one deficiency.

Overall, the examinations found 588 deficiencies in 15 compliance areas. The greatest number of deficiencies identified in the sweep involved registration, followed by contracts, books and records, financial materials, investment activities and advertising.

The two most common registration deficiencies involved inaccurate disclosures on the Form ADV and failing to annually offer an updated Form ADV to clients. In the area of contracts, the most common deficiencies concerned the failure to maintain contracts or to disclose advisory fees. The most common deficiencies found in the area of books and records focused primarily on the failure of advisers to maintain complaint or litigation files.

Examiners found deficiencies among advisers who failed to prepare financial statements or to maintain sufficient net capital. Advisers also sometimes failed to maintain suitability information about their clients. The sweep also found problems with inaccurate and misleading performance reports, inaccurate websites, and failure to maintain advertising files.

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

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

“We developed these best practices in order to help regulators and advisers better understand compliance challenges,” Struck said. “This information can be used to help advisers develop compliance programs that will minimize the potential for regulatory violations. This, in turn, will build public trust in their activities.”

Download IA Sweep 2003

For More Information:
Bob Webster, Director of Communications
202-737-0900

2004 Headlines, Newsroom