2017 Investment Adviser Coordinated...
Transcript of 2017 Investment Adviser Coordinated...
2017 Investment Adviser Coordinated Exams
North American Securities Administrators AssociationThe information provided herein is for your convenience only, is illustrative, and is not intended as legal advice.
Exams Overview • 1227 routine investment adviser examinations
• January – June 2017
• 38 Jurisdictions including Ontario, Canada
• 946 Advisers had AUM > 0
• 336 had AUM > $30MM
• 610 had AUM < $30MM
• 331 first time examined by the state
• 535 were examined in last 5 years
Adviser Stats• 741 advisers had 1 IAR
• 220 advisers had 2 IARs
• 101 affiliated with a BD firm
• 74 advised a pooled investment vehicle
• 572 offered financial planning services
• 78 acted as solicitors for other advisers
• 27 payed solicitors for referrals
64.6%
54.3%
45.4%
27.2% 27.2%
23.4%20.8%
19.1%14.4%
14.1% 13.0%
7.4%5.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%Top Deficiency Categories
US Advisers with AUM > 0
Percent of exams noting at least one deficiency in the category
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2017 2015*Cybersecurity is a new category in 2017
Percent of exams noting at least one deficiency in the category
Comparison to 2015 US Advisers with AUM > 0
2.65%
2.80%
3.08%
3.08%
3.70%
3.98%
5.97%
8.01%
8.53%
9.00%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Journals
Inadequate businesscontinuity/succession planning
Check books, bank statements
Advertising file
Order memorandum
Disclosure Brochures
General and auxiliary ledgers
Written agreements (IA-Clientcontracts)
Trial balances, financial statements
Client suitability information
OtherNot updating WSPsTimely posting to financial recordsWSPs for Cybersecurity
2110 Deficiencies64.6% of US Advisers with AUMBooks and Records
4.8%
6.2%
6.5%
7.6%
7.6%
8.0%
12.3%
14.8%
0.0% 5.0% 10.0% 15.0%
Form ADV - Conflicts of interest
Form ADV - Services provided
Form ADV - Personnel
Form ADV - Business description
Timely filing of amendments
Form ADV - Fee structure
Other issues
Form ADV - Inconsistencies between Part 1and Part 2
Registration
OtherOutdated Info: Address, Contact, and Personnel InfoUndisclosed Judgements/Liens Outside Businesses
903 Deficiencies54.3% of US Advisers with AUM
4.59%
6.49%
6.76%
6.89%
8.11%
8.78%
8.92%
9.59%
10.41%
12.03%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
Services
Hedge clauses
Other state-specific requirements
Properly executed
Not updated
Capital gains compensation
Other issues
In writing
The fee formula
The fee
OtherOutdated accredited investordefinitionGoverning law issuesReferencing 1940 ActSEC Registration
740 Deficiencies45.4% of Advisers with AUM
Contracts
3.2%
6.8%
8.1%
19.4%
26.2%
29.4%
0.0% 10.0% 20.0% 30.0%
Charging on non-managed assets
Insufficient net worth to charge > $500 and > 6 monthsin advance
Adviser unable to provide evidence of work product tojustify asset management fees
Other Fee issues/concerns (include in comment)
Charging miscalculated fees (overcharging)
Fee charged doesn't match contract or ADV
Fees309 Deficiencies27.2% of Advisers with AUM
OtherRequired disclosure for 3% feeAsset mgmt fee mixed with other fees, not itemizedDoesn't match 3rd-partyadviser's fee method
33.3%
12.5% 12.5%10.4%
8.3%6.3% 6.3%
2.1% 2.1% 2.1% 2.1% 2.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Fee Issues Found Where?
2.9%
2.9%
3.2%
3.8%
8.6%
11.8%
15.3%
29.9%
0.0% 10.0% 20.0% 30.0% 40.0%
Safekeeping: Notice to administrator on ADV
Safekeeping: Notice to clients (in writing)
Safekeeping: Account statements from adviser – proper statements
Pooled Vehicle (Annual Audit): Audit distributed to allinvestors w/in 120 days of FYE
Safekeeping: Qualified custodian (separate clientaccounts or under adviser as agent)
Direct Fee Deduction: Dual invoicing client andcustodian
Other issues
Direct Fee Deduction: Proper client invoice (fee, timeperiod, formula, assets in formula)
Custody314 Deficiencies27.2% of Advisers with AUM
OtherPassword access to client accountsHolding private placements for clientsCommingling client funds with personal funds
2.7%
2.9%
3.1%
3.7%
3.9%
4.2%
4.6%
6.3%
7.1%
7.3%
11.0%
15.6%
0.0% 4.0% 8.0% 12.0% 16.0%
Procedures: Oversight of third-party IT or data serviceproviders (e.g., due diligence, etc)
No off-site storage of back-up data
Procedures: Training (protection against breaches, etc)
Procedures: Phishing and other unauthorized accessattempts
No contract or written agreement with technologyspecialist/consultant
Procedures: Internet use (public Wi-Fi, VPN, etc.)
Weak or infrequently changed passwords
Procedures: Hardware/software updates, upgrades, etc
No IT or technology specialist/consultant
Procedures: Securing/limiting access to devices
No testing of cybersecurity vulnerability
No or inadequate cybersecurity insurance
Cybersecurity590 Items Noted23.4% of Advisers with AUM
1.3%
1.3%
1.7%
2.2%
2.6%
7.8%
7.8%
9.1%
18.5%
41.4%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
Evidence of lending to customers (UBP)
Evidence of income or expenses for undisclosedoutside business activities
Evidence of borrowing from customers (UBP)
Insufficient bond
Poor financial condition
Inadequate net worth (normal)
Inadequate net worth (for custody)
Commingling IA records with outside business orpersonal accounts
Inadequate net worth (for discretion)
Other issues
Financial Matters232 Deficiencies20.8% of Advisers with AUM
OtherNot in accordance to GAAPTimely posting to fin'l recordsTimely filing of financialsVague expenses and income
2.2%
3.0%
5.2%
5.2%
8.7%
9.1%
11.7%
12.2%
14.8%
19.1%
0.0% 5.0% 10.0% 15.0% 20.0%
Guarantees of specific results or against loss (UBP)
Misleading charts, graphs, formulas (UBP)
Misleading performance advertising (UBP)
Exaggerated claims (UBP)
Misleading use of professional designation
Misuse of “RIA” or "IAR"
Testimonials (UBP)
Insufficient website disclaimer
Other untrue or misleading statements (UBP)
Misleading qualifications, services, or fees (UBP)
Found in:Website 44.5%Social Media 21.9%Business Cards 14.4%Brochures/Flyers 11.0%Newsletters 4.1%Seminars 2.1%Newspapers 2.1%
OtherUntrue affiliationsImplying endorsement by jurisdictionUnfounded "Specialty" areas
Advertising230 Deficiencies19.1% of Advisers with AUM
2.5%
15.3%
21.2%
26.3%
34.7%
0.0% 20.0% 40.0%
Failure to avoid or mitigate conflicts of interest
Failure to have procedures to preventing the misuse ofmaterial nonpublic information (UBP)
Failure to periodically assess and updatecompliance/supervisory program
Other issues
Failure to follow compliance/supervisory procedures
Supervision118 Deficiencies14.4% of Advisers with AUM
OtherPersonal trading reviewIdentifying client "insiders"Remote office reviews Outsourced compliance functions
11.9%
29.6%
42.2%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Initial delivery
Update/Material change delivery
Annual offering/delivery
Brochure Delivery135 Deficiencies14.1% of Advisers with AUM
3.3%
3.3%
3.3%
3.3%
6.7%
6.7%
6.7%
6.7%
6.7%
6.7%
10.0%
10.0%
10.0%
16.7%
0.0% 5.0% 10.0% 15.0% 20.0%
Actively managed ETFS
Options
Pooled investment vehicle
3rd party advisers/money managers
Passively managed ETFS
Inverse (short) ETFs
Annuities
Private placements
Discretionary trading
Margin
Mutual funds (well-known fund families)
Leveraged ETFs
Debt securities (bonds, notes)
Equities (stocks)
Investment Activities Issues Found Where?
63.3%
55.3%
47.1%
27.9% 28.9%
22.6%
17.5%
23.3%
16.0%11.8%
11.0%
6.1%7.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
<30MM AUM
>30MM AUM
AUM <30MM vs. AUM >30MMUS Advisers with AUM > 0
Percent of exams noting at least one deficiency in the category
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
1 IAR
> 1 IAR
1 IAR vs. >1 IARUS Advisers with AUM > 0
Percent of exams noting at least one deficiency in the category
66.2%
58.9%
49.3%
35.3% 36.2%
23.6%20.8% 22.2%
14.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Ind. IA
IA-BD
Independent IAs vs. BD-affiliated IAs
Percent of exams noting at least one deficiency in the category
70.8%
60.6%
46.6%
27.1%
46.5%
27.1% 27.8%23.9%
13.1%15.2%
10.4%
15.3%
8.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
No PIV
PIV
Percent of exams noting at least one deficiency in the category
Comparison Non-PIV to PIV AdvisersUS Advisers with AUM > 0
• 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 info.• Review and revise Form ADV and disclosure brochure annually to reflect
current and accurate information.• Review and update all client advisory contracts.• Calculate and document fees correctly in accordance with contracts and
ADV.• Implement appropriate custody safeguards, especially for direct fee
deduction.• Start considering Cybersecurity policies, procedures, and measures• Keep accurate and current financials. File timely with the jurisdiction.
Maintain surety bond if required.• Review all advertisements, including website and performance
advertising, for accuracy.• Prepare a written compliance and supervisory procedures manual
relevant to the type of business to include business continuity plan.
Best Practices for Investment Advisers
The information provided herein is for your convenience only, is illustrative, and is not intended as legal advice.