Key Issues for 2016 State Securities Regulatory Examinations

Every two years, state securities regulators report sample data from their investment adviser examinations to the North American Securities Administrators Association (“NASAA”), the voluntary association of state securities regulators.  NASAA recently published the compiled results of this data for 2015.  The states participating in the report provided information from 1,170 examinations, which resulted in 4,983 deficiencies.  The deficiencies detailed in the report identify those issues that are of particular significance to examiners from state securities agencies, and will likely be the focus of investment adviser examinations in 2016.

  1. Books and Records Violations: Nearly 75% of all investment advisers examined in the most recent survey were cited for one or more books and records keeping violations.  These violations included lack of client suitability information (e.g., no investment profile statement), missing written advisory contracts, insufficient client transaction records, incomplete financial statements for the adviser, inadequate written compliance policies, and failure to deliver disclosure documents.  Maintaining adequate books and records is critical to adequate compliance programs, and a primary focus of all examinations.
  2. Non-Compliant Advisory Agreements: Half of all advisers examined in the 2015 survey maintained deficient advisory contracts. The deficiencies ranged from inadequate fee disclosures, improper capital gains and performance fees, and missing clauses for discretionary authority and refund of fees.
  3. Registration: Over 40% of all reported investment adviser examinations resulted in deficiency notices relating to the registration of the firms and their registered personnel. Registration violations included inconsistencies between the ADV Part 1 and ADV Part 2, inadequate disclosures in firm brochures, and employment of unregistered advisers.
  4. Custody: Twenty percent (20%) of advisers examined in the report were found in violation of custody rules. Most common in these deficiency notices were the practices of deducting fees automatically from the customer’s account without proper documentation and exercising custody over customer assets in the form of a trust or power of attorney.
  5. Advertising: Nearly one-fifth of all advisers in the survey were cited for deficient, misleading or unlawful advertising practices. The most common deficiencies included false or misleading statements or omissions, unlawful customer testimonials, insufficient disclaimers, and improper performance disclosures.
  6. Firm Brochure and Privacy Policy. One in five advisers examined in the past year also failed to deliver proper disclosure brochures or adequate privacy policies to customers at the time the advisory contract was executed or on an annual basis thereafter, as required by state and federal law.

Although not an exhaustive list, the foregoing issues have received significant recent attention from state regulators, and will likely be priorities to examiners during the next year.

Best Practices

The NASAA report concluded with a list of best practices that are suggested for registered investment advisers in preparation for the 2016 examination period and beyond.

  • Prepare and maintain all required records, including financial records. Back-up electronic data and protect customer and adviser records.
  • Prepare and maintain client profiles or other client suitability information.
  • Review and update all advisory contracts, making certain all fees are clearly noted and adequately explained in the documents.
  • Review and revise the Form ADV and disclosure brochure annually to reflect current and accurate information, and file amendments in a timely manner.
  • Prepare and distribute a privacy policy to customers initially and annually.
  • Calculate and document fees correctly in accordance with contracts and ADV.
  • Maintain accurate financial records for the adviser and file financial statements with the jurisdiction timely. Procure a surety bond if required.
  • Implement appropriate custody safeguards, paying attention to the conditions for direct fee deduction, if applicable.
  • Review all advertisements, particularly all website pages (which are considered advertisements) and performance advertising, for accuracy.
  • Deliver the adviser’s disclosure brochure to clients initially and provide updates, as required.
  • Prepare a written compliance and supervisory procedures manual relevant to the adviser’s type of business, which should include a written code of ethics and business continuity plan.
  • Review solicitor agreements, solicitor disclosures, and delivery procedures.

As state regulators begin examinations for calendar year 2016, registered advisers should pay particular attention to the areas of focus and best practices identified in the NASAA survey.




100 N. 18th Street | Suite 700 |

Philadelphia | PA | 19103

PH 215.569.2400 | DIR 267.386.4356

About the Author:

John Quinn has eighteen years of securities regulation, compliance and litigation experience in private practice and government service. In private practice, Mr. Quinn has successfully represented investment companies, investment advisers, broker-dealers, securities professionals, insurance companies and agents in compliance, transactions, litigation, arbitration, regulatory, and employment matters. As the former Director of the Division of Corporation Finance for the Pennsylvania Department of Banking and Securities (2006 – 2009), Mr. Quinn was responsible for the registration of securities sold in the Commonwealth of Pennsylvania and for the regulation of financial services professionals marketing such securities. Mr. Quinn has testified as to securities issues before the Pennsylvania Legislature and was a featured lecturer on securities issues at national regulatory and compliance conferences. In 2009, Mr. Quinn was appointed as Chairman of the North American Securities Administrators Association’s Corporate Accountability Project Group, through which Mr. Quinn sponsored policy initiatives in the field of corporate governance.

Mr. Quinn graduated magna cum laude from Villanova University (B.S., International Business) and with high honors from the George Washington University’s National Law Center (Juris Doctor). Mr. Quinn is licensed in Pennsylvania.



NOTICE: This memorandum was prepared for informational purposes only to report on recent developments that may be of interest to the recipients. The information provided herein is therefore general, and should not be considered or relied on as legal advice, nor should receipt of this memorandum constitute the creation of legal representation.