Nationwide NASAA Exams Reveal Advisor Deficiencies

The Deficiencies

The examinations revealed that:

• 298 advisors had 504 deficiencies related to registration issues. The top three deficiencies in this category were inconsistencies between parts I and II of form ADV, failing to amend form ADV in a timely manner, and failing to provide or offer to provide the disclosure document to clients annually.
• 198 advisors had 318 unethical business practice deficiencies, including contract deficiencies, unsuitable recommendations, excessive fees, and misrepresenting qualifications, services, or fees.
• 189 advisors had 384 deficiencies in the area of preparing and maintaining current and accurate books and records. Not maintaining suitability data and financials were noted as the top two deficiencies in this area.
• 152 advisors had 174 supervisory/compliance deficiencies. The most common deficiency was failure to have any written supervisory/compliance procedures.
• 115 advisors had 142 privacy deficiencies. The most common were failure to create a privacy policy and failure to provide privacy notices initially and annually.

Other areas with deficiencies included the preparation and maintenance of financial records, advertising, fees, custody, investment activities, solicitors, performance reporting, and hedge funds.

Best Practices Suggested

Based on the results of the 2007 coordinated exams, NASAA says it recommends the following “Best Practices” as a guide to assist advisors in the development of compliance practices and procedures.

• Review and revise the Form ADV and disclosure brochure annually to reflect current and accurate information.
• Review and update all contracts.
• Prepare and maintain all required records including financial records.
• Prepare and maintain client profiles which show suitability information.
• Prepare a written compliance and supervisory procedures manual relevant to the type of business.
• Prepare and distribute a privacy policy initially and annually.
• Keep accurate financials. File timely with the appropriate jurisdiction. Maintain surety bond if required.
• Calculate and document fees correctly in accordance with contracts and the ADV.
• Review and revise all advertisements, including Web site and performance advertising, for accuracy.
• Implement appropriate custody safeguards, if applicable.
• Review solicitor agreements, disclosure, and delivery procedures.