State regulators report advisers’ top five trouble areas for compliance

Investment advisers are improving their compliance with securities laws, according to state regulators, but some areas are proving particularly difficult to manage.

The latest batch of state coordinated examinations show that the number of deficiencies declined by 30% from 2013 to 2015. The results, released by the North American Securities Administrators Association Inc. on Monday, were based on sample exams in 42 jurisdictions between January and June of this year.

Every two years, state examiners voluntarily report sample data to NASAA. The 1,170 examinations in 2015 turned up 4,983 deficiencies in 22 compliance areas, compared with 6,482 deficiencies in 20 compliance areas reported in 2013.

“The data suggests a robust state examination program and adherence to NASAA’s recommended best practices has helped investment advisers focus on remediating problem areas, which in turn reduces the risk of regulatory violations,” William Beatty, NASAA president and Washington State Securities director, said in a statement.

But the picture wasn’t all rosy. The biggest compliance problems for state-based advisers involved books and records, with about 74.8% of advisers showing deficiencies. They tended to trip up on documenting the suitability of their client recommendations.

“Maintaining sound books and records is the best way for investment advisers to protect themselves and their clients,” Mr. Beatty said.

Rounding out the top five trouble areas: contracts (failing to explain fees), registration (inconsistencies on ADV Part 1 and Part 2), fees (not charging what’s outlined in the ADV) and custody (improper client invoices for direct-fee deductions).

State securities regulators oversee advisers with less than $100 million in assets under management. The Dodd-Frank financial reform law shifted about 2,100 advisers with between $30 million and $100 million in AUM from Securities and Exchange Commission regulation to the states in 2013.