Compliance FAQ: Common Regulatory Compliance Deficiencies

This month, Lexington Compliance looks at the results of a key industry report that reveals trends in regulatory deficiencies at RIA firms. 

In September of 2015, the North American Securities Administrators Association (NASAA) released its 2015 Investment Adviser Coordinated Examinations Report. The biennial report is a can't-miss registered investment adviser (RIA) compliance resource. As RIA compliance consultants, we recommend that the Chief Compliance Officer (CCO) of all investment advisory firms review the regulatory exam summary report to determine if any compliance changes need to be implemented at their firms.

For the 2015 report, 42 jurisdictions (the majority of states across the country) provided data for RIA audits performed from January through June 2015. The characteristics of the 1,170 investment advisory firms which were examined break down as follows:

  • 823 firms had regulatory assets under management (AUM) 
  • 232 firms had AUM greater than $30 million
  • 591 firms had AUM less than $30 million
  • 324 firms were examined for the first time

The table below breaks down the number of regulatory compliance deficiencies found per RIA audit over the four most recent NASAA examination reports:

Source: 2009, 2011, 2013, and 2015 NASAA Investment Adviser Coordinated Examinations Reports

The table above shows that the average number of regulatory deficiencies found during audits peaked in 2013 at 5.74 per examination. The 2015 figure of 4.26 deficiencies per audit mirrors the 2011 figure of 4.29 per audit.

The chart below depicts the percentage of RIA firms that had at least one regulatory deficiency from 2007 to 2015 across the most common categories:





Source: 2007, 2009, 2011, 2013, and 2015 NASAA Investment Adviser Coordinated Examinations Reports. Note that some past reports do not contain the categories as depicted in the 2015 report (e.g. contracts and brochure delivery).

As shown above, the top three categories for regulatory deficiencies in the newly released 2015 report are:

  1. Books and Records (74.8% of firms with AUM)
  2. Contracts (49.5% of firms with AUM)
  3. Registration (41.5% of firms with AUM)

The top regulatory trouble areas for 2015 closely mirror the 2013 results with one slight difference in that registration issues were more common than contracts issues in 2013. Historically, registration issues have been an even more common RIA compliance trouble area as the registration category topped all other categories in the 2007, 2009, and 2011 reports.

Overall, the total number of deficiencies per audit has decreased by 25.8% since the 2013 report. NASAA attributes the drop in deficiencies to an increase in adherence of their best practices recommendations and better state examination programs. As in past years, NASAA has once again provided an updated set of best practices which they recommend RIA firms use as a guide for developing and improving their compliance programs.

For more information or to see this original blog post, please visit the RIA in a Box blog.

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