Compliance FAQ: Be Aware of the Top NASAA RIA Compliance Deficiency

Books and records is the top 2015 NASAA RIA compliance deficiency. In this month’s report, Lexington Compliance looks at where books and records problems commonly occur.

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

In this installment of our break-down of the new 2015 report, we focus on NASAA's most common RIA compliance deficiency category: books and records. Of the 1,170 investment advisory firms examined in 2015, 74.8% of all firms examined with assets under management (AUM)  had at least one books and records-related regulatory deficiency. In total, there were 1,515 books and records deficiencies across all firms audited. In other words, on average, a firm that had at least one books and records-related deficiency was also likely to have at least one other related compliance issue in the same category.

About 76% of RIA firms with AUM greater than $30 million had at least one such deficiency compared to roughly 74% of investment advisory firms with less than $30 million in AUM. Compared to the 2013 report on coordinated state examinations released by NASAA, books and records compliance deficiencies increased from 68.2% of all firms examined in 2013 to 74.8% of all RIA firms audited in 2015. Looking even further back at the results from the 2007, 2009, and 2011 NASAA reports, books and records issues had previously held steady at around 40-45% of all firms examined in each study. As such, it's important to note that investment advisor books and records compliance deficiencies are up dramatically in the 2015 report compared to past years. The table below highlights the changes over the years:

Investment advisor CCOs need to be aware of the top books and records compliance deficiencies.

In 2015, the top issues were:

  • Client suitability information: 9.8%
  • Order memorandum: 8.3%
  • Missing written agreements: 8.0%
  • Trial balances / financial statements: 6.6%
  • Inadequate written supervisory procedures related to business continuity planning: 6.1%

In 2013, the top issues were:

  • Suitability documentation: 10.8%
  • Missing client contracts: 8.5%
  • Trial balances / financial statements: 7.1%
  • Written supervisory procedures / business continuity plan: 4.9%
  • Disclosure brochure: 4.6%

It's evident that RIA firms need to continue to focus on always having proper and updated client suitability information on file as it continues to be the most common books and records-related investment advisor compliance issue. Investment advisory firms also need to remember to keep accurate financial statements on file at all times. It's also important to note that missing written agreements remained in the top 3 in this year's report. That’s a good reminder that it's essential that all state-registered RIA firms have a written client contract on file.

You’re welcome to also check out our past blog post on the top investment advisor books and records compliance deficiencies from the 2013 NASAA report.

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