According to the North American Securities Administrators Association (NASAA), 58.5% of registered investment adviser (RIA) firms audited between January 1, 2013 and June 30, 2013 had registration deficiencies. The #1 most common registration deficiency cited by NASAA was the Form ADV Part 1 not matching the Form ADV Part 2. RIA registration deficiencies trailed only Books and Records deficiencies (68.2% of investment advisory firms examined) as the most common deficiency category.
We are currently in the midst of RIA registration renewal season as RIA firms must file annual Form ADV amendment by March 31, 2014. This is a great time of the year for the RIA firm's Chief Compliance Officer (CCO) to thoroughly review that the advisory firm's Form ADV Part 1 and Form ADV Part 2 are not only accurate, but also properly match where appropriate. One of the most important RIA compliance tasks is ensuring that the firm's Form ADV is always accurate.
As RIA compliance consultants, we frequently come across RIA firms who originally registered as an RIA firm many years back. While the Form ADV filed at the time of initial RIA registration may have been accurate back then, it's very typical that the RIA firm's business model has evolved over time to offer additional services, charge different fee structures, etc. Unfortunately, these operational RIA changes are often not captured by properly updating the firm's Form ADV Part 1 and Part 2. As such, many RIA firms who are audited do not have a Form ADV that matches the RIA firm's current business practices. This issue is a very preventable RIA compliance deficiency.
NASAA recommends as a best practice that investment advisers regularly review the Form ADV to ensure its accuracy and we, as RIA compliance consultants, strongly agree with this recommended best practice. The Form ADV is the first document that an examiner reviews before performing an RIA regulatory exam and an up-to-date, well constructed Form ADV is a great way to make a strong first impression on an examiner. On the other hand, an out-of-date Form ADV is unfortunately a far too common way to make a very bad first impression and lead an examiner to believe that the RIA firm has not established the proper culture of compliance.
Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.