Recently, the North American Securities Administrators Association (“NASAA”) released its 2019 Investment Adviser Coordinated Examinations Report. This report is released on a biannual basis and analyzes the findings from state-registered investment adviser ("RIA") examinations. 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 changes should be implemented at their firm as a result of NASAA’s findings.
This study is based on 1,078 routine investment adviser examinations conducted by NASAA from across 43 jurisdictions (including Ontario, Canada) from January through June 2019. Additional statistics of the advisory firms examined are as follows:
- 292 firms were examined by the state for the first time
- 80% of US-based RIA firms had regulatory assets under management ("AUM") greater than $0
- 67% had AUM greater $30 million
- 33% had AUM less than $30 million
- 70% of RIAs examined had 1 investment adviser representative ("IAR")
- 19% of RIAs examined had 2 IARs
- 63 of the firms examined were affiliated with a broker dealer firm
- 30 of the firms audited advised a pooled investment vehicle
- 214 of the firms offered financial planning services
- 77 (36 solely) of the firms acted as solicitors for other RIA firms
- 23 of the firms audited payed solicitors for referrals
The chart below depicts the percentage of RIA firms that had at least one regulatory deficiency from 2007 to 2019 across this year's ten most common categories:
Source: 2007, 2009, 2011, 2013, 2015, 2017, and 2019 NASAA Investment Adviser Coordinated Examinations Reports. Note that some past reports do not contain all categories as depicted (e.g. cybersecurity prior to 2017, etc).
As shown above, the top three categories for regulatory deficiencies in the newly released 2019 report are:
- Books and Records (59.5% of firms with AUM)
- Registration (49.5% of firms with AUM)
- Contracts (43.9% of firms with AUM)
The top regulatory trouble areas for 2019 closely mirror the 2017 results however, there is a slight decline in deficiencies across each regulatory area with the exception of cybersecurity. In 2019, 25.8% of firms examined had a cybersecurity-related regulatory compliance deficiency compared to 23.4% of firms in 2017. To address growing cybersecurity concerns, NASAA adopted an information security model rule package earlier this year which among other components, requires investment advisers to adopt physical information and cybersecurity policies.
Be sure to check back soon for more detailed information as we will be breaking down each compliance category with additional blog posts in the coming weeks.