RIA Compliance and Practice Management Blog

Top 2017 NASAA RIA Compliance Deficiencies: Custody

Posted by RIA in a Box

Dec 14, 2017 8:25:20 AM

2017 state investment adviser compliance deficencies: custody

In October of this year, the North American Securities Administrators Association ("NASAA") released its 2017 Investment Adviser Coordinated Examinations Report. The biannual report is a must read for registered investment adviser ("RIA") firms. 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 firm.

In this week's installment of our break-down of the new 2017 report, we focus on one of NASAA's most common RIA regulatory compliance deficiency categories: custody. Of the 1,227 investment advisory firms examined in 2017, 27.2% of all firms examined with regulatory assets under management ("AUM") had at least one custody-related regulatory deficiency. In total, there were 314 custody-related deficiencies cited across all firms which were audited.

Download the SEC 2017 RIA Top 10 Exam Priorities Checklist

Compared to 2015 and prior years, the frequency of custody-related deficiencies has risen. Since 2009, custody-related deficiencies have steadily increased, and 2017 is no exception. The table below highlights the changes over the last 10 years of reports:

Top RIA custody compliance issues from 2007 to 2017 for state-registered firms

In 2017, the top 5 custody-related deficiencies were:

  1. Direct fee deduction: Proper client invoice (29.9%)
  2. Other issues: Password access to client accounts, holding private placements for clients, etc. (15.3%)
  3. Direct fee deduction: Dual invoicing client and custodian (11.8%)
  4. Safekeeping: Qualified custodian (8.6%)
  5. Pooled Vehicle (Annual Audit): Audit distribution to all investors within 120 days of fiscal year-end (3.8%)

In 2015, the top 5 fees-related deficiencies were:

  1. Direct fee deduction: Proper client invoice (48.8%)
  2. Direct fee deduction: Dual invoicing client and custodian (17.5%)
  3. Beneficial trust: Signed acknowledgment of beneficial owner (6.0%)
  4. Direct fee deduction: Written client authorization (4.2%)
  5. Safekeeping: Account statements from adviser (3.6%)

Given the continued increase in custody-related deficiencies from 2011 to 2017, it's evident that investment advisory firms need to take a step back and ensure they are meeting the requirements to stay in compliance with the relevant state or federal regulatory requirements. In both 2015 and 2017, the top deficiencies related to custody relate to the proper invoicing of clients as many states require an RIA firm to send a separate billing statement with specific details in addition to the statement sent by the custodian. As RIA compliance consultants, we encourage the CCO of every investment advisory firm to take a few minutes to look over the firm’s current custody procedures. In addition, RIA firms should review the latest custody guidance recently provided by the Securities and Exchange Commission as it relates to standing letters of authorization.

Be sure to also check out our past blog post on the top investment adviser registration compliance deficiencies from the 2015 NASAA report.

Download the Top RIA Compliance Deficiencies 2015 Infographic 


Topics: RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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