RIA Compliance and Practice Management Blog

Top 2019 NASAA RIA Compliance Deficiencies: Contracts

Posted by RIA in a Box

Dec 2, 2019 9:41:41 AM

2019 state investment adviser compliance deficiencies: contracts

The North American Securities Administrators Association (“NASAA”) has released its 2019 Investment Adviser Coordinated Examinations Report. This report is released on a biennial basis and analyzes the findings from adviser examinations and offers best practices. 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.

In this week's installment of our break-down of the 2019 report, we focus on one of NASAA's most common RIA regulatory compliance deficiency categories: client contracts. Of the 1,078 investment advisory firms examined in 2019, 43.9% of all firms examined with regulatory assets under management ("AUM") had at least one contracts-related regulatory deficiency. On the positive side, contracts-related deficiencies are continuing to trend downward compared to 45.4% of firms 2017 and 49.5% of firms in 2015 having contracts-related deficencies. The graph depicts the changes over the last 12 years of examination reports as it relates to contracts deficiencies:

top client contract related regulatory compliance deficiencies for RIA firms

In 2019, the top 5 contracts-related investment adviser regulatory compliance deficiencies were:

  1. The fee formula: 13.8%
  2. The fee: 13.3%
  3. In writing: 9.0%
  4. Other state-specific requirements: 8.9%
  5. Properly executed (proper signatures and dates): 7.8%
In 2017, the top 5 contracts-related deficiencies were:
  1. The fee: 12.03%
  2. The fee formula: 10.41%
  3. In writing: 9.59%
  4. Other issues: 8.92%
  5. Capital gains compensation: 8.78%

As RIA compliance consultants, we encourage the CCO of the investment advisory firm to consider these RIA compliance-related questions as he or she reviews the firm's client agreements:

  1. Does the firm have a properly executed, written client agreement on file for each client relationship
  2. Do the services outlined in the agreement match the current services being provided to the client?
  3. Does the fee amount, calculation formula, and frequency match how the client is currently billed?
  4. Does the contract include any hedge clauses that may conflict with the firm’s fiduciary responsibility?
  5. If the firm has discretionary authority, is it properly outlined in the executed agreement?
  6. Does the contract properly address how pre-paid fees will be refunded in the event of termination?

Be sure to also check out our related blog posts analyzing the results of the 2019 survey including books and records deficiencies, registration, and overall top deficiencies

Download our 2019 NASAA Top Compliance Deficiencies 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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