RIA Compliance and Practice Management Blog

Top RIA Compliance Deficiencies: Books and Records

Posted by RIA in a Box

Aug 2, 2014 4:07:00 PM

In 2013, coordinated state exams of 1,130 investment advisory firms conducted by members of the North American Securities Administrators Association (NASAA) found 6,482 compliance deficiencies across 20 registered investment adviser (RIA) compliance categories. The biannual coordinated investment adviser examination report recently published by NASAA is a can't miss investment adviser compliance resource. As RIA compliance consultants, we recommend that all Chief Compliance Officers (CCOs) review the regulatory exam summary report to determine if any compliance changes need to be implemented by their RIA firms.

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In this week's installment of our break-down of the report, we are going to focus on NASAA's most common RIA compliance deficiency category: books and records. Of the 1,130 investment advisory firms examined in 2013, 68.2% of all firms examined had at least one books and records-related regulatory deficiency. In total, there were 1,783 books and records deficiencies across the ~770 firms that had at least one such deficiency. 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.

70.4% of RIA firms with assets under management (AUM) greater than $30 million had at least one such deficiency compared to 65.3% of investment advisory firms with less than $30 million in AUM. Firms examined for the first time also were slightly more likely (~70% vs. ~63%) to have at least one books and records-related deficiency. Around 63% of investment advisers that had been previously examined were still found to have at least a single deficiency in the books and records category. In other words, previously examined firms performed only slightly better than their peers going through their first exam.

Compared to the 2011 report on coordinate state examinations released by NASAA, books and records compliance deficiencies in 2013 jumped sharply from 45.0% of all firms examined in 2011 to the 68.2% of all RIA firms audited in 2013. Looking even further back at the results from the 2007 and 2009 NASAA reports, books and records issues had been relatively steady at around 45% of all firms examined in each study. As such, it's important to note that investment adviser books and records compliance deficiencies are up dramatically compared to past years.

Investment adviser CCOs need to be sure to be aware of the top books & records compliance deficiencies. In 2013, the top issues were:

  1. Suitability documentation: 10.8%
  2. Missing client contracts: 8.5%
  3. Trial balance / financial statements: 7.1%
  4. Written supervisory procedures / business continuity plan: 4.9%
  5. Disclosure brochure: 4.6%

In 2011, the top books & records investment adviser regulatory issues were:

  1. Suitability information: ~25%
  2. Safeguarding records, backup data, etc: ~20%
  3. Trial balance / financial statements : ~12%
  4. Journals / ledgers: ~10%
  5. Advertising file: ~5%

It's evident that RIA firms need to continue to focus on always having proper and updated client suitability information on file as it has been and continues to be the most common books and records-related investment adviser compliance issue. Investment advisory firms also need to remember to keep accurate financial statements on file at all times. As it relates to both of those common issues, we are seeing more investment advisers migrate to cloud-based, software solutions to help track and monitor suitability information and to keep real-time financial statements. Intuit's QuickBooks Online continues to be the most popular accounting solution for the vast majority of RIA firms.


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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