RIA Compliance and Practice Management Blog

Top RIA Compliance Deficiencies: Supervision

Posted by RIA in a Box

Oct 25, 2014 9:00:00 AM

In 2013, members of the North American Securities Administration Association (NASAA) performed coordinated state exams in examiners uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories. Last week we discussed the deficiencies in fees, specifically issues with fees that don’t match client contracts or the Form ADV, miscalculated fees, and unreasonable fees.

In this week’s installment we’ll cover another common RIA compliance deficiency category: Supervision. The 2013 NASAA investment adviser examination report contains results from 1,130 investment advisory firms examined. In the supervision category, of all RIA firms examined, 16.7% of audits noted at least one deficiency. This figure is particularly notable due to the fact that supervision-related deficiencies were discovered in 30.2% of RIA firms audited in the 2011 NASAA investment adviser examination report. As such, there has been a fairly notable decline in supervision-related compliance deficiencies from 2011 to 2013.Download our free white paper: RIA Systems and Operational Best Practices

According to the 2013 report, 18.0% of firms with less than $30 million in assets under management (AUM) had supervision-related deficiencies, compared to 15.1% of investment advisory firms with more than $30 million in AUM. Just under 20% of RIA firms audited for the first time had supervision-related deficiencies, which wasn’t far off from the approximately 20% of firms with a supervision-related deficiency that had been previously examined.

As stated earlier, 16.7% of investment advisory firms examined according to the 2013 NASAA report had supervision-related deficiencies. The Chief Compliance Officer (CCO) of each investment adviser firm should to be aware of the top supervision compliance deficiencies. In 2013, the top issues were:

  1. Failure to periodically assess and update policies and procedures (29.6%)
  2. Failure to follow procedures (29.1%)
  3. No procedures to prevent misuse of material nonpublic information (8.5%)
  4. Failure to avoid or mitigate conflicts of interest (3.7%)

In 20111, the top supervision-related issues were:

  1. Inadequate policies or procedures including business continuity plan (~40%)
  2. No policies or procedures (~32%)
  3. Other including personal trades, remote location supervision, etc. (~18%)
  4. Failure to follow procedures (~10%)

In order to ensure RIA firms continue to decrease the amount of supervision-related deficiencies, NASAA recommends firms prepare a written compliance and supervisory procedures manual relevant to the type of business including a business continuity plan which is assessed and update periodically. As RIA compliance consultants, we strongly encourage the CCO of every investment advisory firm to take a few minutes to not only review the firm's current policies and procedures, but to also ensure that each policy and procedure is being properly followed throughout the firm.

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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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