IA Compliance:
Common Exam Deficiencies In 2023
The following information reflects the views of NASAA’s Investment Adviser Section Resources and Publications Project Group. It does not necessarily represent the views of NASAA, and it is not intended as legal advice. Any questions should be directed to the appropriate state regulators.
In 2023, the Investment Adviser Coordinated Exams Report found top examination deficiencies in the categories of registration, books and records, contracts, and fees. In this article, best practices for each deficiency area will be discussed to support investment advisers in meeting their compliance requirements.
Registration
Inaccurate and inconsistent information disclosed in the Forms ADV and U4, particularly undisclosed outside business activities (OBAs), make up the top registration deficiencies. For more information on Form U4 and outside business activities, please review the IA compliance article on Outside Business Activities Disclosures. The Forms ADV and U4 are the primary disclosure documents used by securities regulators to review the business practices of an adviser, so it is important the information is accurate and consistent with the adviser’s current business practices.
Advisers should consider the following to prevent these registration deficiencies:
- Review and revise the Form ADV and disclosure brochure annually, based on your jurisdiction’s annual filing deadline.
- Develop and implement procedures to update the Form ADV and Form U4 promptly when material changes occur.
- Refer to the appropriate Uniform Form Library instructions and glossary.
- Carefully review each question and response for completeness, accuracy, and consistency.
- When updating one form, be aware that it could trigger the need for amendments to other forms.
- If available, have a second set of eyes review the forms prior to filing.
Books and Records
Investment advisers are required to obtain and maintain certain books and records. The most common books and records deficiencies are missing, or inadequate information related to client suitability, Form ADV amendments, written contracts, and financial statements.
Advisers should consider the following to prevent these books and records deficiencies:
- Review and understand the books and records requirements of their jurisdiction.
- Periodically review the books and records kept by the firm to ensure they are in compliance.
- Establish procedures for updating written contracts.
- Train staff on books and records retention requirements.
- Limit access to books and records to only essential staff.
- Create templates or checklists for ensuring required documents are obtained (i.e., onboarding, annual updates, etc.) for client files.
For more information on effective record keeping, advisers should review the IA compliance article on Record Keeping Preparation for a Regulatory Examination.
Contracts
A common exam deficiency is missing or incomplete contracts. This includes contracts that attempt to limit an adviser’s liability, fail to include required clauses, or contain prohibited language. Contracts that are missing signatures, initials, dates, services, or fee arrangements are incomplete and deficient. Advisers are required to execute written client contracts prior to providing services to clients, and they must maintain these client contracts as part of the required books and records.
Advisers should consider the following to prevent these deficiencies:
- Develop onboarding procedures for new clients, including a review or checklist for completeness of client files.
- Subsequently review all client files and contracts for completeness and accuracy on a recurring basis.
- Annually review the firm’s contract templates for outdated information, regulatory changes, or changes in business practices. Be aware that changes to the contract or other forms could trigger the need to execute revised contracts.
- If using software to obtain or maintain contracts, remember that the adviser is always responsible for meeting regulatory obligations for contracts.
Fees
The final common exam deficiency category is fees. This includes inconsistent fees disclosure between in the Form ADV and the contract, miscalculated fees, undisclosed fees, and unreasonable fees. Advisers are required to adequately disclose and charge reasonable fees.
Advisers should consider the following to prevent these deficiencies:
- Conduct periodic and regular reviews of client contracts and the firm’s ADV to ensure accuracy and consistency.
- Create a checklist for making changes to the firm’s fee model that includes updating the Form ADV and client contracts.
- If the adviser uses a third party to assess or deduct fees, they should periodically test the formula used to calculate the fees based on the client agreement.
For more information on fees and fee disclosure, advisers should review the following guidance and articles:
- Learn about regulatory concerns surrounding reasonable fees by reviewing the NASAA Investment Adviser Section Regulatory Policy and Review Project Group’s Fee Guidance.
- Learn more about disclosing fees by reviewing the IA compliance article on Clear and Reasonable Disclosure of Fees.
While the above list of top deficiencies is not exhaustive, advisers can benefit from implementing the recommendations on registration forms, books and records, contracts, and fees. Advisers should always consult with their jurisdiction’s specific requirements for advisory firms and their representatives. View jurisdiction specific contact information on NASAA’s Contact Your Regulator page.
