In 2013, members of the North American Securities Administration Association (NASAA) performed coordinated state exams in which examiners uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories in 44 jurisdictions. 1,130 examinations were reported and 6,482 deficiencies were exposed throughout all of the categories. Last week we discussed investment activity deficiencies.
In addition to the top compliance deficiencies we discussed in our earlier blog series, the 2013 NASAA investment adviser examination report also found a number of other types of deficiencies as it relates to RIA firms advising a polled investment vehicle (PIV). When comparing deficiencies of PIV advisors to non-PIV advisers in 2013, the results show that advisers to private funds tend to have higher frequency of regulatory deficiencies as it relates to brochure delivery, custody , supervision, financials, investment activities, and custody arrangements. In total, 26.6% of all RIA firms that advise a private fund or pooled investment vehicle had at least one deficiency as it relates to the pooled investment.
The top pooled investment-related deficiencies in 2013 were:
- Custody as general partner of the fund (20.6%)
- Independent CPA performs annual audit (8.8%)
- Violation of offering exemption (8.8%)
- Suitability questionnaires for each investor (8.8%)
- Offering document doesn’t contain adequate advisers disclosure information (5.9%)
As RIA compliance consultants, we strongly encourage the Chief Compliance Officer (CCO) of each investment advisory firm that advises pooled investments to take a few minutes to review the firm’s current procedures to ensure it is meeting all the relevant state or SEC regulatory requirements. In particular, many such RIA firms may not realize that the firm is considered to have custody and thus may be subjected to additional compliance requirements.