NASAA Reports Decrease in Top Violations and Provides Update on Investment Advisors’ Compliance Deficiencies

According to the North American Securities Administrators Association (NASAA), the most recent state registered investment advisor review has shown a decline in “top reported violations.” NASAA collects this data every two years from state securities regulators.

Andrew Hartnett, the President of NASAA, stated that the report provides valuable insights into compliance practices, and he encourages advisors to use this information to review their own compliance practices.

Although NASAA mentioned that overall books and records violations were down compared to the previous examination, state securities examiners still discovered a significant number of violations related to client suitability information.

The coordinated examinations conducted this year focused on asset-managing investment advisors, with 50% of them managing $30 million or less in assets. Furthermore, 72% of the state-registered investment advisors examined were one-person firms.

Approximately 34% of the conducted examinations were for investment advisers who were undergoing their first state exam. Interestingly, 7% of the state-registered investment advisors also conducted other business activities such as insurance.

When ranked by the number of deficiencies, registration (23%), books and records (17%), and supervision and compliance (16%) were identified as the most frequent shortcomings. Contracts (12%) and fees (6%) rounded out the top five leading areas of deficiencies identified by examiners.

The data also revealed contract-related violations, which included performance fees, hedge clauses, and fee miscalculations. Furthermore, privacy violations were identified as the eighth most common violation, with the majority of violations stemming from a lack of evidence of delivering privacy policies to clients, either initially or on an annual basis.

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