‘Big Switch’ RIAs Now Regulated by States Exhibit Similar Deficiencies on Exams: NASAA

Just released exam data of advisors who switched from federal to state oversight earlier this year shows similarities in the type or frequency of deficiencies between those advisors previously registered with the states, according to the North American Securities Administrators Association.

The little difference in the types and frequency of deficiencies “demonstrates that states and NASAA worked hard to inform and educate switching advisers [about states’ examination procedures] before and during the switch,” said Heath Abshure, NASAA president and Arkansas Securities Commissioner, in a statement.

NASAA’s 2013 Examination Report, released Monday at NASAA’s annual meeting in Salt Lake City, included exam data on 1,130 advisors reported voluntarily between January and June 2013 by 44 state and provincial securities examiners. The 2013 exams uncovered 6,482 deficiencies in 20 compliance areas, compared to 3,543 deficiencies in 13 compliance areas identified in a similar 2011 report of 825 investment advisors.

Under the Dodd-Frank Act, about 2,100 mid-sized investment advisors with AUM between $30 million and $100 million switched from federal to state oversight earlier this year.

The top five deficiencies for advisors with less than $30 million in assets under management involved books and records, registration, contracts, privacy and brochure delivery.

The top five deficiencies found among advisors with more than $30 million in AUM—which included 411 advisors (36.8%)--involved books and records, registration, contracts, advertising and fees.

The top deficiencies in the various categories were:

Every two years, state securities examiners voluntarily report sample data from their advisor exams to NASAA’s Investment Adviser Operations Project Group. “Using this sample data helps NASAA identify common regulatory deficiencies and recommend best practices that investment advisers should consider to minimize the risk of regulatory violations,” said Abshure (who also blogs regularly for ThinkAdvisor).

NASAA said that deficiencies were also found in advertising, fees, supervision, custody, financials, investment activities and unethical practices.

Based on the 2013 sample data, NASAA said that it recommends the following “Best Practices” to help newly switching advisors:

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