2017 Investment Adviser Coordinated Exams

North American Securities Administrators AssociationThe information provided herein is for your convenience only, is illustrative, and is not intended as legal advice.

Exams Overview • 1227 routine investment adviser examinations

• January – June 2017

• 38 Jurisdictions including Ontario, Canada

• 946 Advisers had AUM > 0

• 336 had AUM > $30MM

• 610 had AUM < $30MM

• 331 first time examined by the state

• 535 were examined in last 5 years

Adviser Stats• 741 advisers had 1 IAR

• 220 advisers had 2 IARs

• 101 affiliated with a BD firm

• 74 advised a pooled investment vehicle

• 572 offered financial planning services

• 78 acted as solicitors for other advisers

• 27 payed solicitors for referrals

64.6%

54.3%

45.4%

27.2% 27.2%

23.4%20.8%

19.1%14.4%

14.1% 13.0%

7.4%5.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%Top Deficiency Categories

US Advisers with AUM > 0

Percent of exams noting at least one deficiency in the category

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2017 2015*Cybersecurity is a new category in 2017

Percent of exams noting at least one deficiency in the category

Comparison to 2015 US Advisers with AUM > 0

2.65%

2.80%

3.08%

3.08%

3.70%

3.98%

5.97%

8.01%

8.53%

9.00%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

Journals

Inadequate businesscontinuity/succession planning

Check books, bank statements

Advertising file

Order memorandum

Disclosure Brochures

General and auxiliary ledgers

Written agreements (IA-Clientcontracts)

Trial balances, financial statements

Client suitability information

OtherNot updating WSPsTimely posting to financial recordsWSPs for Cybersecurity

2110 Deficiencies64.6% of US Advisers with AUMBooks and Records

4.8%

6.2%

6.5%

7.6%

7.6%

8.0%

12.3%

14.8%

0.0% 5.0% 10.0% 15.0%

Form ADV - Conflicts of interest

Form ADV - Services provided

Form ADV - Personnel

Form ADV - Business description

Timely filing of amendments

Form ADV - Fee structure

Other issues

Form ADV - Inconsistencies between Part 1and Part 2

Registration

OtherOutdated Info: Address, Contact, and Personnel InfoUndisclosed Judgements/Liens Outside Businesses

903 Deficiencies54.3% of US Advisers with AUM

4.59%

6.49%

6.76%

6.89%

8.11%

8.78%

8.92%

9.59%

10.41%

12.03%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Services

Hedge clauses

Other state-specific requirements

Properly executed

Not updated

Capital gains compensation

Other issues

In writing

The fee formula

The fee

OtherOutdated accredited investordefinitionGoverning law issuesReferencing 1940 ActSEC Registration

740 Deficiencies45.4% of Advisers with AUM

Contracts

3.2%

6.8%

8.1%

19.4%

26.2%

29.4%

0.0% 10.0% 20.0% 30.0%

Charging on non-managed assets

Insufficient net worth to charge > $500 and > 6 monthsin advance

Adviser unable to provide evidence of work product tojustify asset management fees

Other Fee issues/concerns (include in comment)

Charging miscalculated fees (overcharging)

Fee charged doesn't match contract or ADV

Fees309 Deficiencies27.2% of Advisers with AUM

OtherRequired disclosure for 3% feeAsset mgmt fee mixed with other fees, not itemizedDoesn't match 3rd-partyadviser's fee method

33.3%

12.5% 12.5%10.4%

8.3%6.3% 6.3%

2.1% 2.1% 2.1% 2.1% 2.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Fee Issues Found Where?

2.9%

2.9%

3.2%

3.8%

8.6%

11.8%

15.3%

29.9%

0.0% 10.0% 20.0% 30.0% 40.0%

Safekeeping: Notice to administrator on ADV

Safekeeping: Notice to clients (in writing)

Safekeeping: Account statements from adviser – proper statements

Pooled Vehicle (Annual Audit): Audit distributed to allinvestors w/in 120 days of FYE

Safekeeping: Qualified custodian (separate clientaccounts or under adviser as agent)

Direct Fee Deduction: Dual invoicing client andcustodian

Other issues

Direct Fee Deduction: Proper client invoice (fee, timeperiod, formula, assets in formula)

Custody314 Deficiencies27.2% of Advisers with AUM

OtherPassword access to client accountsHolding private placements for clientsCommingling client funds with personal funds

2.7%

2.9%

3.1%

3.7%

3.9%

4.2%

4.6%

6.3%

7.1%

7.3%

11.0%

15.6%

0.0% 4.0% 8.0% 12.0% 16.0%

Procedures:  Oversight of third-party IT or data serviceproviders (e.g., due diligence, etc)

No off-site storage of back-up data

Procedures:  Training (protection against breaches, etc)

Procedures:  Phishing and other unauthorized accessattempts

No contract or written agreement with technologyspecialist/consultant

Procedures:  Internet use (public Wi-Fi, VPN, etc.)

Weak or infrequently changed passwords

Procedures:  Hardware/software updates, upgrades, etc

No IT or technology specialist/consultant

Procedures:  Securing/limiting access to devices

No testing of cybersecurity vulnerability

No or inadequate cybersecurity insurance

Cybersecurity590 Items Noted23.4% of Advisers with AUM

1.3%

1.3%

1.7%

2.2%

2.6%

7.8%

7.8%

9.1%

18.5%

41.4%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%

Evidence of lending to customers (UBP)

Evidence of income or expenses for undisclosedoutside business activities

Evidence of borrowing from customers (UBP)

Insufficient bond

Poor financial condition

Inadequate net worth (normal)

Inadequate net worth (for custody)

Commingling IA records with outside business orpersonal accounts

Inadequate net worth (for discretion)

Other issues

Financial Matters232 Deficiencies20.8% of Advisers with AUM

OtherNot in accordance to GAAPTimely posting to fin'l recordsTimely filing of financialsVague expenses and income

2.2%

3.0%

5.2%

5.2%

8.7%

9.1%

11.7%

12.2%

14.8%

19.1%

0.0% 5.0% 10.0% 15.0% 20.0%

Guarantees of specific results or against loss (UBP)

Misleading charts, graphs, formulas (UBP)

Misleading performance advertising (UBP)

Exaggerated claims (UBP)

Misleading use of professional designation

Misuse of “RIA” or "IAR"

Testimonials (UBP)

Insufficient website disclaimer

Other untrue or misleading statements (UBP)

Misleading qualifications, services, or fees (UBP)

Found in:Website 44.5%Social Media 21.9%Business Cards 14.4%Brochures/Flyers 11.0%Newsletters 4.1%Seminars 2.1%Newspapers 2.1%

OtherUntrue affiliationsImplying endorsement by jurisdictionUnfounded "Specialty" areas

Advertising230 Deficiencies19.1% of Advisers with AUM

2.5%

15.3%

21.2%

26.3%

34.7%

0.0% 20.0% 40.0%

Failure to avoid or mitigate conflicts of interest

Failure to have procedures to preventing the misuse ofmaterial nonpublic information (UBP)

Failure to periodically assess and updatecompliance/supervisory program

Other issues

Failure to follow compliance/supervisory procedures

Supervision118 Deficiencies14.4% of Advisers with AUM

OtherPersonal trading reviewIdentifying client "insiders"Remote office reviews Outsourced compliance functions

11.9%

29.6%

42.2%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

Initial delivery

Update/Material change delivery

Annual offering/delivery

Brochure Delivery135 Deficiencies14.1% of Advisers with AUM

3.3%

3.3%

3.3%

3.3%

6.7%

6.7%

6.7%

6.7%

6.7%

6.7%

10.0%

10.0%

10.0%

16.7%

0.0% 5.0% 10.0% 15.0% 20.0%

Actively managed ETFS

Options

Pooled investment vehicle

3rd party advisers/money managers

Passively managed ETFS

Inverse (short) ETFs

Annuities

Private placements

Discretionary trading

Margin

Mutual funds (well-known fund families)

Leveraged ETFs

Debt securities (bonds, notes)

Equities (stocks)

Investment Activities Issues Found Where?

63.3%

55.3%

47.1%

27.9% 28.9%

22.6%

17.5%

23.3%

16.0%11.8%

11.0%

6.1%7.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

<30MM AUM

>30MM AUM

AUM <30MM vs. AUM >30MMUS Advisers with AUM > 0

Percent of exams noting at least one deficiency in the category

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

1 IAR

> 1 IAR

1 IAR vs. >1 IARUS Advisers with AUM > 0

Percent of exams noting at least one deficiency in the category

66.2%

58.9%

49.3%

35.3% 36.2%

23.6%20.8% 22.2%

14.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Ind. IA

IA-BD

Independent IAs vs. BD-affiliated IAs

Percent of exams noting at least one deficiency in the category

70.8%

60.6%

46.6%

27.1%

46.5%

27.1% 27.8%23.9%

13.1%15.2%

10.4%

15.3%

8.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

No PIV

PIV

Percent of exams noting at least one deficiency in the category

Comparison Non-PIV to PIV AdvisersUS Advisers with AUM > 0

• Prepare and maintain all required records, including financial records. Back-up electronic data and protect records. Document checks forwarded.

• Prepare and maintain client profiles or other client suitability info.• Review and revise Form ADV and disclosure brochure annually to reflect

current and accurate information.• Review and update all client advisory contracts.• Calculate and document fees correctly in accordance with contracts and

ADV.• Implement appropriate custody safeguards, especially for direct fee

deduction.• Start considering Cybersecurity policies, procedures, and measures• Keep accurate and current financials. File timely with the jurisdiction.

Maintain surety bond if required.• Review all advertisements, including website and performance

advertising, for accuracy.• Prepare a written compliance and supervisory procedures manual

relevant to the type of business to include business continuity plan.

Best Practices for Investment Advisers

The information provided herein is for your convenience only, is illustrative, and is not intended as legal advice.