2009 COORDINATED INVESTMENT ADVISER EXAMS

North American Securities Administrators Association

Who Was Examined?

458 State-level advisers, of which...

100 advisers (21.8%) were affiliated with a BD

76 advisers (16.6%) used or acted as solicitors

42 advisers (9.2%) managed pooled investments

Who Conducted the Exams?

Securities examiners from 35 jurisdictions including British Columbia, Ontario, Nova Scotia, Quebec, and Saskatchewan, Canada

What Was Found?

1887 total deficiencies in 13 categories

The Categories

• Books and Records• Financials• Registration

– ADV, U4, Firm, IARs, ADV Delivery

• Fees• Advertising

– Ads, Websites, Business Cards, Seminars,

• Privacy• Supervisory/Compliance

– Supervisory Procedures, Compliance Procedures, Policies

• Investment Activities– Adherence to Investment

Policy, Fairness, Conflicts

• Performance Reporting• Custody• Solicitors• Pooled Investment

Vehicles (Hedge Fund)• Unethical Business

Practices– 21 from NASAA Model

Rule 120(a)(4)-1• Unsuitable

Recommendations• Contracts• Unauthorized trades• Excessive Fees• Borrowing from client• Etc...

1

7.5

47

IARs Assets UnderManagement

(millions)

Accounts

The "Average" Adviser

Averages do not include advisers which had “0” Accounts and “0” Assets Under Management because they were:

Financial Planners Only

Solicitors Only

New Advisers

Averages do not include Canadian Provinces due to no maximum Assets Under Management

2009 Deficiencies by Category Exams with at Least One Deficiency in the Category

3.9%

12.2%

15.9%16.6%16.8%18.6%

27.7%

37.8%

41.7%

60.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Regis

tratio

n

Books

& R

ecord

s

Uneth

ical

Pra

ctic

es

Super

visi

on

Finan

cials

Privac

y

Adver

tisin

gFee

s

Custo

dy

Inve

stm

ent A

ctiv

ities

Comparing 2009 and 2007 DeficienciesExams with at Least One Deficiency in the Category

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Regis

tratio

n

Books

& R

ecor

ds

Uneth

ical

Pra

ctic

es

Super

visi

on

Fina

ncia

ls

Privac

y

Adver

tisin

gFe

es

Custo

dy

Inve

stm

ent A

ctiv

ities

2009 2007

0%

10%

20%

30%

40%

50%

60%

70%

Registra

tion

Books & R

ecords

Unethical P

ractic

es

Supervis

ory

Financials

Privac

y

Advertis

ing

Fees

Custody

Inve

stment A

ctiviti

es

Independent IA (358)

BD Affiliated (100)

Comparison of Independent IA and BD Affiliated Advisers

Exams with at least One Deficiency in the Category

0%

10%

20%

30%

40%

50%

60%

70%

1 IAR (349)

>1 IAR (109)

Comparing Advisers with 1 IAR to Those with More than 1 IAR

Exams with at least One Deficiency in the Category

0%

10%

20%

30%

40%

50%

60%

70%

Non-Hedge Fund Advisers (416)

Hedge Fund + IA Business (25)

Hedge Fund Only (17)

Comparing Hedge Fund Advisers to Non-Hedge Fund Advisers

Exams with at least One Deficiency in the Category

Registration475 Deficiencies

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

Other ADV Delivery

Unregistered IAR

Initial ADV Delivery

Business Descript

Affiliate Disclosure

Services Provided

Fee Structure

Annual ADV Offer

Assets Under Mgmt.

Other ADV

Inconsistency between Parts I and II

Updates to ADV not made timely

60% of all advisers had at least one deficiency.

Books and Records380 Deficiencies

0.00% 5.00% 10.00% 15.00% 20.00%

Bills, Receipts, Invoices

Cancelled Checks, Statements

Correspondence File

Advertising File

Cash - Securities Disburse. log

Complaint File

Journals - Ledgers

Trial Balance, Fin'l Stmts

Other B&R

Suitability Info

41.7% of all advisers had at least one deficiency.

Safeguarding Records and Data

Backup Data

Checks Forwarded Log

Unethical Practices291 Deficiencies

0.00% 5.00% 10.00% 15.00% 20.00%

Contract Non-assign

Other Unethical Practice

Contract-Recission Language

Contract-Refund of P'paid

Non-Public Info Policy

Contract-Not Executed

Qualifications, Svcs, Fees

Contract-Other

Contract-Hedge Clause

Contracts-None or Missing

37.8% of all advisers had at least one deficiency.

Other

Conflict with ADV

Not Updated

Unethical Business Practices 291 Deficiencies

• Advisory Contracts– 153 exams (33.4%) noted

at least one contract deficiency*

– 214 (73.5%) of the 291 UBP deficiencies

• Other Unethical Practices– 60 exams (13.1%) noted at

least one non-contract unethical practice deficiency*

– 77 (26.5%) of the 291 UBP deficiencies

173 exams (37.8%) noted at least one unethical business practice deficiency

* Some advisers had both contract and other unethical practice deficiencies

Two Types

0%

25%

50%

75%

Contracts Other UBP

37.8% of all advisers had at least one unethical

business practice deficiency

Unethical Business Practices

291 Total Deficiencies

No/Missing Contract: 26%

Hedge Clause: 17.8%

Other: 15.9% (info, not updated)

Not Executed: 7.5%

Pre-Paid Refund: 6.5%

Rescission: 5.6% (48hr lang.)

Non-Assignment: 5.1%

Fee Formula: 4.2%

Discretion: 3.3%

Term: 2.8%

Qualifications/Services: 23.4%

NPI Policy: 19.5%

Other: 14.3%

Conflicts: 11.7%

Excessive Fee: 5.2%

214 Contract Deficiencies

77 “Other” Deficiencies

Supervisory/Compliance140 Deficiencies

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

Didn't FollowProcedures

Other

InadequateProcedures

No Procedures

27.7% of all advisers had at least one deficiency.

Personal Trades

Remote Location Supervision

Business Continuity

Financials122 Deficiencies

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Insufficient Bond

Poor Financial Condition

No Bank Reconciliations

Inaccurate Net Worth

Other

Insufficient Net Worth

Inaccurate Financials

Not GAAP

CPA Independence

Commingling Accts.

18.6% of all advisers had at least one deficiency.

Privacy115 Deficiencies

0.00% 10.00% 20.00% 30.00% 40.00%

Other

Deficient Policy

No InitialDelivery

No AnnualDelivery

No PrivacyPolicy

16.8% of all advisers had at least one deficiency.

Advertising114 Deficiencies

0.00% 10.00% 20.00% 30.00%

Seminar

Performance Ads

Ads -Correspondence

Other - Ads

Misuse of "RIA"

Business Card

Website

Services

Designations

Indexes

Regulator

“Gratuities”

16.6% of all advisers had at least one deficiency.

Fees107 Deficiencies

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Different Fees - Same Service

Fee Invoices

Billing Errors

Fees vs ADV

Other - Fees

Fees vs. Contract

Fee Calculation

Undisclosed Fees

15.9% of all advisers had at least one deficiency.

Custody75 Deficiencies

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

Trustee for Relative

Signatory

Physical Custody

General Power of Attorney

Non-disclosed Custody

General Partner

Trustee

Other - Custody

Inadvertent Custody

Direct Fee Deduction

>$500, >6 months fees

Annual Audit of PIV

Notice to Administrator

PIN to Client Account

12.2% of all advisers had at least one deficiency.

Investment Activities19 Deficiencies

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%

Soft Dollars

Conflicts withADV/Contract

Other

Cross-Trades

Aggregate Orders

Proxy Voting

3.9% of all advisers had at least one deficiency.

Solicitors28 Deficiencies

0.00% 10.00% 20.00% 30.00% 40.00%

No Screening

Other - Solicitor

ADV Delivery

IA-Solicitoragreement

SolictitorDisclosure

Undisclosed Solicitors

20 of 76 advisers (26.3%) who used solicitors or acted as solicitors had at least one deficiency.

0%

10%

20%

30%

40%

50%

Hedge Fund Deficiencies

Hedge Fund + IA Business (25)

Hedge Fund Only (17)

Comparing Hedge Fund Advisers

Exams with at least One Deficiency in the Category

10 of 25 (41.6%) of hedge fund advisers

who also had a regular IA practice had at least one deficiency in this

category.

1 of 17 (5.9%) of hedge fund advisers who had no other clients had at

least one deficiency in this category.

Hedge Funds13 Deficiencies

0.00% 15.00% 30.00% 45.00%

Non-disclosed Conflicts

Other - PIV

Registration-ExemptionIssues

Non-accredited InvestorIssues

Back-testing

Order Tickets

10 of 25 (41.6%) of hedge fund advisers who

also had a regular IA practice had at least one

deficiency in this category.

1 of 17 (5.9%) of hedge fund advisers who had no other clients had at least one deficiency in

this category.

Performance Reporting8 Deficiencies

0.00% 10.00% 20.00% 30.00% 40.00%

Other

InaccurateResults

MisleadingPresentation

Best Practices for Investment Advisers• Review and revise Form ADV and disclosure brochure annually

to reflect current and accurate information.• Review and update all contracts.• Prepare and maintain all required records, including financial

records. Back-up electronic data and protect records.• Prepare and maintain client profiles.• Prepare a written compliance and supervisory procedures manual

relevant to the type of business.• Prepare and distribute a privacy policy initially and annually.• Keep accurate financials. File timely with the jurisdiction.

Maintain surety bond if required• Calculate and document fees correctly in accordance with

contracts and ADV.• Review all advertisements, including website and performance

advertising, for accuracy.• Implement appropriate custody safeguards, if applicable.• Review solicitor agreements, disclosure, and delivery procedures.