Gerald Rome Securities Commissioner. Gerald Rome Securities Commissioner

Colorado Division of SecuritiesDepartment of Regulatory Agencies

March 13, 2015

David B. SwaffordChief Examiner

Financial Planning Associationof Colorado

The Examination:To Fear Or Not to Fear

Gerald RomeSecurities Commissioner

The Examination:To Fear


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The Examination:Or Not To Fear


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The Examination:To Fear Or Not To Fear

The Examination begins?



Licensing



Licensing, like Examinations is a

Process



The Process reconciles:ADV Part 1 A & B



The Process reconciles:ADV Part 1 A & BADV Part 2 A & B




Contracts (or offering Documents)




Contracts (or offering Documents)Interview




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The Examination is a Process



The Examination is a Process:Selection




Notification




NotificationCollection and Analysis of Documents




NotificationCollection and Analysis of Documents

Close the Examination



The Examination is a Process:

Selection:Risk Based and Cyclical




Selection:Risk Based and Cyclical…..….and For Cause




Notification:Letter and Phone call




Notification:Letter and Phone call………..or We Show Up




Collection and Analysis of Documents:Initial Document Request





An Interview





An InterviewFollow-up Document Requests





An InterviewFollow-up Document Requests

Follow-up Questions




Close the Examination:Deficiency Letter with Instructions





Deficiency Letter with Agreed Upon Consequences





Deficiency Letter with Agreed Upon ConsequencesReferral to Enforcement



What can you do to be prepared for when not if?


NASAA 2013 Coordinated Investment Adviser Examinations

WWW.NASAA.ORG | 202 737 0900 | 750 FIRST ST NE STE 1140 WASHINGTON, DC 20002

Investment Adviser Operations Project Group

NASAA Investment Adviser SectionOctober, 2013


NASAA’s Coordinated Exams Program is a biennial initiative conducted to identify common investment adviser deficiencies.

The data draws from a sample of state-level investment-adviser examinations, reported by states.

States report examinations on a voluntary basis.

The number and types of exams reported by each state varies year-to-year and is at the discretion of each state.

The goal of NASAA’s Coordinated Exam Initiative is to draw from sample data to identify common regulatory deficiencies and develop best practices to avoid regulatory violations

2013 Reported Examinations

1,130 advisers between Jan. 1, 2013 and June 30, 2013*

183 advisers (16.2%) were affiliated with a BD

126 advisers (11.2%) used or acted as solicitors

74 advisers (6.5%) managed pooled investments

712 advisers (63%) had one IAR only

65 advisers (5.8%) had only financial planning clients

411 advisers (36.8%) had AUM >$30MM

* In some instances, exams conducted in late Summer and Fall of 2012 were counted if the state had performed the majority of their exams prior to January 1, 2013.


Who Conducted the Exams?

Securities examiners from 44 jurisdictions including Alberta, British Columbia, Ontario and Quebec, Canada

What Was Found?

6,482 deficiencies in 20 categories


• Books and Records• Financials• Registration

– ADV, U4, Firm, IARs, ADV Delivery

• Fees• Contracts• Advertising

– Ads, Websites, Business Cards, Seminars,

• Privacy• Supervisory/

Compliance– Supervisory

Procedures, Compliance Procedures

• Investment Activities– Adherence to

Investment Policy, Fairness, Conflicts

• Performance Advertising

• Performance Reporting

• Custody• Acting as Solicitor• Paying Solicitors• Pooled Investment

Vehicles (Hedge Fund)

• Custodial Arrangements

• Unethical Practices• Brochure Delivery• Financial Planning• IA/BD Crossover

The Categories


Percentage of Exams With Category Deficiencies

All Advisers with AUM > 0

% of Exams noting at least one deficiency in the category


Books and Records Deficiencies (1,783)

No WSP/Compliance Manual

Advertising File

Order Memorandum

General/Aux Ledgers

Changes to Disclosure Brochure

Disclosure Brochure

WSP-Business Continuity Plan

Trial Balance/Fin'l Statements

Missing Client Contracts

Suitability Documentation

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

2.9%

3.0%

3.1%

3.2%

3.2%

4.6%

4.9%

7.1%

8.5%

10.8% 68.2% of all adviserswith AUM > 0

Form ADV - Discretion

Form ADV - Overstated AUM

Form ADV - Affiliations

Form ADV - Personnel

Form ADV - Conflicts of interest

Timely filing of amendments

Form ADV - Business description

Form ADV - Services provided

Form ADV - Fee structure

Form ADV - Part 1 vs. Part 2

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

2.9%

3.6%

4.0%

4.8%

4.8%

6.9%

7.5%

9.3%

9.5%

13.5%

Registrations Deficiencies (1,211)

58.5% of all adviserswith AUM > 0

Contracts Deficiencies (791)

44.0% of all adviserswith AUM > 0

Refund of pre-paid fees

Capital gains compensation

Services

Discretionary authority

Not updated

48 hour rescission clause

In writing

Hedge clauses

Fee formula

Fee

Not properly executed

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

4.3%

4.3%

4.6%

5.1%

5.3%

5.4%

6.4%

9.0%

10.4%

10.5%

10.9%

Suggested Best Practices

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

Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.

Review and update all contracts.

Prepare and distribute a privacy policy initially and annually.

Deliver disclosure brochure initially and annually as required.




Review all advertisements, including website and performance advertising, for accuracy.

Calculate and document fees correctly in accordance with contractsand ADV.

Prepare and maintain written compliance and supervisory procedures relevant to the type of business to include business continuity plan. Assess and update periodically.

Implement appropriate custody safeguards, as applicable. Pay close attention to direct fee deduction invoices.



Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.

Make sure client’s investment policy and suitability information are current.

Disclose soft dollars or benefits received.

Prepare and maintain current client profiles.

Review solicitor agreements, disclosure, and delivery procedures.


Bottom Line:

Once a year (Annual Updating Amendment) look at your ADV Part 1 A&B, compare it to your

ADV Part 2 A & B, compare it to yourContracts (or offering Documents), and compare it to

what you actually do.

60% to 75% of deficiencies on an Examination



Then check the Colorado Division of Securities website for your books and records requirements


The Examination:Or Not To Fear


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The Examination:To Fear


http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://tyronetribulations.com/2014/03/&ei=N4oBVYWNC4LhsATsuIDwCQ&bvm=bv.87920726,d.cWc&psig=AFQjCNEM7eGc4zrNyYPs6GyH1_krNtLJyw&ust=1426250471019856


Resources:

Colorado Division of Securities: www.dora.colorado.gov.dos Colorado Division of Securities IA Books & Records Requirements:

51-4.6(IA)NASAA : www.nasaa.org

U.S. Securities and Exchange Commission: www.sec.govInvestment Adviser Public Disclosure (IAPD): www.adviserinfo.sec.gov

Financial Industry Regulatory Authority: www.finra.org

David B. Swafford: [email protected]


Colorado Division of SecuritiesDepartment of Regulatory Agencies

On behalf of Commissioner Rome and the Department of Regulatory Agencies, Division of Securities,

we

Thank You!
