State Investment Adviser and Securities Regulators Hold Annual Conference

Parker MacIntyre attorneys Steve Parker and Bryan Gort attended the 2015 annual conference of the North American Securities Administrators Association (NASAA) held last week in San Juan, Puerto Rico. As usual, the conference provided valuable guidance and updated information on areas of importance to state-registered investment advisers, as well as federal notice filed broker-dealers and SEC registered investment advisers.

Of interest to state-registered investment advisers are proposed amendments to Part 1B of Form ADV that would attempt to capture an RIA’s use of social media and information on the use of third-party compliance professionals.

NASAA also presented the findings of its 2015 coordinated investment adviser examination review, compiled from the results of over 1100 investment adviser examinations. Once again, books and records deficiencies was the leading category, with 78% of all examined entities having deficiencies in that area. Within that category the failure to maintain adequate client suitability data was the leading deficiency, accounting for 10% of the deficiencies noted within the books and record category.

A surprisingly large number of registrants also having contract deficiencies, usually indicative of the failure to include required statutory provisions, the inclusion of statutorily prohibited provisions, or inaccurate or unclear language relating to a material term, such as the client’s fee.

While the number of registration related violations dropped between 2013 and 2015, there were more reported violations in every other category in 2015 when compared to the 2013 examination data.

A nine-state task force consisting of state regulators is also considering a cybersecurity examination module to examine firms’ compliance with procedures designed to safeguard client identities and clients’ personal nonpublic information. This task force is coordinating with recent SEC initiatives. Among the issues emphasized was that firms conduct due diligence on third-party service providers who provide IT services and other cybersecurity task as contracted vendors. Several states are conducting outreach programs with their registered advisers regarding cybersecurity compliance, among other issues.

Among other topics this year were a NASAA proposed model rule to prevent elder financial abuse, proposed on the final day of the conference, and final model rule on registration exemption for merger and acquisition broker-dealers. NASAA also unveiled a Model Fee Disclosure form that was developed by the state regulators working closely with industry representatives, including the Financial Services Institute and the Securities Industry and Financial Markets Association.

Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.