This is the first of a two-part series dealing with the state-registered investment adviser industry. In this first post we examine the landscape and discuss common deficiencies identified in state adviser examinations.
Relevant statistics can be found in the North American Securities Administrators Association’s 2018 Investment Adviser Section Annual Report. The Report offers an overview of the state-registered investment adviser industry in the US and highlights the work that state regulators and NASAA’s Investment Adviser Project Groups completed in 2017. The report should be viewed as a useful tool for state-registered advisers to anticipate and correct deficiencies that are commonly cited by state regulators.
There are currently 17,668 state-registered investment advisers in the United States. The five states with the most state-registered investment advisers are California (2,998), Texas (1,279), Florida (1,099), New York (876), and Illinois (778). The states that experienced the greatest increases in state-registered investment advisers are Ohio (27), Wyoming (21), Arizona (19), Texas (17), and Kentucky (12).
The Report focuses on the results of investment adviser examinations conducted by NASAA’s Operations Project Group in 2017. No current year information is available. This portion of the Report should be helpful to state-registered investment advisers who seek guidance regarding which compliance issues they should pay particular attention to. The top five exam deficiency categories, according to the Report, were books and records (64.6%), registration (54.3%), contracts (45.4%), fees (27.2%), and custody (27.2%). These general categories are further broken down into specific violations.
The Report also provides information and statistics regarding state-registered investment advisers’ business models. For example, NASAA observed that the average state-registered investment adviser is a “one-to-two person shops staffed with licensed professionals exclusively.” While state-registered investment advisers provide a vast array of services, most of their services involve individual portfolio management. In fact, the Report claims that 82 percent of state-registered investment advisers’ clients are retail investors, while 18 percent are high-net worth individuals and less than one percent are businesses. As for fees, the Report indicates that most state-registered investment advisers charge their clients fees based on a percentage of assets under management. A significant number also charge clients on an hourly basis for main or ancillary services. A small number of state-registered investment advisers charge clients commissions or fixed fees.
Recent activities of NASAA’s Investment Adviser Section’s various Project Groups and what the Project Group’s goals are for the foreseeable future include continuing to examine registrants with a focus on cybersecurity policies and working with various other NASAA groups to make sure that NASAA members are prepared to address cyberattacks. The Regulatory Policy and Review Project Group and the Operations Group plan to work together to develop new tools that will help examiners identify and assess unethical business practices, fiduciary duty and advertising violations. The IA Training Project Group plans to continue to provide training and education to NASAA members to make sure that members are familiar with and ready to tackle relevant issues in the securities industry.
As detailed in the Report, NASAA members conducted outreach programs in 2017 to help educate state-registered investment advisers. These events included the Pennsylvania Compliance 2017 Conference, which was held to inform investment professionals and their firms of changes in federal and state securities laws and regulations. They also included the Senior$afe outreach initiative, which is intended to educate investment advisers and broker-dealers about senior financial exploitation and what they can do to prevent it.
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 compliance with federal and state laws and rules. Please visit our website for more information.