SOS Home :: Securities :: Securities Audit Reports :: 2012

Securities Division – Audit Unit

Quarterly Report – Third Quarter 2012

The Audit Unit of the Missouri Securities Division releases a quarterly report that provides information on audit activities, common deficiencies and best practices.

Audit Statistics for the Third Quarter 2012
  3rd Quarter Year to Date

Number of audits opened (onsite audits and desk audits)

16

36

Number of audits closed (onsite audits and desk audits)

17

35

Number of pre-registration examinations commenced (total)

8

89

Number of investment adviser firms applying for state registration pursuant to Dodd-Frank "Switch"

2

59

Number of "for-cause" audits

4

6

Number of audits referred to Enforcement Section

5

8

Number of new registered broker-dealer firms

22

67

Number of new registered investment adviser firms

10

81

Number of new notice-filed federal-covered investment adviser firms

20

100


Top 5 Deficiencies

The Audit Unit inspects broker-dealers and investment advisers and notes deficiencies in their compliance with Missouri statutes and regulations. The following were the top five most common deficiencies found in the second quarter of 2012:

  1. Client contracts that contain inappropriate or misleading hedge/arbitration clauses*;

  2. Failure to maintain the required net worth;

  3. Failure to update client suitability information;*

  4. Inaccurate disclosure of outside business activities;* and

  5. Inconsistencies between the firm’s compliance manual and its compliance practices.


* Also common deficiencies in the second quarter of 2012

IA Switch Report

IIn the first six months of 2012, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Missouri Securities Division facilitated the transition of approximately 60 investment advisers from federal to state registration (the “IA Switch”).

After that registration transition was complete, the Division compiled and analyzed the information gathered during the IA Switch to evaluate the effectiveness of the Division’s efforts. The findings of that analysis were then issued in a report (the “IA Switch Report”) summarizing the Division’s outreach leading up to the transition, providing data about the mid-sized investment advisers new to state registration, and outlining the Division’s audit schedule for mid-sized investment advisers that transitioned to Missouri registration.

The IA Switch Report in its entirety can be found at:

http://www.sos.mo.gov/securities/listserv/docs/iaswitchreport_2012.pdf


Securities Division – Audit Unit

Quarterly Report – Second Quarter 2012

The Audit Unit of the Missouri Securities Division releases a quarterly report that provides information on audit activities, common deficiencies and best practices.

Audit Statistics for the Second Quarter 2012
  2nd Quarter Year to Date

Number of audits opened (onsite audits and desk audits)

9

20

Number of audits closed (onsite audits and desk audits)

8

18

Number of pre-registration examinations commenced (total)

57

81

Number of investment adviser firms applying for state registration pursuant to Dodd-Frank "Switch"

44

57

Number of "for-cause" audits

2

2

Number of audits referred to Enforcement Section

3

3

Number of new registered broker-dealer firms

17

45

Number of new registered investment adviser firms

53

71

Number of new notice-filed federal-covered investment adviser firms

24

80


Top 5 Deficiencies

The Audit Unit inspects broker-dealers and investment advisers and notes deficiencies in their compliance with Missouri statutes and regulations. The following were the top five most common deficiencies found in the second quarter of 2012:

  1. Inappropriate or misleading hedge/arbitration clauses;*

  2. Inconsistencies between ADV Part 1 and Part 2;*

  3. Failure to update client suitability information;*

  4. Failure to accurately report outside business activities; and

  5. Failure to clearly identify soft-dollar benefits in Form ADV Part 2.


*Also common deficiencies in the first quarter of 2012.

Dodd-Frank IA Switch Update

In response to the Dodd-Frank Act's mandated switch to state registration for certain investment advisers, the Division has received a total of 63 applications for registration from investment advisers switching from federal to state registration. Of those 63 applicants, 30 are based in Missouri.

As of June 30, 2012, 56 of the 63 (28 of 30 Missouri-based) switching advisers that applied with Missouri have been approved for registration. Some applications remain pending, as Division auditors have required additional information or modifications from seven applicants.

Based on information received from both the U.S. Securities and Exchange Commission and the North American Securities Administrators Association, the Securities Division might receive as many as 10-20 additional applications from advisers required to switch to state registration.

For more information on switching from federal to state oversight, please visit the Securities Division's IA Switch website at www.sos.mo.gov/iaswitch.


Securities Division – Audit Unit

Quarterly Report – First Quarter 2012

The Audit Unit in the Missouri Securities Division releases a quarterly report that provides information on audit activities, common deficiencies and best practices.

Audit Statistics for the First Quarter 2012
  1st Quarter Year to Date

Number of audits opened (onsite audits and desk audits)

11

11

Number of audits closed (onsite audits and desk audits)

10

10

Number of pre-registration examinations commenced (total)

24

24

Number of “for-cause” audits

0

0

Number of audits referred to Enforcement Section

0

0

Number of new registered broker-dealer firms

28

28

Number of new registered investment adviser firms

18

18

Number of investment adviser firms applying for Missouri registration pursuant to the Dodd-Frank “Switch”

13

13

Number of new notice-filed federal-covered investment adviser firms

56

56



Top 5 Deficiencies

The Audit Unit inspects broker-dealers and investment advisers and notes deficiencies in their compliance with Missouri statutes and regulations. The following were the top five most common deficiencies found in the first quarter of 2012:

  1. Inappropriate or misleading hedge/arbitration clauses;*

  2. Inconsistencies between ADV Part 1 and Part 2;*

  3. Inaccurate or misleading information on the adviser’s website;

  4. Failure to update client suitability information; and

  5. Inconsistent disclosure of fee structure.


*Most common deficiencies since the first quarter of 2011.

Timeline for Investment Advisers Switching From Federal to State Registration

The Commissioner of Securities has issued an advisory release regarding the application timeline for advisers switching from federal to state registration. The release is available on the Securities Division’s website (www.sos.mo.gov/securities/iaswitch/advisoryList.asp?nID=AR-12-01).

For more information on switching from federal to state oversight, please visit the Securities Division’s IA Switch website at www.sos.mo.gov/iaswitch.



2011 Quarterly Audit Reports
2010 Quarterly Audit Reports
 

Missouri Securities Division
Investor Protection Hotline: (800) 721-7996
General: (573) 751-4136   Facsimile: (573) 526-3124
Email: securities@sos.mo.gov
600 West Main Street
Jefferson City, MO 65101Driving Directions