Securities Division – Audit Unit
To view the Report on the 2010 Senior Investor Protection Audit Sweep, click here.
Quarterly Report – Fourth Quarter 2010
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 Fourth Quarter 2010
| 4th Quarter | Year To Date | |
Number of audits opened (onsite audits and desk audits) |
16 | 80 |
Number of audits closed (onsite audits and desk audits) |
13 | 89 |
Number of pre-registration examinations commenced* |
13 | 13 |
Number of “for-cause” audits |
- | 5 |
Number of specific “cognitive decline” audits |
- | 24 |
Number of audits referred to Enforcement Section |
1 | 4 |
Number of new registered broker-dealer firms |
17 | 126 |
Number of new registered investment adviser firms |
8 | 40 |
Number of new notice-filed federal-covered investment adviser firms |
19 | 131 |
*In September 2010 the Unit began conducting pre-registration examinations of investment adviser applicants.
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 fourth quarter of 2010:
Lack of client suitability information;*
Failure to maintain the minimum required net worth for the firm;*
Incomplete or inaccurate form ADV;*
Inadequate supervisory procedures; and
- Inaccurate information contained on investment adviser firm’s website.
*Also included in Top 5 Deficiencies for other quarters of 2010.
Best Practice Recommendations for Investment Advisers
The following are examples of best practices employed by investment adviser firms, as discovered in the course of audits. This list is not exhaustive or meant to supplant a thorough reading of all statues and regulations related to firm compliance.
Implement procedures to ensure client suitability information is updated every 36 months.
When preparing client performance reports, keep the documentation on which the performance figures were based. The same is true for performance reports prepared for the firm. Be aware of the specific guidelines for what must be documented when preparing firm performance figures if the figures are to be advertised.
Maintain the required net worth for the firm. Be prepared to provide auditors with documentation demonstrating the financial information contained on a balance sheet and profit and loss statement.
When auditors request documents in advance of an audit, prepare them in advance. If you aren’t sure how to prepare the documents, contact the auditor for guidance. Don’t wait until auditors arrive to retrieve and prepare the requested information.
Have a Privacy Policy prepared and deliver that policy to clients initially and annually as required by the FTC.
Protecting Seniors and Their Life Savings: Policies and Practices of Missouri’s Investment Firms Report
Missouri Secretary of State Robin Carnahan recently released the findings of the Audit Unit’s statewide examination of the practices used by Missouri’s broker-dealer and investment adviser firms to protect their senior clients. Specific audit findings for individual firms are not public, but statewide trends suggest more should be done to address the unique investment challenges faced by aging clients. The report contains specific recommendations to better protect Missouri’s 1.1 million seniors and their life savings.
To view the report click here.
Securities Division – Audit Unit
To view the Report on the 2010 Senior Investor Protection Audit Sweep, click here.
Quarterly Report – Third Quarter 2010
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 Third Quarter 2010
| 3rd Quarter | Year To Date | |
Number of audits opened (onsite audits and desk audits) |
21 | 64 |
Number of audits closed (onsite audits and desk audits) |
37 | 76 |
Number of “for-cause” audits |
- | 5 |
Number of specific “cognitive decline” audits |
- | 24 |
Number of audits referred to Enforcement Section |
- | 3 |
Number of new registered broker-dealer firms |
34 | 109 |
Number of new registered investment adviser firms |
10 | 32 |
Number of new notice-filed federal-covered investment adviser firms |
28 | 112 |
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 third quarter of 2010:
Solicitor arrangements not properly maintained and/or disclosed properly to clients on form ADV.
Deficiencies related to fees – fees charged not correct based on client agreement and/or not disclosed properly to client;*
Out-of-date, incomplete or inaccurate form ADV Part II;*
Lack of client suitability information;* and
Failure to maintain the minimum required net worth for the firm.#
* Also included in Top 5 Deficiencies for First and Second Quarter of 2010.
# Also included in Top 5 Deficiencies for Second Quarter of 2010.
Best Practice Recommendations For Investment Advisers
The following are examples of best practices employed by investment adviser firms, discovered in the course of audits. This list is not exhaustive or meant to supplant a thorough reading of all statues and regulations related to firm compliance.
At renewal time, be sure that the firm pays renewal fees for both itself and any investment adviser representatives.
When auditors request documents in advance of an audit, prepare them in advance. If you aren't sure how to prepare the documents, contact the auditor for guidance. Don't wait until auditors arrive to retrieve and prepare the requested information.
Firms must have written contracts with all clients and include details of the items outlined in securities statutes and regulations.
Be sure to maintain the required net worth for the firm. Be prepared to provide auditors with documentation demonstrating the financial information contained on its balance sheet and profit and loss statement.
Know how to access and use the reports available to the firm through custodians. Be prepared to provide these reports to auditors.
ADV Part 2
On July 28, 2010 the Securities and Exchange Commission (SEC) released a revised Form ADV [SEC Release No. IA-3060; File No. S7-10-00]. The release primarily adopted amendments to Part 2 of Form ADV (also referred to as brochure or new Part 2). The new Part 2, with the instructions, can be found on the SEC’s web site at http://www.sec.gov/rules/final/2010/ia-3060.pdf. The amendment is changing the formats of Part 2 from a check-the-box form to a narrative brochure written in plain English.
As of January 1, 2011 all new investment adviser applicants will have to file, through the IARD, the new Part 2 of Form ADV as part of their application. As of January 1, 2011 all licensed investment advisers will need to incorporate the new Part 2 of Form ADV with their next filing of an amendment to Form ADV. Between October 12, 2010 and January 1, 2011 applicants and current licensed investment advisers filing amendments to their Part II of Form ADV may use either the current Part II or the new Part 2.
The Missouri Commissioner of Securities is reviewing other ADV Part 2 matters and is considering issuance of an advisory release on the same.
Securities Division – Audit Unit
Quarterly Report – Second Quarter 2010
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 Second Quarter 2010
| 2nd Quarter | Year To Date | |
Number of audits opened (onsite audits and desk audits) |
20 | 43 |
Number of audits closed (onsite audits and desk audits) |
16 | 39 |
Number of “for-cause” audits |
2 | 5 |
Number of specific “cognitive decline” sweep audits |
15 | 24 |
Number of audits referred to Enforcement Section |
1 | 3 |
Number of new registered broker-dealer firms |
33 | 75 |
Number of new registered state-covered investment adviser firms |
15 | 22 |
Number of new notice-filed federal-covered investment adviser firms |
24 | 84 |
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 2010:
Lack of client suitability information;*
Out-of-date, incomplete or inaccurate form ADV Part II;*
Use of business cards and/or stationary that are misleading as to the entity’s registration status;
Deficiencies related to fees – fees charged not correct based on client agreement and/or not disclosed properly to client;* and
- Failure to maintain the minimum required net worth for the firm.
* Also included in Top 5 Deficiencies for First Quarter of 2010.
Best Practice Recommendations For Investment Advisers
The following are examples of best practices employed by investment adviser firms, discovered in the course of audits. This list is not exhaustive or meant to supplant a thorough reading of all statues and regulations related to firm compliance.
When auditors request documents in advance of an audit, prepare them in advance. If you aren’t sure how to prepare the documents, contact the auditor for guidance. Don’t wait until auditors arrive to retrieve and prepare the requested information.
At renewal time, be sure that the firm pays renewal fees for both itself and any investment adviser representatives.
Firms must have written contracts with all clients and include details of the items outlined in securities statutes and regulations.
When recommending an annuity replacement or sale, document all of the facts relating to the transaction. Include reasons for the replacement, surrender charge schedule for the new contract, current value, surrender value, rider information, and guaranteed death benefit on both contracts, advantages and disadvantages of the replacement, and any other relevant facts used to make the recommendation.
Be sure to maintain the required net worth for the firm. Be prepared to provide auditors with documentation demonstrating the financial information contained on its balance sheet and profit and loss statement.
Securities Division – Audit Unit
Quarterly Report – First Quarter 2010
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 2010
Number of audits opened (onsite audits and desk audits) |
23 |
Number of audits closed (onsite audits and desk audits) |
23 |
Number of “for-cause” audits |
3 |
Number of specific “cognitive decline” sweep audits |
9 |
Number of audits referred to Enforcement Section |
2 |
Number of new registered broker-dealer firms |
42 |
Number of new registered state-covered investment adviser firms |
7 |
Number of new notice-filed federal-covered investment adviser firms |
60 |
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 2010:
-
Missing, incomplete, inaccurate or otherwise non-compliant client agreements;
Out-of-date, incomplete or inaccurate Form ADV Part II;
No privacy policy for fim and/or policy not annually offered to customers;
Lack of client suitability information; and
Deficiencies related to fees – fees charged no correct based on client agreement and/or not disclosed properly to client.
Best Practice Recommendations For Investment Advisers
The following are examples of best practices employed by investment adviser firms, discovered in the course of audits. This list is not exhaustive or meant to supplant a thorough reading of all statutes and regulations related to firm compliance.
Review Form ADV Parts I & II and Form U4 for the firm and associated individuals at least annually, and amend inaccurate responses.
File Form ADV Part II online.
Maintain detailed information relating to the firm’s billing and fees, including documentation of the assets on which the fees were calculated, how the fees were calculated, copies of any invoices sent to customers as well as to custodians, and documentation of when fees deducted directly from clients accounts were withdrawn.
Maintain current client suitability information.
Maintain records, including electronic records such as e-mail and other correspondence, in a manner that allows easy accessibility to auditors.
Cognitive Decline Sweep
In the first quarter of 2010 the Audit Unit prepared for and began a sweep of broker-dealer and investment adviser firms to gather data and information about how firms address and respond to issues faced by Missouri’s elderly investors. The sweep focuses on issues related to the cognitive decline many older Americans may experience, how firms screen for decline amongst their senior clients, what special compliance policies firms have in place in order to address these issues, and how thoroughly these policies are being implemented. This “Cognitive Decline Sweep” was implemented by adding cognitive decline questions to customary exam modules, as well as by conducting several audits focused solely on cognitive decline. The sweep will continue into the second quarter of 2010, and a report will be issued in the Summer of 2010.