Securities Division – Audit Unit
Quarterly Report – Fourth Quarter 2011
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 Fourth Quarter 2011
| 4th Quarter | Year to Date | |
Number of audits opened (onsite audits and desk audits) |
20 |
64 |
Number of audits closed (onsite audits and desk audits) |
13 |
53 |
| Number of pre-registration examinations commenced* | 9 |
51 |
Number of “for-cause” audits |
1 |
2 |
Number of audits referred to Enforcement Section |
1 |
5 |
Number of new registered broker-dealer firms |
17 |
104 |
Number of new registered investment adviser firms |
8 |
51 |
Number of new notice-filed federal-covered investment adviser firms |
8 |
75 |
* 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 third quarter of 2011:
Incomplete or inaccurate Form ADV*;
Failure to maintain a log of cash/securities received;
Inappropriate or misleading hedge/arbitration clauses*;
Failure to update client suitability information*; and
Failure to disclose potential conflicts of interest.
*Also included in Top 5 Deficiencies for the first, second or third quarter of 2011.
NASAA Coordinated Review Program
In an effort to ease the transition of investment advisers switching from federal to state oversight (as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act), the Missouri Securities Division is participating in the North American Securities Administrators Association’s (“NASAA”) Coordinated Review Program. The Coordinated Review Program is available for switching investment advisers required to register in 4-14 states, and was created to facilitate an expedited and uniform application process.
For more information on the NASAA Coordinated Review Program, please visit the Missouri Securities Division’s IA Switch Website (http://www.sos.mo.gov/securities/iaswitch/) and review the Division’s advisory release regarding the NASAA Coordinated Review Program (http://www.sos.mo.gov/securities/advisory.asp?nID=AR-11-07).
Securities Division – Audit Unit
Quarterly Report – Third Quarter 2011
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 2011
| 3rd Quarter | Year to Date | |
Number of audits opened (onsite audits and desk audits) |
16 |
44 |
Number of audits closed (onsite audits and desk audits) |
12 |
40 |
| Number of pre-registration examinations commenced* | 14 |
42 |
Number of “for-cause” audits |
0 |
1 |
Number of audits referred to Enforcement Section |
1 |
4 |
Number of new registered broker-dealer firms |
20 |
87 |
Number of new registered investment adviser firms |
13 |
43 |
Number of new notice-filed federal-covered investment adviser firms |
10 |
67 |
* 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 third quarter of 2011:
Incomplete or inaccurate Form ADV*;
Failure to maintain the minimum required net worth for the firm;*
Inappropriate or misleading hedge/arbitration clauses*;
Failure to deliver the ADV part 2*; and
Distributing advertisements that do not comply with Section 206(4)-1 of the Investment Advisers Act of 1940.
*Also included in Top 5 Deficiencies for the first or second quarter of 2011.
Risk Factors Considered when Scheduling Routine Examinations
In determining targets for routine examination, the Audit Unit often considers investment advisers with certain characteristics a high priority. The following are 10 risk factors the Audit Unit considers when making such determinations.
Participation in, or management of, pooled investment vehicles;
Size of the investment adviser;
Custody of client funds or securities;
Number of clients;
Percentage of the investment adviser's accounts that are discretionary;
Past or pending regulatory actions, civil actions, criminal convictions, or industry suspensions against the investment adviser or an affiliate;
Recommendation of securities in which the investment adviser, or an affiliate, has a sales or proprietary interest;
Charging performance based fees;
The investment adviser is also a broker-dealer or a bank; and
Use of solicitors.
Securities Division – Audit Unit
Quarterly Report – Second Quarter 2011
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 2011
| 2nd Quarter | Year to Date | |
Number of audits opened (onsite audits and desk audits) |
12 |
28 |
Number of audits closed (onsite audits and desk audits) |
13 |
28 |
| Number of pre-registration examinations commenced* | 18 |
28 |
Number of “for-cause” audits |
1 |
1 |
Number of audits referred to Enforcement Section |
3 |
3 |
Number of new registered broker-dealer firms |
30 |
67 |
Number of new registered investment adviser firms |
16 |
30 |
Number of new notice-filed federal-covered investment adviser firms |
23 |
57 |
* 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 first quarter of 2011:
Failure to maintain financial statements;
Failure to maintain the minimum required net worth for the firm;*
Inappropriate arbitration clauses in client contracts;;
Failure to deliver the ADV part 2;* and
Lack of client suitability information*
*Also included in Top 5 Deficiencies for The First Quarter of 2011.
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.
Review the Securities Division’s website at www.sos.mo.gov/securities for renewal filing procedures and answers to frequently asked questions related to registration requirements.
If the firm has Compliance/Supervisory Manuals, the firm should ensure that the manuals are current and that the firm follows the policies and procedures contained within the manuals.
Maintain records, including electronic records (such as email) and other correspondence, in a manner that allows easy accessibility to auditors.
Be sure that all the professional designations used on business cards and other materials, and included on Form ADV, are current.
Have the documents that were requested in advance prepared when the auditors arrive for the audit. If unsure how to prepare the documents, contact the auditor for guidance.
SEC Rules and Schedules finalized for Investment Adviser Transition to State Registration
Commissioner of Securities Matt Kitzi recently posted an advisory release with important information regarding the transition from federal to state registration for mid-sized investment advisers as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. You can access that release, and other important advisory releases, here.
Securities Division – Audit Unit
Quarterly Report – First Quarter 2011
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 2011
| 1st Quarter | Year to Date | |
Number of audits opened (onsite audits and desk audits) |
16 |
16 |
Number of audits closed (onsite audits and desk audits) |
15 |
15 |
| Number of pre-registration examinations commenced* | 10 |
10 |
Number of “for-cause” audits |
- |
- |
Number of audits referred to Enforcement Section |
- |
- |
Number of new registered broker-dealer firms |
37 |
37 |
Number of new registered investment adviser firms |
14 |
14 |
Number of new notice-filed federal-covered investment adviser firms |
34 |
34 |
* 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 first quarter of 2011:
-
Incomplete or inaccurate form ADV;*
Failure to maintain the minimum required net worth for the firm;
Inappropriate hedge clauses in client contract;
Failure to deliver the ADV part 2; and
Lack of client suitability information.
* Also included in Top 5 Deficiencies for 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 statutes and regulations related to firm compliance.
Review the Securities Division’s website at www.sos.mo.gov/securities for renewal filing procedures and answers to frequently asked questions related to registration requirements.
Maintain detailed information related to the investment adviser’s billing practices. Include documentation of the assets upon which fees were based, how the fees were calculated, copies of invoices sent to clients and/or custodians, and documentation demonstrating when fees deducted directly from clients accounts were withdrawn.
Maintain written contracts with all clients. Routinely update contracts if changes to the relationship have been made.
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.
Maintain a check log indicating any checks that are received by the investment adviser and forwarded to a custodian on behalf of a client. Include in the log the date the check was received, from whom it was received, the amount, the payee, and the date the check was forwarded on to the custodian.
Possible Delays in Investment Adviser Transition to State Registration
The Commissioner of Securities recently posted an advisory release with important information regarding possible delays in the transition from federal to state registration of mid-sized investment advisers as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. You can access that release, and other important advisory releases, by clicking here.