While conducting audits and pre-registration examinations of Missouri investment advisers, the Audit Unit of the Missouri Securities Division notes and seeks cure of common deficiencies found within the advisers' filings, contracts, records and practices. Each Quarter, the Division lists the most common investment adviser deficiencies in its Quarterly Audit Report. However, many of those common deficiencies continue to be prevalent. By proactively curing the following common deficiencies, Missouri investment advisers may expedite the audit or pre-registration exam process:
Common Deficiency: Inconsistencies between ADV Part 1, ADV Part 2, and client contracts.
Potential Cure: The representations that investment advisers make about their business to clients and to the Division should be consistent. When making changes to the client contract, be sure to update other related disclosure documents. When initially applying for registration, carefully examine ADV Part 1, ADV Part 2, and all client contracts to ensure each piece of information is consistent from form to form.
Common Deficiency: Inclusion of misleading arbitration or hedge clauses in client contracts.
Potential Cure: Investment advisers often include in their client contracts arbitration or hedge clauses. The Division has found that many of those clauses may mislead a client to believe that certain rights guaranteed under state or federal securities laws have been or must be forfeited. Furthermore, because investment advisers may in some cases be held liable for acts done in "good faith," the inclusion of hedge clauses that attempt to indemnify the adviser from such liability potentially runs contrary to the fiduciary duty owed to clients. For that reason, hedge clauses should be removed from client contracts and arbitration clauses should conspicuously state that the client is not waiving any rights guaranteed under state or federal securities laws.
Common Deficiency: Failure to maintain an appropriate system to track the receipt and disbursement of client checks/funds.
Potential Cure: Missouri investment advisers are required keep track of the receipt and disbursement of client funds. To meet that requirement, firms receiving client checks should consider maintaining a log indicating the date a check is received, from whom it was received, the amount, the payee, and the date the check is forwarded to the custodian.
Common Deficiency: Failure to maintain updated suitability information.
Potential Cure: Investment advisers should keep updated suitability information on each of their clients. As a best practice, advisers should require clients to complete a client information form every 36 months (at the least) that may include, among other things: the client's name, tax identification number, address, telephone number, date of birth, employment status, annual income, net worth, and the client's investment objectives. Some investment advisers require clients to fill out client information forms more frequently when the adviser is aware of potential changes in the client's suitability information. Completed client information forms should be kept on file for the investment adviser's reference.
Common Deficiency: Investment adviser representative does not meet Missouri's examination requirement for registration.
Potential Cure: Missouri-registered investment adviser representatives are required to have either a passing score on the Series 65 examination, or passing scores on both the Series 66 and Series 7 examinations. Further, in 2000, the Series 65 and Series 66 examinations were updated and substantially overhauled, and the new versions of the exams were subsequently adopted by the Commissioner. As a result, investment adviser representatives who took the Series 65 or Series 66 exam prior to 2000 may not meet the examination requirement for registration and should either: (1) take the new version of the examination; or (2) apply for an examination waiver.
Under the authority of the Missouri Securities Act of 2003, the Audit Unit in the Missouri Securities Division's Registration Section conducts routine and for-cause examinations of Missouri-registered investment advisers and broker-dealers. Such examinations may be either announced or unannounced. An investment adviser or broker-dealer could expect any of the following to occur during an announced examination:
What to expect during an announced examination/audit:
Unannounced examinations follow a process similar to announced examinations, excluding the notification process. It should also be noted that serious deficiencies or violations discovered during an examination may lead to a referral to the Division's Enforcement Section. In addition to the process above, firms should consider these recommendations for an expedited and successful examination:
Recommendations for an expedited and successful examination:
September 6, 2012
The Commissioner of Securities has issued an Advisory Release alerting Missouri's investment advisers and others to a recent report on the Investment Adviser Registration "Switch." Read the release here, and the Report here.
July 3, 2012
The Commissioner of Securities has issued an Advisory Release concerning pending investment adviser registration applications after the Dodd-Frank Act "Switch" deadline. Read the release here.
May 17, 2012
The Commissioner of Securities has issued an Advisory Release concerning a no-action letter and the April 26 rulemaking concerning Missouri Private Fund Advisers. Read the release here.
April 26, 2012
The Commissioner of Securities has issued an advisory release concerning a rulemaking related to an exemption from registration for certain advisers to private funds. Read the release here.
March 23, 2012
The Commissioner of Securities has issued an advisory release on the fast-approaching deadlines and best registration practices for investment advisers switching to state registration. Read the release here.
December 30, 2011
The Commissioner of Securities sent a letter to Missouri Investment Advisers who may switch to state regulation in 2012 under the Dodd-Frank Act. Read the letter here .
December 15, 2011
Advisory Release AR-11-07
The Commissioner of Securities issued an advisory release summarizing NASAA’s coordinated review program for investment advisers switching to state regulation in 4-14 states. Read the release here.
July 20, 2011
Advisory Release AR-11-04
The Commissioner of Securities for the State of Missouri issued an advisory release summarizing a No-Action Determination issued in response to a request by an adviser to a private fund. Read the release here.