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With 17,000 RIAs in flux, state regulators issue exam guidance

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The number of state-registered RIAs amounts to 17,688 firms, according to state regulators, who released their first-ever snapshot of smaller practices and warned advisors about areas of enhanced oversight.

North American Securities Administrators Association President Joseph Borg unveiled the statistics on May 7 at the organization’s policy conference in Washington, D.C. He also spoke supportively of the SEC’s proposed Regulation Best Interest while pledging to help improve it.

The total RIA population of 30,509 practices includes 17,688 state-registered firms with fewer than $100 million in assets under management and SEC-registered firms with more than $100 million in AUM, which now number 12,821 practices.

The number of small RIAs receiving examinations and the number of deficiencies uncovered in each one have grown, thanks to technology and training, NASAA said last fall. They’re also inspecting three more compliance categories than in 2015, including cybersecurity.

The new report follows a checklist guide for RIAs with 89 different questions NASAA says examiners assess in their inspections, as well as their findings on the most frequent deficiencies in all areas.

“Both of these efforts were specifically designed to provide free and direct aid to smaller investment advisor shops,” Andrea Seidt, the chairwoman of NASAA’s Investment Adviser Section, said in a statement.

“With these two reports in hand, state-registered investment advisors can quickly identify common examination deficiencies of concern to our member regulators and develop stronger cybersecurity policies, procedures, and practices.”

Advisors should expect more regulatory requirements, enforcement actions and uncertainty in 2018, experts say.
December 11

Deficiencies show up most often in the categories of books and records (64%) and registration (54%), according to NASAA. Client suitability information and disparities between Parts 1 and 2 of Form ADV represent the most common deficiencies in each category.

In addition to the close scrutiny of those two categories, advisors should also expect to supply more information before the examination in the form of pre-exam questionnaires, state regulators say. NASAA held the policy conference at a critical time for regulators, just a few weeks after the SEC proposed its Regulation Best Interest.

The proposal is viewed as a substitute for the Department of Labor’s fiduciary rule, which an appeals court decision vacated in March. SEC Chairman Jay Clayton has reached out to NASAA to set up a meeting so that state regulators can engage with SEC staff on the proposal, Borg says.

"We will take him up on that. I guarantee it," Borg said. "We're going to be digging through that 1,000-page document, and we will be making some very strong commentary. We want to tell them what we like, what we don't like."

Borg welcomes the proposed restrictions on the use of the term "advisor," for example.

"But it's a long way to go from where we need to be," he said. "I think we all agree the suitability standard needs to be raised."

Borg praised Clayton for putting out the proposal, and "making it a primary issue," but he called it a "skeleton" and said that the commission will have to "put meat on the bones" for the rule to have its intended effect of protecting investors from unscrupulous advice.

SEC Commissioner Kara Stein and other critics have argued that the proposal would amount to a preservation of the status quo, permitting brokers to continue operating with harmful conflicts of interest and relying too heavily on disclosures. Stein, a Democrat, was the only commissioner to vote against advancing the proposal.

State-level regulations may throw a wrench into the SEC’s proposal if they impose a patchwork of their own fiduciary standards in place of the vacated Labor Department rule. The issue, along with the rising emphasis on cybersecurity, could place major compliance burdens on smaller RIAs.

Some 78% of state-registered RIAs consist of only one or two employees, and the vast majority of their clients, 82%, are retail investors rather than high-net-worth clients, according to NASAA. California has the most state-registered RIAs, with 2,988, followed by Texas, Florida, New York and Illinois.

“State advisors dot the landscape in every town, in every state across the country,” NASAA’s report notes.

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