WASHINGTON -- State securities regulators have been ramping up examinations of investment advisors in the aftermath of the Dodd-Frank Act, which required more than 2,000 midsized advisors, who had been overseen by the feds, to register with state authorities.
In the latest biennial poll by the North American Securities Administrators Association, state regulators said they discovered 6,482 deficiencies in exams conducted in 2013 or late 2012, up 83% from the 3,543 deficiencies reported in 2011. State authorities reported 1,130 exams conducted in the most recent period, up from 825 exams in 2011.
NASAA's poll draws on a sample of 44 state and provincial securities examiners that aims to present a representative analysis of the compliance pitfalls for smaller advisors who are overseen by state authorities.
"Using this sample data helps NASAA identify common regulatory deficiencies and recommend best practices that investment advisors should consider to minimize the risk of regulatory violations," explains A. Heath Abshure, Arkansas Securities Commissioner and a former NASAA president.
NASAA reported that about 2,100 advisors who manage assets between $30 million and $100 million registered with state regulators as a result of the Dodd-Frank Act.
In a subsequent study, NASAA reported that 3,564 advisors and brokers had withdrawn their licensing applications as a result of state enforcement action last year, a 27% increase over 2011. Another 736 licenses were denied, revoked, suspended or conditioned, according to the group.
The organization attributes both the increasing frequency and rigor of the examination process and the heightened scrutiny of new licensing applications to the expanded role accorded to state authorities under the Dodd-Frank Act.
"All advisors and brokers were getting a closer look as a result of the switch," says NASAA spokesman Bob Webster. "We had more categories of deficiencies in the most recent sweep, which would indicate to me a kind of a closer scrutiny in the examination process."
Regulators polled by NASAA said that the volume and type of deficiencies that they found with the mid-sized advisors now under their purview were generally consistent with the smaller practitioners they have historically overseen. However, advisors who had never been subjected to a state exam were cited for more deficiencies than those who had previously been examined in almost all categories.
For both sets of advisors, the top three deficiencies were in the areas of books and records, registration and contracts. Advisors with assets under $30 million were also commonly cited for issues relating to privacy and brochure delivery. Examiners reported numerous deficiencies with mid-sized advisors involving advertising and fees.
Books and records was the category where examiners found the most frequent deficiencies, issuing record-keeping citations in 68.2% of the exams reported in the NASAA survey. Registration issues, often involving discrepancies between Parts 1 and 2 of Form ADV, were cited in 58.5% of the exams.
MAKING THE SWITCH
Ken Shapiro, president of the Shapiro Financial Security Group based in Hazlet, N.J., was one of the RIAs compelled to switch from federal oversight to state registration under Dodd-Frank.
Shapiro, a CPA and CFP, has been practicing for 30 years, though over that time his business has shifted from the accounting space into financial planning and advising. Beginning around 2003, his firm began sharply growing its assets under management, and about four years later, having crossed the threshold for federal registration, then set at $25 million, he hired a consultant to assist with his compliance efforts and help manage the transition to SEC registration.
Now, with about $70 million in AUM, he is once again a state registrant. There was little in that shift that entailed substantive changes in his firm's compliance framework, Shapiro says, though he describes a laborious process of preparing and filing the paperwork with state authorities and unregistering with the SEC.
"Overall the transition went rather smoothly," he says. "We spent a lot of staff time, not billable time, regurgitating a lot of the review that we did when we SEC registered."
MULTIPLE STATE REGISTRATIONS
Due to its client base, in addition to registering in Shapiro's home state, the firm also had to register in New York, which demanded an additional set of documents, and re-registered with Texas, where the group had previously filed paperwork before the initial move to the SEC." After a year-end review, Shapiro anticipates that he might have to register with additional states.
But with his firm's AUM on the rise, Shapiro is looking toward crossing the $100 million threshold that would allow him to return to the SEC. That transition would, of course, bring a new round of forms to file, but it would have the longer-term payoff of operating under a single regulatory regime.
"If I was SEC it would all be very consistent," Shapiro says. "There would be a standardized set of reports that I have to do each year and I know what to expect."
He adds: "I harbor a little bit of ill will to the various advisors that have been abusive with their responsibilities, starting with Mr. Madoff. That has created these changes out here and made it harder for an independent RIA like myself to deal with compliance and all the time and energy and cost to have to zigzag back and forth, really with no benefit for my clients."
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