When it comes to compliance, does size matter? Not so much, according to an analysis comparing RIA firms of different sizes.

A recent report by the NASAA analyzed deficiencies found during examinations at larger RIAs that had switched to state oversight from the SEC in response to the Dodd-Frank Act, and compared them with those at (smaller) existing state RIAs. The key takeaway: RIAs with significantly higher AUM commit the same compliance mistakes as firms managing much less money.

Since state securities examiners found larger RIAs often make the same mistakes as smaller firms, SEC-registered advisors should look in the mirror. These bigger firms may be making the same compliance errors as state-registered RIAs.

The NASAA report identified several specific hot spots for examined firms. For RIAs in both groups - those with more than and less than $30 million in assets - the three areas with the most common deficiencies were books and records, registration and contracts. Trouble spots Nos. 4 and 5 for the larger RIAs were in advertising and fees; for smaller firms, the last two areas of deficiencies were privacy and brochure delivery.

Among books and records deficiencies, examiners found a lack of suitability documentation. They also observed instances of missing contracts and other financial statements. Some RIAs lacked written supervisory procedures or business continuity plans.

Registration deficiencies were also plentiful. Form ADVs contained erroneous information, such as inaccurate AUM. Examiners also found inaccurate or improperly executed advisory contracts, including some with erroneous fees and fee formulas.

Examiners discovered that some RIAs failed to deliver their privacy policies at the inception of the advisory contract, as well as annually. Certain RIAs did not even implement privacy policies.

The RIAs examined also committed Form ADV delivery mistakes. And state examiners found a variety of other compliance issues related to fees, supervision, custody, financials and investment activities.

For advisory firms of all sizes, compliance should be an area of particular focus. SEC Chairwoman Mary Jo White has said that the commission may pursue even the smallest infractions, since they can lead to more serious violations. RIAs should take a similar approach: Beef up compliance manuals and crack down on employees who are violating policies and procedures.

It shouldn't take the threat of sanctions to force RIAs to live up to their fiduciary obligations to clients. An RIA's policies and procedures should go beyond what's required by the rules to ensure that clients' interests come first.


Les Abromovitz is an attorney and a senior consultant with National Compliance Services in Delray Beach, Fla.


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