Investment Adviser Policies and Procedures Manual State Only

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Investment Adviser Policies and Procedures Manual State Only Powered By Docstoc
					    2007 COORDINATED
INVESTMENT ADVISER EXAMS
    North American Securities
    Administrators Association
Who Was Examined?

     418 State-level advisers, of which...

         104 advisers (25%) were affiliated with a BD
           69 advisers (16.5%) used or acted as solicitors
          28 advisers (6.7%) managed pooled investments

Who Conducted the Exams?

     Securities examiners from 43 jurisdictions
     including British Columbia, Ontario, Nova
     Scotia, and Quebec, Canada

What Was Found?
     2135 total deficiencies in 13 categories
                        The Categories
• Books and Records                • Performance Reporting
• Financials                       • Custody
• Registration                     • Solicitors
   – ADV, U4, Firm, IARs, ADV      • Pooled Investment
     Delivery                        Vehicles (Hedge Fund)
• Fees                             • Unethical Business
• Advertising                        Practices
   – Ads, Websites, Business           – 21 from NASAA Model
     Cards, Seminars,                    Rule 120(a)(4)-1
• Privacy                                 • Unsuitable
                                            Recommendations
• Supervisory/Compliance                  • Contracts
   – Supervisory Procedures,              • Unauthorized trades
     Compliance Procedures,               • Excessive Fees
     Policies                             • Borrowing from client
• Investment Activities                   • Etc...
   – Adherence to Investment
     Policy, Fairness, Conflicts
                   The "Average" Adviser
47 Advisers (11.2%) had “0” Accounts and “0”
Assets Under Management because they were:
        Financial Planners Only
                                                   47
        Solicitors Only
        New Advisers


Averages do not include Canadian Provinces due
to no maximum Assets Under Management




                                     8.03
                   1.6

                   IARs           Assets Under   Accounts
                                  Management
                                   (millions)
75.0%      71.3%                    Deficiencies by Category
                      Exams with at Least One Deficiency in the Category




50.0%              47.4%
                           45.2%



                                   36.4%


                                           27.5%
                                                   24.4% 23.2%
25.0%                                                          22.2%


                                                                       14.8%


                                                                               5.5%   5.5%
                                                                                             2.9%   1.9%

    0.0%
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                           Comparing 2007, 2005, and 2003 Exams
                       Exams with at Least One Deficiency in the Category
                                                                                                       71%
     Registration                                                                      59%
                       49%
                                                                         45%
Books & Records*                                    26%                                      2007
                       23%
                                                                   41%
        Contracts                                                              50%           2005
                       34%
                                                             36%
      Supervisory                                         33%                                2003
                       11%

           Privacy
                       14%

        Financials
                       23%

             Fees                                          *For 2007, ”Maintaining Suitability Info”
                       11%
                                                           deficiencies were counted in Books and
      Advertising                                          Records instead of Investment Activities.
                       15%
                                                           Without the move...2007 Books & Records
                                        15%
          Custody                             21%          would have been 40% of exams with
                       12%                                 deficiencies, and Investment Activities would
                                 6%                        have been 21% of exams with deficiencies.
 Invest Activities*                            23%
                       22%

          Solicitor

                      0%    5%    10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75%
 80%                                                     Comparison of Independent IA and BD
                                                                 Affiliated Advisers
 70%                                                    Exams with at least One Deficiency in the Category


 60%
                                                                                                                                                        IA
                                                                                                                                                                                                       50%
 50%
                                                                                                                                                        BD

 40%


 30%


 20%


 10%


  0%
                       n                   P              s               y              y                 l   s         s                  g                y               es                    s
                 tio                    lB              rd              or            ac                ia             ee              in                  od            iti                  it or
            ra                      a                 co          i   s         i   v             n   c            F              t is             s   t
                                                                                                                                                                    iv                   ic
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                                  o     ks                                                                                                              ve
                                                                                                                                                  I   n
                               Bo
                                                       Comparing Advisers with 1 IAR to
 80%                                                     Those with More than 1 IAR
                                                Exams with at least One Deficiency in the Category
 70%


 60%                                                                                                                                                   1 IAR
 50%                                                                          46%                                                                      >1 IAR

 40%
                                                                        33%
 30%


 20%


 10%


  0%

                    n                  P                s                 y               y         s                     l   s                    g             y                  s
              tio                 lB                  rd                or             ac         ee                   ia                     in             t od              i tie
           ra                 a                     co           vi
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                                                                                                        F                     Ad                                  s   tA
                U                  ks                                                                                                                          ve
                            Boo                                                                                                                          I   n
100%                                                   Comparing Hedge Fund Advisers to
                         93%                              Non-Hedge Fund Advisers
90%
                                                 Exams with at least One Deficiency in the Category

80%
                                                                                                                              Non-Hedge Fund Advisers
70%
                                                                                                                              Hedge Fund Advisers
60%
                                                                                                                50%
50%                                                                                                                                                               46%


40%

30%

20%

10%

 0%

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                                            &            Su                                                               Ad                                  s   tA
                                      s                                                                                                                    ve
                                   ok                                                                                                                I   n
                            Bo
                                     Registration                      71% of all advisers had
                                                                       at least one deficiency.
                                    504 Deficiencies

               Other ADV

        Annual ADV Offer

Assets Under Management
                                                                  OTHER
            Fee Structure
                                                  Inconsistency between Parts I and II
    Business Description
                                                  Updates to ADV not made timely
 IAR Unregistered Activity

       Initial ADV Delivery

       Services Provided

    Affiliations Disclosure

Firm Unregistered Activity

 Discretionary Disclosure

           Other Delivery

                Personnel

                         0.00%   5.00%   10.00%    15.00%   20.00%   25.00%   30.00%    35.00%
                  Unethical Business Practices
                              318 Deficiencies

               198 exams (47.4%) noted at least one
              unethical business practice deficiency

                                Two Types


• Advisory Contracts                   • Other Unethical Practices
   – 172 exams (41%) noted at               – 54 exams (13%) noted at least
     least one contract                       one non-contract unethical
     deficiency*                              practice deficiency*

   – 236 (74%) of the 318 UBP               – 82 (26%) of the 318 UBP
     deficiencies                             deficiencies


 * Some advisers had both contract and other unethical practice deficiencies
                          Unethical Business Practices
                               318 Total Deficiencies
75%   236 Contract Deficiencies
                                                        47.4% of all advisers
                                                          had at least one
       Other: 28% (unsigned, not dated)                  unethical business
                                                         practice deficiency
       No/Missing Contract: 25%
       Hedge Clause: 11%
50%
       Pre-Paid Refund: 8.9%
       Fee: 7.2%
       Non-Assignment: 6.4%
       Discretion: 5.1%
       Fee Formula: 3.8%                      82 “Other” Deficiencies
25%                                              Excessive Fee: 19.5%
       Term: 3.4%
                                                 Qualifications/Services: 18.3%
       Services: 1.3%
                                                 Conflicts: 11%
                                                 Unsuitable: 8.5%
                                                 More on breakout graph
0%

                   Contracts                             Other UBP
              Advisory Contracts Unethical Practices               41% of all advisers had
                                                                   at least one deficiency.
                              236 Deficiencies

                 Other

No or Missing Contracts

         Hedge Clause
                                                                          Other
Refund of Pre-Paid Fees
                                                               Not signed
           Missing Fee                                         Not dated
Non-assignment Clause                                          48 hour language

     Discretion Clause

           Fee Formula

                  Term

              Services

                      0.00%    5.00%   10.00%    15.00%   20.00%      25.00%      30.00%
                    Non-Contract Unethical Practices                13% of all advisers had
                                                                    at least one deficiency.
                                  82 Deficiencies

               Excessive Fee
Qualifications, Services, Fees
          Conflicts of Interest
Unsuitable Recommendations
    Custody w/o Safekeeping
                  Advertising
                   Borrowing
     Unauthorized Discretion
              Other Unethical
        Unauthorized Trades
             Performance Fee
                      Lending
                   Strawman*
                                              *”Straw man” refers to committing prohibited
                        Fraud                 acts through a 3rd party.
  Non-Public Information Use

                              0.00%       5.00%       10.00%         15.00%          20.00%
                                Books and Records                45% of all advisers had
                                    384 Deficiencies             at least one deficiency.

                     Suitability Info
              Financial Statements
                              Other
                Journals - Ledgers
                     Complaint File
Cash - Securities Disbursement Log
                                                                       Other
              Correspondence File
                                                             Checks Forwarded Log
                Advertisement File
Cancelled Checks, Bank Statements                            Electronic Storage
           Bills, Receipts, Invoices                         E-mail
        Performance Support Docs
                 Client Statements
             3rd Party Agreements
                   Record Location
                    Financial Plans
         List of Discretionary Accts

                                        0%     5%      10%            15%           20%
                                                        36% of all advisers had
                      Supervisory/Compliance            at least one deficiency.
                          174 Deficiencies



No Procedures



  Inadequate
  Procedures


 Didn't Follow
  Procedures


                             Other
        Other
                             Remote Location Supervision


                 0%           15%                 30%                       45%
                                            28% of all advisers had
                           Privacy          at least one deficiency.
                        142 Deficiencies


    No Privacy
      Policy

     No Annual
      Delivery

      No Initial
      Delivery

Deficient Policy


          Other


                   0%   10%           20%   30%                 40%
                                                      24% of all advisers had
                                Financials            at least one deficiency.
                            163 Deficiencies

   Inaccurate Financials

   Inaccurate Net Worth

   Insufficient Net Worth

                   Other

No Bank Reconciliations                                   Other
                                                     Filing Financials
       Insufficient Bond

Poor Financial Condition

                        0.00%     5.00%   10.00% 15.00% 20.00% 25.00%
                                                           23% of all advisers had
                                    Fees                   at least one deficiency.
                          147 Deficiencies

          Fees vs Contract

               Fees vs ADV

              Billing Errors

               Fee Invoices

           Fee Calculations

                      Other                      Other
                                            Undisclosed Fees
Different Fees-Same Service

                               0%      5%     10%        15%       20%         25%
                                                        22% of all advisers had
                           Advertising                  at least one deficiency.
                          136 Deficiencies

            Website


    Business Cards


Ads-Correspondence


              Other                             Other
                                             SEC Registered
    Misuse of "RIA"                          Designations
                                             Expired CFP
   Performance Ads


Missing Seminar Info

                  0.00%       10.00%              20.00%                   30.00%
                                                        15% of all advisers had
                               Custody                  at least one deficiency.
                             84 Deficiencies
     Direct Fee Deduction
              Inadvertent
          General Partner
  Non-Disclosed Custody
                    Other                             Other

General Power Of Attorney                      >$500, >6 months fees
                                               Check cashiering
                  Trustee
                Signatory
        Physical Custody
      Trustee for Relative

                         0.00%     5.00% 10.00% 15.00% 20.00% 25.00%
                                                         5.5% of all advisers had
                       Investment Activities             at least one deficiency.
                          23 Deficiencies



Activities vs
 Contract



                                                 Other
       Other
                                          Allocation of Aggregate
                                          Trades




Soft Dollars



            0.00%   10.00%   20.00%   30.00%   40.00%     50.00%        60.00%
                           Solicitor                23 of the 69 advisers
                                                    who used solicitors or
                        30 Deficiencies
                                                    acted as solicitors had at
                                                    least one deficiency.
                                                    Of 30 BD affiliated
    IA-Solicitor
                                                    advisers, 50% had at
    Agreement
                                                    least one deficiency
                                                    Of 39 independent
                                                    advisers, 21% had at
                                                    least one deficiency
         Other


                                          Other
                                          Unregistered
      Solicitor                           Solicitors
     Disclosure




ADV Delivery by
   Solicitor


              0.00%   10.00%    20.00%    30.00%         40.00%
                                             3% of all advisers had at
               Performance Reporting          least one deficiency.
                   15 Deficiencies


 Misleading
Presentation



                                                          Other
      Other                                           Indices
                                                      Comparison
                                                      “Gross” Only


  Inaccurate
    Results


           0.00%   10.00%      20.00%   30.00%       40.00%
                                                         25% of all hedge fund
                           Hedge Funds                  advisers had at least one
                                                            deficiency in this
                          12 Deficiencies                       category.



Registration-Exemption
        Issues


                 Other                                     Other
                                                     Ineligible Incentives
                                                     PPM Issues
Non-accredited Investor
        Issues


Non-disclosed Conflicts


                      0.00%    15.00%       30.00%     45.00%
         Best Practices for Investment Advisers
• Review and revise Form ADV and disclosure brochure
  annually to reflect current and accurate information.
• Review and update all contracts.
• Prepare and maintain all required records, including financial
  records.
• Prepare and maintain client profiles.
• Prepare a written compliance and supervisory procedures manual
  relevant to the type of business.
• Prepare and distribute a privacy policy initially and annually.
• Keep accurate financials. File timely with the jurisdiction.
  Maintain surety bond if required
• Calculate and document fees correctly in accordance with
  contracts and ADV.
• Review all advertisements, including website and performance
  advertising, for accuracy.
• Implement appropriate custody safeguards, if applicable.
• Review solicitor agreements, disclosure, and delivery procedures.

				
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