* Some don't document why investments are right for clients
* Some lack written contracts, lack clarity in calculating
* "Mid-sized" advisers moved to state oversight after Madoff
By Suzanne Barlyn
SALT LAKE CITY, Utah, Oct 7 Many U.S.
state-registered investment advisers are failing to follow basic
industry record-keeping rules, according to a nationwide series
of examinations by state regulators.
One of the biggest problems: many advisers are not
adequately documenting why their investment choices are
appropriate for clients.
Examination results compiled for a study conducted every two
years by the North American Securities Administrators
Association, or NASAA, also revealed that some advisers do not
have written contracts with clients or properly describe their
formulas for calculating fees, NASAA said.
Record-keeping problems topped the five most common
violations at state-registered investment advisers who were
examined during the project. NASAA, whose members also include
regulators from U.S. territories, Canadian provinces, and
Mexico, unveiled the results late on Monday, the second day of
its annual meeting in Salt Lake City, Utah.
Investment advisers must register with either states or the
U.S. Securities and Exchange Commission, depending on the amount
of assets they manage for clients. Securities law requires
investment advisers to act in their clients' best interests when
making investment decisions.
The study, which covered a sampling of 1,130 advisers,
included those who manage between $30 million and $100 million,
a group that was recently switched from federal to state
oversight as required by the Dodd-Frank financial reform law.
Advisers managing over $100 million are overseen by the U.S.
Securities and Exchange Commission.
NASAA's analysis covered a critical period in which state
regulators took on responsibility for the first time to oversee
an additional 2,100 "mid-sized" advisers who were previously
registered with the SEC. Dodd-Frank required these advisers who
manage between $30 million and $100 million to register with
states, instead of the SEC, earlier this year.
The change came about in the wake of Bernard Madoff's
multibillion-dollar Ponzi scheme, which wiped out the life
savings of many investors. The scandal led to efforts to beef up
the policing of brokerages and advisory firms. Many advisers who
made the switch had never been examined by the SEC, according to
state regulators. The agency examines advisers roughly once
every 11 years, according to a 2011 study by its staff.
There were virtually no differences in the types of problems
that state regulators uncovered among smaller advisers who were
already state-registered - those who manage less than $30
million - and those who recently switched, NASAA said.
Many state regulators were initially concerned that they
would uncover serious problems among advisers who switched, such
as unethical business practices, given the SEC's inability to
"It was uneventful," said Linda Cena, director of securities
for the Michigan Office of Financial and Insurance Services
during a presentation on Monday. "Everything we feared that
would happen didn't," she said.
State regulators engaged in outreach efforts to advisers
beginning in 2010 to help ward off problems.
Securities regulators in 44 states and provinces reported a
total of 1,130 examinations between January and June 2013. Of
those, there were 6,482 instances of problems in 20 focus areas,
Other problems included charging customers fees that were
higher than those advisers disclosed to clients, not having a
businesses running during an emergency.