May 3, 2016

CCO Series: Top Regulatory Deficiencies for RIAs -- Books and Records

What you need to know

Registered investment advisors are required to maintain and preserve books and records in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment advisor.1 We cover books and records compliance in more detail in a previous post.
Annually, the North American Securities Administrators Association (“NASAA”) issues a report about common deficiencies found in state coordinated investment adviser examinations.2 The most common books and records deficiencies described by NASAA are lack of documentation of “recommendations made or proposed and any advice given or proposed,”3 which will include 1) the advisor’s analysis of client suitability for an investment product and 2) when acting as a fiduciary why the advice is the client’s “best interest”.

Common Deficiency: Client Suitability Records

Examiners noted the lack of documentation about the suitability of an investment product and lack of documentation that the advice is the client’s “best interest”. The mantra of an examiner is that if it is not documented then it was not done. Since July of 2012 when the FINRA suitability obligations went into effect,4 a major focus of the examiner’s books and records review has been on whether suitability is being properly documented in the client profile.

Common Deficiency: Focus on Fiduciaries

In addition, with the new Department of Labor fiduciary rule being published on April 8th, and effective in April 2017, examiners will be focused on reviewing suitability and “best interest” documentation. With the new fiduciary rule advisors serving clients in qualified retirement plans and IRAs will need to document how the advice is in the client’s “best interest” similar to other ERISA clients. Also, in certain cases the advisor’s client agreement may need to satisfy a Best Interest Contract Exemption pursuant to the new rule.

How do we avoid these deficiencies?

To avoid these deficiencies at your firm AdvisorAssist recommends the best practices of:
  • Perform an annual review of the advisor’s books and records archive to ensure you are keeping the required documentation for the required duration.
  • Preparing and maintaining a comprehensive profile on each client. This profile should be created during the onboarding of the client, confirmed with the client annually and updated as any new accounts or new information is received from the client.
  • Ensure your books and records contains all necessary backup documentation in addition to the client profile as needed to support your investment recommendations or advice.
  • Create and maintain Best Interest Contracts as needed for DOL-regulated transactions involving retirement plans.
  • Document in the client profile why advice regarding rollovers and other major transactions are in client’s best interest. Stay up to date with Fiduciary Rule Changes by clicking this link.
1. See 17 CFR §275.204-2(e)(1). Link.
2. See North American Securities Administrators Association, “2015 Investment Adviser Coordinated Exams,”. Link.
3. See 17 CFR §275.204-2(a)(7). Link.
4. See FINRA Regulatory Notice 11-02. Link.

AdvisorAssist’s CCO Series: Regulatory Deficiencies for RIAs is a series of articles that will help your firm understand and avoid the most common compliance deficiencies found by regulators. Our goal is to help you increase your confidence that your firm remains “exam ready” as well as some practical steps to help Chief Compliance Officers address this topic.
Brendan Furey
Michael Conlon


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