Tuesday, November 19, 2013

Massachusetts lists deficiencies in "Switch Adviser" exams

In the wake of Dodd-Frank, the Massachusetts Securities Division added approximately 140 advisors that did not meet the asset requirements of the new SEC regulations.

The MA Securities Division has visited approximately half of these advisors through October 2013 and plans to visit all of them soon. Of the ~140 advisors, ~100 have a principal place of business in Massachusetts, so they have conducted exams of ~50 of these firms.

The MA Securities Division has noted numerous deficiencies from books and records to disclosures and of course custody. As the Maddoff fraud unveiled weaknesses in regulatory reviews, the MA Securities Division pointed out that only 1 of 102 advisors had a previous custody exam by the SEC. Below is a list of these deficiencies.

Some details on these deficiencies (while not noted in the report), include:

  • ADV disclosures not properly reflecting state requirements.

  • ADV not accurately reflecting custody requirements for advisors that deduct fees. In addition to the SEC safeguards, a most state advisors are subject to additional rules to avoid custody. An advisor must provide the client with an invoice (or similar report) that provides the calculation methodology used to derive the advisors fee. This must be sent out promptly after deducting any fees from the client's account(s) and include: (i) the period covered; (ii) the market value used in the calculation; (iii) the rate (annual/quarterly or monthly); and (iv) the amount deducted.

  • Client agreements that do not meet state requirements and do not reflect custody clauses (as noted above).
  • Custody. Many advisors had not updated practices and disclosures for new custody rules.

  • Conflicts of Interest. ADV and related disclosures not adequately reflecting all conflicts.

  • Books and Records. The largest volume of deficiencies. While MA follows the SEC rules (Rule 204-2 of the Advisers Act), advisors are still struggling with books and records.
  • Financials. Yes they care about your internal books and records and financial health!

There are many other deficiencies noted. A compilation of deficiencies from numerous states was published by NASAA >> http://www.nasaa.org/wp-content/uploads/2013/10/IA-Sweep-2013-Final.pdf

Here is a link to the state report >>> www.sec.state.ma.us/sct/sctpdf/switch-report.pdf


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