Securities Division – Audit Unit
Quarterly Report – First Quarter 2011
The Audit Unit in the Missouri Securities Division releases a quarterly report that provides information on audit activities, common deficiencies and best practices.
Audit Statistics for the First Quarter 2011
| 1st Quarter | Year to Date | |
Number of audits opened (onsite audits and desk audits) |
16 |
16 |
Number of audits closed (onsite audits and desk audits) |
15 |
15 |
| Number of pre-registration examinations commenced* | 10 |
10 |
Number of “for-cause” audits |
- |
- |
Number of audits referred to Enforcement Section |
- |
- |
Number of new registered broker-dealer firms |
37 |
37 |
Number of new registered investment adviser firms |
14 |
14 |
Number of new notice-filed federal-covered investment adviser firms |
34 |
34 |
* In September 2010 the Unit began conducting pre-registration examinations of investment adviser applicants.
Top 5 Deficiencies
The Audit Unit inspects broker-dealers and investment advisers and notes deficiencies in their compliance with Missouri statutes and regulations. The following were the top five most common deficiencies found in the first quarter of 2011:
-
Incomplete or inaccurate form ADV;*
Failure to maintain the minimum required net worth for the firm;
Inappropriate hedge clauses in client contract;
Failure to deliver the ADV part 2; and
Lack of client suitability information.
* Also included in Top 5 Deficiencies for 2010.
Best Practice Recommendations For Investment Advisers
The following are examples of best practices employed by investment adviser firms, discovered in the course of audits. This list is not exhaustive or meant to supplant a thorough reading of all statutes and regulations related to firm compliance.
Review the Securities Division’s website at www.sos.mo.gov/securities for renewal filing procedures and answers to frequently asked questions related to registration requirements.
Maintain detailed information related to the investment adviser’s billing practices. Include documentation of the assets upon which fees were based, how the fees were calculated, copies of invoices sent to clients and/or custodians, and documentation demonstrating when fees deducted directly from clients accounts were withdrawn.
Maintain written contracts with all clients. Routinely update contracts if changes to the relationship have been made.
Maintain the required net worth for the firm. Be prepared to provide auditors with documentation demonstrating the financial information contained on a balance sheet and profit and loss statement.
Maintain a check log indicating any checks that are received by the investment adviser and forwarded to a custodian on behalf of a client. Include in the log the date the check was received, from whom it was received, the amount, the payee, and the date the check was forwarded on to the custodian.
Possible Delays in Investment Adviser Transition to State Registration
IThe Commissioner of Securities recently posted an advisory release with important information regarding possible delays in the transition from federal to state registration of mid-sized investment advisers as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. You can access that release, and other important advisory releases, by clicking here.