Securities Division – Audit Unit
Quarterly Report – Second Quarter 2010
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 Second Quarter 2010
| 2nd Quarter | Year To Date | |
Number of audits opened (onsite audits and desk audits) |
20 | 43 |
Number of audits closed (onsite audits and desk audits) |
16 | 39 |
Number of “for-cause” audits |
2 | 5 |
Number of specific “cognitive decline” sweep audits |
15 | 24 |
Number of audits referred to Enforcement Section |
1 | 3 |
Number of new registered broker-dealer firms |
33 | 75 |
Number of new registered state-covered investment adviser firms |
15 | 22 |
Number of new notice-filed federal-covered investment adviser firms |
24 | 84 |
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 second quarter of 2010:
Lack of client suitability information;*
Out-of-date, incomplete or inaccurate form ADV Part II;*
Use of business cards and/or stationary that are misleading as to the entity’s registration status;
Deficiencies related to fees – fees charged not correct based on client agreement and/or not disclosed properly to client;* and
- Failure to maintain the minimum required net worth for the firm.
* Also included in Top 5 Deficiencies for First Quarter of 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 statues and regulations related to firm compliance.
When auditors request documents in advance of an audit, prepare them in advance. If you aren’t sure how to prepare the documents, contact the auditor for guidance. Don’t wait until auditors arrive to retrieve and prepare the requested information.
At renewal time, be sure that the firm pays renewal fees for both itself and any investment adviser representatives.
Firms must have written contracts with all clients and include details of the items outlined in securities statutes and regulations.
When recommending an annuity replacement or sale, document all of the facts relating to the transaction. Include reasons for the replacement, surrender charge schedule for the new contract, current value, surrender value, rider information, and guaranteed death benefit on both contracts, advantages and disadvantages of the replacement, and any other relevant facts used to make the recommendation.
Be sure to maintain the required net worth for the firm. Be prepared to provide auditors with documentation demonstrating the financial information contained on its balance sheet and profit and loss statement.