Securities Division – Audit Unit
Quarterly Report – Third Quarter 2011
The Audit Unit of the Missouri Securities Division releases a quarterly report that provides information on audit activities, common deficiencies and best practices.
Audit Statistics for the Third Quarter 2011
| 3rd Quarter | Year to Date | |
Number of audits opened (onsite audits and desk audits) |
16 |
44 |
Number of audits closed (onsite audits and desk audits) |
12 |
40 |
| Number of pre-registration examinations commenced* | 14 |
42 |
Number of “for-cause” audits |
0 |
1 |
Number of audits referred to Enforcement Section |
1 |
4 |
Number of new registered broker-dealer firms |
20 |
87 |
Number of new registered investment adviser firms |
13 |
43 |
Number of new notice-filed federal-covered investment adviser firms |
10 |
67 |
* 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 third quarter of 2011:
Incomplete or inaccurate Form ADV*;
Failure to maintain the minimum required net worth for the firm;*
Inappropriate or misleading hedge/arbitration clauses*;
Failure to deliver the ADV part 2*; and
Distributing advertisements that do not comply with Section 206(4)-1 of the Investment Advisers Act of 1940.
*Also included in Top 5 Deficiencies for the first or second quarter of 2011.
Risk Factors Considered when Scheduling Routine Examinations
In determining targets for routine examination, the Audit Unit often considers investment advisers with certain characteristics a high priority. The following are 10 risk factors the Audit Unit considers when making such determinations.
Participation in, or management of, pooled investment vehicles;
Size of the investment adviser;
Custody of client funds or securities;
Number of clients;
Percentage of the investment adviser's accounts that are discretionary;
Past or pending regulatory actions, civil actions, criminal convictions, or industry suspensions against the investment adviser or an affiliate;
Recommendation of securities in which the investment adviser, or an affiliate, has a sales or proprietary interest;
Charging performance based fees;
The investment adviser is also a broker-dealer or a bank; and
Use of solicitors.