By Cory Roberson, Principal at FIN Compliance and FIN Lancer
Since the top of
2018, we’ve seen a increase in the number of examination requests by auditors
at the California Department of Business Oversight (DBO). We suspect this is due to a recent
budget increase as shown in an article from Think Advisor.
DBO
spokesperson Tom Dressler explains, “The current 2016-17 budget is $27 million
for the department's BD and IA oversight work. The state has been giving the
office more funds, Desslar says, so it could add 36 positions over the past two
fiscal years and hopefully another 15 in the upcoming two fiscal years.
What does this mean
for my firm?
In
alignment with recent SEC updates, the states have added additional disclosure
requirements. For example, on the ADV
Part 2A some questions were allowed to be omitted if non-applicable for advisors. Now examiners require more clarifications in answering
those questions.
We’ve compiled
information from a typical examination request list sent to a few California-based
advisors this year. This information is
also helpful for advisors in other state jurisdictions.
Four common audit
targets include:
Firms with
High-Risk profiles,
Advisors with
disciplinary or regulatory actions,
Newly-Formed
Advisors,
Advisors who have
never been audited.
What goes on during an exam?
SEC Exam
Typically, during a limited scope exam, an SEC auditor
will send a list of items to the advisor ahead of a future visit (if any). The division will then send a discrepancy
letter of items to address for clarification and/or correct for accuracy. We will have more blogs to cover other SEC audit types in the future. Contact me at: cory@riareview.com for an updated document request list from March 2018.
California DBO Exam
During a routine audit, a state examiner will send a
request list, interview the firm principal for an overview of business
operations, and then inspect records during a visit. The examination will take anywhere from 1- 3
days to perform, and will include a sampling of client files by
the auditor. Although uncommon, it is
possible for an auditor to show up to an advisor’s office for a surprise
audit. The auditor may choose to address
discrepancies during the audit or following the visit in the form of a letter to
the firm. Contact me at: cory@riareview.com for an updated document request list from the California DBO.
A typical examination can include the following (request list items in red):
Financial Books and Records
As a part of Books and Records requirements, firms are
required to generate Balance/Income sheets and General Ledger reports using a GAAP format.
This information is usually requested in accrual
format.
We now understand that CA examiners will likely request financials in an accrual
format to review business income, debt, and expenses on the following
supplemental documentation.
Monthly
Bank Statements
Monthly
credit card statements
Monthly
brokerage statements
Minimum
Financial Worksheet*
Verification Form*
On reports, we
suggest that firms label business income to match the services listed on
the ADV or the examiner may ask for additional clarification.
*For CA firms
- Financials must be sent on either a
monthly or annual basis if firm is subject to minimum financial requirements (CCR 260.237.2).
For other states – check requirements on our
software, RIA Review.
Advisory Agreements
Advisors should maintain copies of all client contracts. If agreement is outdated or missing from
client file, firms should send either a new agreement and/or addendum for
clients to sign with an accurate description of all services and fees paid.
Client Lists
Examiners will review copies of all managed client account
lists to sample fees and the nature of these relationships for the
firms. If deemed as having custody (e.g.
Trustee for a clients’ or check writing authority), advisors should adhere to
custody rule provision also listed in Custody Center of our software RIA
Review.
A list of Financial Planning clients or other
client types will be requested if marked on ADV 1A (Item 5) or 2A (Item 7).
A Brokerage Account list will be required for all firms who
manage client portfolio accounts.
Advertising
Advisors should maintain a correspondence file of all client records
and business activities. These files can
be kept on paper or, for best practices, in electronic format such as in the cloud
or in a CRM tool.
Firms should maintain a client complaint file even if there are
no such events. This form of
recordkeeping can be kept on paper or, for best practices, in electronic format
such as in the cloud or in a CRM tool.
Advertising for
firms that release marketing material:
Based
on a special examination from the SEC (Touting Initiative), examiners are looking
for firms to add proper disclosures that explain and/or justify the use of
professional awards, advisor ranking lists, and/or professional designations in
advertising materials.
Any uses of Professional Designations should include
disclosures with a summary of minimum qualifications required for achieving
credentials, continuing education requirements, and if the educational award is
still active.
A summary of all Third-Party Accolades should include
disclosures for the methodology of data, time period of awards, and limitations
for relying on certain information. In
addition, firms should avoid misleading information, such as referencing awards
that have lapsed or represent accolades from several years prior with such
disclosures.
Also, in accordance with advertising code C.C.R 260.235 (based on SEC
Rule 206(4)-1), standard advertising disclosures are required for all marketing materials.
Other discrepancies are commonly seen on the Form ADV (Part 1A, 1B, 2A, 2B, and/or Appendix I for wrap accounts)
Other discrepancies are commonly seen on the Form ADV (Part 1A, 1B, 2A, 2B, and/or Appendix I for wrap accounts)
Common
discrepancies that we’ve noticed from advisors include the following:
ADV Part 1A Item 5 (services) doesn’t
match all services listed in ADV Part 2A (Item 4) and/or agreement.
ADV Part 1A Item 5 (fees) doesn’t match all
fees listed in ADV Part 2A (Item 5) and/or agreement.
ADV Item 5 (personnel) doesn’t match
current organization chart.
ADV Part 2B (business/employment history)
doesn’t match current U-4
Missing client agreements.
Financial Statements include calculation
errors.
Professional designations (e.g. CFP, CFA,
etc.) and examinations (e.g. Series 7, 66, etc.) must be separately labeled.
Where to make changes?
Changes to your
firm’s ADV are typically made by filing an Other Than Annual Amendment.
Compliance and Business Management
FIN Compliance (FINCompliance.io) is a
consortium of compliance services including: RIA Consults-Roberson Consults
Group, a compliance consulting firm, RIA Review, a compliance-management
software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management
software tool, and FINLancer is a business
management portal featuring: E-signature tools; Invoicing integration,
Vendor Directory, continuity directory*, business client document portal, and
more (available by Q3 2019). Access all services
on one site: FINCompliance.io.
Impact
FIN Missions (FINmissions.com) provides business support group
sessions for other entrepreneurs. In addition, Cory has volunteered
for more than fifteen youth programs in locations such as like S. Korea, China,
S. Africa, Thailand, and India.
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