Investment Adviser Pre-Exam Procedures By Randy Mullikin Assistant Director of Compliance Office of the Kansas Securities Commissioner.

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Presentation transcript:

Investment Adviser Pre-Exam Procedures By Randy Mullikin Assistant Director of Compliance Office of the Kansas Securities Commissioner

Benefits of Pre-Exam Conduct a preliminary risk analysis of the investment adviser. Develop an examination plan.

Risk Analysis Fraud/Conversion –Custodian (verification) –Adviser’s Bank Account Statements –Adviser’s Bank Account Reconciliation Report Financials –Solvency (financial statements) –Minimum Adjusted Net Worth (discretion or custody) –Surety Bond (discretion or custody)

Risk Analysis (Continued) Conflicts of Interest –Loans to or from Clients –Joint Business Interest Involving Clients –Broker-Dealer Relationships –Third-Party Managers Suitability –Types of Securities (stocks, mutual funds, etc.) –Sophisticated Investments (penny stocks, options, private placements, hedge funds) –Margin

Risk Analysis (Continued) Suitability –Types of Securities (stocks, mutual funds, etc.) –Sophisticated Investments (penny stocks, options, private placements, hedge funds) –Margin Fees –Excessive Fees –Billing (adequately listed and accurate)

Risk Analysis (Continued) Books & Records –IARD Filings (timely and complete) –Written Supervisory/Operational Procedures –Client Contracts/Agreements –Client Information (suitability/recommendations) –Internal Audit Reports (include broker-dealer branch office audits) –Retention Practices (electronic and paper) Professional Designations –Current & Substantive

Pre-Exam Tools Pre-Exam Checklist Module ADV Cross Reference Module

Pre-Exam Resources CRD/IARD ADV Part 1 and Part II Roster of Individuals associated with adviser Form U-4 (Registration history, disclosures) Filing history (firm & individuals) Name changes (adviser) Related entities (broker/dealer)

Other Pre-Exam Sources of Information Agency internal records. Government web sites (Sec. of State, Insurance Dep., Revenue Dep., Accountancy Board, Law Licensing) Professional web sites (CFPs, etc.) Web search engines (Google, etc.)

Some of the information that can be learned form these sources. 1.How long the investment adviser has been in business. 2.The individuals who are associated with the investment adviser. 3.Disclosure information regarding the investment adviser or its associated individuals. 4.Whether the investment adviser is a sole proprietorship or formal entity.

Some of the information that can be learned form these sources. 5.Services offered. 6.Fees. 7.Conflicts of interest/Outside business. 8.Custody/Discretion. 9.Types of clients. 10.Number of clients. 11.Assets under management.

Information Associated with Risk Analysis Prior disclosure history. Custody/Managed Investment Pool. Custodian. Types of securities offered. Direct fee deduction. Conflicts of interest. Types of services offered. Supervisory structure.

Examination Plan Identify violations prior to field work. Assess the difficulty of the exam. Identify areas of review. Aid in developing a request list. Allow for a comprehensive interview of the adviser. Display an aurora of expertise.

Exam Focus Sample 1.Custody issues “safekeeping” 2.Adviser’s financial condition 3.Supervisory/operational procedures 4.Conflicts of Interest 5.Records maintenance 6.Investment suitability 7.Client fees - accuracy 8.Advertising – website