2009 COORDINATED INVESTMENT ADVISER EXAMS North American Securities Administrators Association

Who Was Examined? 458 State-level advisers, of which advisers (21.8%) were affiliated with a BD 76 advisers (16.6%) used or acted as solicitors 42 advisers (9.2%) managed pooled investments Who Conducted the Exams? Securities examiners from 35 jurisdictions including British Columbia, Ontario, Nova Scotia, Quebec, and Saskatchewan, Canada What Was Found? 1887 total deficiencies in 13 categories

The Categories Books and Records Financials Registration –ADV, U4, Firm, IARs, ADV Delivery Fees Advertising –Ads, Websites, Business Cards, Seminars, Privacy Supervisory/Compliance –Supervisory Procedures, Compliance Procedures, Policies Investment Activities –Adherence to Investment Policy, Fairness, Conflicts Performance Reporting Custody Solicitors Pooled Investment Vehicles (Hedge Fund) Unethical Business Practices –21 from NASAA Model Rule 120(a)(4)-1 Unsuitable Recommendations Contracts Unauthorized trades Excessive Fees Borrowing from client Etc...

Averages do not include advisers which had “0” Accounts and “0” Assets Under Management because they were: Financial Planners Only Solicitors Only New Advisers Averages do not include Canadian Provinces due to no maximum Assets Under Management

Comparison of Independent IA and BD Affiliated Advisers Exams with at least One Deficiency in the Category

Comparing Advisers with 1 IAR to Those with More than 1 IAR Exams with at least One Deficiency in the Category

Comparing Hedge Fund Advisers to Non-Hedge Fund Advisers Exams with at least One Deficiency in the Category

Inconsistency between Parts I and II Updates to ADV not made timely 60% of all advisers had at least one deficiency.

41.7% of all advisers had at least one deficiency. Safeguarding Records and Data Backup Data Checks Forwarded Log

37.8% of all advisers had at least one deficiency. Other Conflict with ADV Not Updated

Unethical Business Practices 291 Deficiencies Advisory Contracts –153 exams (33.4%) noted at least one contract deficiency* –214 (73.5%) of the 291 UBP deficiencies Other Unethical Practices –60 exams (13.1%) noted at least one non-contract unethical practice deficiency* –77 (26.5%) of the 291 UBP deficiencies 173 exams (37.8%) noted at least one unethical business practice deficiency * Some advisers had both contract and other unethical practice deficiencies Two Types

37.8% of all advisers had at least one unethical business practice deficiency Unethical Business Practices 291 Total Deficiencies No/Missing Contract: 26% Hedge Clause: 17.8% Other: 15.9% (info, not updated) Not Executed: 7.5% Pre-Paid Refund: 6.5% Rescission: 5.6% (48hr lang.) Non-Assignment: 5.1% Fee Formula: 4.2% Discretion: 3.3% Term: 2.8% Qualifications/Services: 23.4% NPI Policy: 19.5% Other: 14.3% Conflicts: 11.7% Excessive Fee: 5.2% 214 Contract Deficiencies 77 “Other” Deficiencies

27.7% of all advisers had at least one deficiency. Personal Trades Remote Location Supervision Business Continuity

Not GAAP CPA Independence Commingling Accts. 18.6% of all advisers had at least one deficiency.

16.8% of all advisers had at least one deficiency.

Services Designations Indexes Regulator “Gratuities” 16.6% of all advisers had at least one deficiency.

Undisclosed Fees 15.9% of all advisers had at least one deficiency.

>$500, >6 months fees Annual Audit of PIV Notice to Administrator PIN to Client Account 12.2% of all advisers had at least one deficiency.

Cross-Trades Aggregate Orders Proxy Voting 3.9% of all advisers had at least one deficiency.

Undisclosed Solicitors 20 of 76 advisers (26.3%) who used solicitors or acted as solicitors had at least one deficiency.

Comparing Hedge Fund Advisers Exams with at least One Deficiency in the Category 10 of 25 (41.6%) of hedge fund advisers who also had a regular IA practice had at least one deficiency in this category. 1 of 17 (5.9%) of hedge fund advisers who had no other clients had at least one deficiency in this category.

Back-testing Order Tickets 10 of 25 (41.6%) of hedge fund advisers who also had a regular IA practice had at least one deficiency in this category. 1 of 17 (5.9%) of hedge fund advisers who had no other clients had at least one deficiency in this category.

Best Practices for Investment Advisers Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information. Review and update all contracts. Prepare and maintain all required records, including financial records. Back-up electronic data and protect records. Prepare and maintain client profiles. Prepare a written compliance and supervisory procedures manual relevant to the type of business. Prepare and distribute a privacy policy initially and annually. Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required Calculate and document fees correctly in accordance with contracts and ADV. Review all advertisements, including website and performance advertising, for accuracy. Implement appropriate custody safeguards, if applicable. Review solicitor agreements, disclosure, and delivery procedures.