The North American Securities Administrators Association has announced a series of recommended best practices that investment advisors should consider in order to improve their compliance practices and procedures.

NASAA made the announcement on Friday at its annual conference in Scottsdale, Ariz.

The best practices were developed after a nationwide sweep of investment advisors by state examiners in 26 states revealed a significant number of problem areas. NASAA Investment Advisor Section Chair and Wisconsin Securities Administrator Patricia Struck reported that 257 examinations of investment advisors were conducted between March 2003 and May 2003. Of these exams, 200 revealed at least one deficiency.

“We developed these best practices in order to help regulators and advisors better understand compliance challenges,” Struck said in a release. “This information can be used to help advisors develop compliance programs that will minimize the potential for regulatory violations. This, in turn, will build public trust in their activities.”

Overall, the examinations found 588 deficiencies in 15 compliance areas. The greatest number of deficiencies identified in the sweep involved registration, followed by contracts, books and records, financial materials, investment activities and advertising. The two most common registration deficiencies involved inaccurate disclosures. In the area of contracts, the most common deficiencies concerned the failure to maintain contracts or to disclose advisory fees. The most common deficiencies found in the area of books and records focused primarily on the failure of advisors to maintain complaint or litigation files.

Examiners also found deficiencies among advisors who failed to prepare financial statements or to maintain sufficient net capital. Advisors also sometimes failed to maintain suitability information about their clients. The sweep also found problems with inaccurate and misleading performance reports, inaccurate websites, and failure to maintain advertising files.

Based on the sweep results, NASAA proposed a series of 10 “Best Practices” to help advisors develop compliance practices and procedures. The best practices include:

  1. Annually review disclosure documents, and update them to reflect current and accurate information.
  2. Review and update all advisory contracts.
  3. Prepare and maintain required books and records.
  4. Maintain a surety bond, if required.
  5. Prepare and maintain client profiles.
  6. Review all advertisements, including performance advertising and website, for accuracy.
  7. Prepare and distribute a privacy policy initially and annually.
  8. Implement appropriate custody safeguards, if applicable.
  9. Calculate and document fees correctly.
  10. Prepare a written supervisory procedures manual relevant to the type of business.