In order to provide state-registered investment advisers with a better understanding of what they need to do to “stay out of trouble” we analyzed all the state-level compliance material (e.g., examination request lists, deficiency letters, policy notices, speeches) we have assembled over the years to develop a list of compliance issues that are of greatest concern to all state regulators.

As a matter of first course, we thought it best to list the deficiencies most commonly found by state regulators.

• Registration – inconsistencies between Parts I and 2A of Form ADV and failing to amend Form ADV in a timely manner.
• Preparation and maintenance of books and records – not maintaining suitability information, not properly safeguarding records and not backing up data.
• Unethical business practice deficiencies involved missing or no contracts and other contract-related issues, and misrepresenting qualifications, services and fees.
• Supervision – failure to have any written supervisory/compliance procedures or having inadequate procedures in place.
• Financials – deficiencies included inaccurate financials, insufficient or inaccurate net worth, no bank reconciliations and poor financial conditions.

We have always contended that it is far easier to register as an investment adviser with the SEC than it is with most any state. Counterintuitive though it may be, registration with the SEC requires the filing of ONLY two documents (e.g., the ADV Part 1 and Part 2A). When registering as an investment adviser with a state, you may be required to file multiple additional documents (e.g., financial statements, advisory agreements, compliance material, surety bonds, various affidavits). And not only that, but states actually look over your registration documents very carefully and will often request revisions. This rarely happens at the SEC level. A lot of transitioning SEC-registered advisers are now seeing how difficult and frustrating the state registration process actually is.

For those SEC-registered advisers transitioning to registration in the State of California, you need to include the following two disclosures in your ADV Part 2A:

• “XYZ Advisors has disclosed all material conflicts of interest under section 260.238(k) of the California Code of Regulations regarding the firm, its representatives and its employees which could be reasonably expected to impair the rendering of unbiased and objective advice.”
• “Lower fees for comparable services may be available from other sources.”