INVESTMENT ADVISERS—NASAA report provides a snapshot of state advisers, reviews COVID-19-related challenges - 23 April 2021

The annual report from NASAA's Investment Adviser Section includes an updated profile of state-registered firms and offers compliance guidance related to the pandemic.

The North American Securities Administrators Association (NASAA) has released its annual report on the state-registered investment adviser industry and the related activities of state securities regulators. The report also discusses the challenges faced by the advisory industry and state regulators stemming from the COVID-19 pandemic and an accelerating shift to a digital environment.

By the numbers. There were 17,454 state-registered investment advisers in 2020. California had the most state-registered firms (2,959) followed by the states of Texas (1,340), Florida (1,112), New York (828), and Illinois (736). Florida, Ohio, Texas, Arizona, and Nevada saw the greatest increases in the number of state-registered advisers over the prior year. Fifty-four percent of advisers are now located in states east of the Mississippi River, while 46 percent are west of that point.

The report notes that state-registered advisers do business in almost every town in every state, with 81 percent of the registered population consisting of one-to-two person shops. Ninety-five percent of the workforce holds an investment adviser representative registration, while 48 percent of workers are licensed as insurance agents and 36 percent are registered representatives of broker-dealers.

Although state-registered firms offer a variety of services, their primary focus is individual portfolio management, with a majority also offering broader financial planning services. Eighty-four percent of state-registered advisers charge at least some clients a fee based on assets under management, while only 3 percent charge fees on a commission basis.

COVID-19 compliance. The report reminds firms that they should be implementing and updating their written procedures and practices to address the new realities of the COVID-19 pandemic, including the possibility of serious health and safety risks for personnel and clients, remote work environments, the increased use of electronic communication, and market volatility.

The report states it is particularly important for all firms to have a business continuity and succession plan that can be implemented when key personnel are unable to perform their assigned functions or during office work disruptions. Among the questions for advisers to ask are:

  • How will personnel access the firm’s books and records?
  • How will checks or other mail that clients send to the firm’s offices be handled?
  • How will regular client meetings be handled in a safe way?

The pandemic has forced many firms to move to a remote working environment, leading to an increase in the use of electronic communications. The report observes that more personnel may be accessing networks and communicating with clients through their private devices; sensitive documents may be printed from remote locations or emailed for remote client meetings; personnel may need additional training; and clients may be more likely to give trade instructions through email, which requires identity authentication.

Accordingly, the report states, this is a great time for advisers to review their cybersecurity plan and conduct an assessment to consider the potential risks and vulnerabilities presented by remote work. This assessment should be conducted every year.

The report cautions that the shift to a remote work environment may also require changes to an adviser’s supervisory systems that should be captured in its written procedures. For example, supervisors may not have the same level of oversight and interaction with personnel, which could impact activities from trade oversight, handling of clients’ checks that are mailed to the office, or the maintenance of the firm’s books and records.

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