Securities Regulators Say That Bad Business Practices Are on the Rise at Investment Advisers


State regulators uncovered 3,543 unethical practices and rule violations, an average of 4.3 violations per advisory firm, during the first half of this year. Among the violations that InvestmentNews, an industry publication, found to be especially noteworthy were individual advisers falsely designating themselves as “registered investment advisers.” See “States: Advisers violating rules by using ‘RIA,'” InvestmentNews). Misleading investors about credentials is a form of fraud.

Other unethical practices reportedly involved altering documents, signing blank documents, and non-existent or missing customer agreements.

Regulators also found inconsistencies and outdated information in advisory firms’ Form ADV, the main disclosure document provided to clients.

Regulators further cited advisory firms for failure to keep client suitability information, which includes the essential facts about the client, such as the client’s investment objectives and risk tolerance.

Hedge fund advisers that were examined by state regulators were cited for violations concerning their valuation of holdings, undisclosed conflicts of interest, cross-trading (not recording transactions that cancel each other out, often to hide a markup), preferential treatment, selling to nonaccredited investors, and selling unregistered securities without an exemption.

In June of 2012, state securities will start overseeing investment advisory firms with under $100 million in assets under management (up from $25 million). This is expected to bring another 3,200 investment advisor representatives under state regulation.

It certainly appears that state regulators will have their work cut out for them.

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