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Many U.S. investment advisers fall short on record-keeping: study

By Suzanne Barlyn

SALT LAKE CITY, Utah (Reuters) - Many U.S. state-registered investment advisers are failing to follow basic industry record-keeping rules, according to a nationwide series of examinations by state regulators.

One of the biggest problems: many advisers are not adequately documenting why their investment choices are appropriate for clients.

Examination results compiled for a study conducted every two years by the North American Securities Administrators Association, or NASAA, also revealed that some advisers do not have written contracts with clients or properly describe their formulas for calculating fees, NASAA said.

Record-keeping problems topped the five most common violations at state-registered investment advisers who were examined during the project. NASAA, whose members also include regulators from U.S. territories, Canadian provinces, and Mexico, unveiled the results late on Monday, the second day of its annual meeting in Salt Lake City, Utah.

Investment advisers must register with either states or the U.S. Securities and Exchange Commission, depending on the amount of assets they manage for clients. Securities law requires investment advisers to act in their clients' best interests when making investment decisions.

The study, which covered a sampling of 1,130 advisers, included those who manage between $30 million and $100 million, a group that was recently switched from federal to state oversight as required by the Dodd-Frank financial reform law. Advisers managing over $100 million are overseen by the U.S. Securities and Exchange Commission.

CRITICAL PERIOD

NASAA's analysis covered a critical period in which state regulators took on responsibility for the first time to oversee an additional 2,100 "mid-sized" advisers who were previously registered with the SEC. Dodd-Frank required these advisers who manage between $30 million and $100 million to register with states, instead of the SEC, earlier this year.

The change came about in the wake of Bernard Madoff's multibillion-dollar Ponzi scheme, which wiped out the life savings of many investors. The scandal led to efforts to beef up the policing of brokerages and advisory firms. Many advisers who made the switch had never been examined by the SEC, according to state regulators. The agency examines advisers roughly once every 11 years, according to a 2011 study by its staff.

There were virtually no differences in the types of problems that state regulators uncovered among smaller advisers who were already state-registered - those who manage less than $30 million - and those who recently switched, NASAA said.

Many state regulators were initially concerned that they would uncover serious problems among advisers who switched, such as unethical business practices, given the SEC's inability to police them.

"It was uneventful," said Linda Cena, director of securities for the Michigan Office of Financial and Insurance Services during a presentation on Monday. "Everything we feared that would happen didn't," she said.

State regulators engaged in outreach efforts to advisers beginning in 2010 to help ward off problems.

Securities regulators in 44 states and provinces reported a total of 1,130 examinations between January and June 2013. Of those, there were 6,482 instances of problems in 20 focus areas, NASAA said.

Other problems included charging customers fees that were higher than those advisers disclosed to clients, not having a privacy policy in place, and not having a plan to keep businesses running during an emergency.

(Editing by Eric Walsh)

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