Bureau of Securities Compliance and Examinations

The department’s Bureau of Compliance and Examination performs examinations of Investment Advisers and Broker-Dealers licensed by the department. The department employs examiners who have the qualifications and experience to conduct thorough examinations in a professional manner.

On-Site Examination 

In a typical on-site examination, the department will issue a letter to the licensee requesting information in advance of the examination.  As a courtesy, an examiner will then contact the licensee to schedule the date of the examination.  Upon arrival at the organization, most if not all required information and records should be ready and available for review by the examiner.  In most cases, the examiner will do the following during an on-site examination:

Request access to the tools necessary to conduct the exam. These tools include the following: 

• An adequate workspace. The workspace needs enough table room for the examiner to spread out the documents being reviewed. 
• An electrical outlet. The outlet will preferably be located at the examiner’s workspace because the examiner needs the power for a laptop. 
• A photocopier. The photocopier access is needed in the event that the examiner needs to make photocopies of any of the documents being reviewed. 
• A place to secure items. The secure place needs to accommodate the examiner’s belongings as well as the organization’s files.
• Hold a meeting with the organization’s management to get an understanding of its operations. 
• Request the names of, and access to, the people who can provide the required materials and information.  
• Request a contract or agreement sample.  The sample size will depend on the unique requirements of each examination based on complexity of the company, number of complaints, targeted investigations and other factors.  There is no limit as to how many contracts the examiner may request. 
• Hold an exit meeting with the organization’s management to summarize and review any issues and answer any questions that arose during the examination. 

The examiner’s goal is to determine if any violation or issue exists, to conclude whether that violation or issue was isolated or systemic, and to accomplish all corrective action during the examination when possible.

The examiner may request additional and more specific records during the examination, but in general the following may be requested from an Investment Adviser or Broker-Dealer:

• Sample advisory or client contracts or agreements
• List of clients and respective Assets Under Management
• Sample client billing report
• Sample monthly or quarterly transaction report
• Sample consolidated report
• Example of a complete client file
• Information on clearing broker-dealer and custodian(s)
• Planning or reporting software used
• List of current employees, contractors, partners, officers, and/or directors and their titles
• Names of any registrants, officers and/or directors that resigned over the last year and the reason for their departure
• Company names of which any employee is an officer or director of within the last year
• Any marketing material provided to existing or prospective clients
• Name of clients lost during the last fiscal year and the reason for their departure
• If adviser to private fund the following information:
• Name of entity
• Investment strategy
• Any agreements
• Latest fiscal year audited financial statements of any private fund(s) managed
• Number of investors and amount of assets managed
• Amount of adviser’s equity interest in each entity
• Amount of adviser’s affiliated persons’ interest in each entity
• Firm’s Written Supervisory Procedures
• Client list
• List of any individuals under heightened supervision
• Complaint and litigation files
• Correspondence file
• Advertising file
• Sample performance advertising
• Sample performance report
• Correspondence with any regulatory body
• Most recent compliance examination report
• Evidence of last compliance meeting
• Any documents on outside business activity
• Any documents on private securities transactions
• Any documents on outside brokerage accounts
• Evidence of receipt of securities
• Evidence of third party checks
• Evidence of any lending or borrowing
• General or limited POA
• Purchase and/or sales record
• Cash receipts and disbursements
• Detailed billing statement sample
• Billing invoice to custodian
• Billing invoice to client
• Bank statements
• Annual billing summary
• Balance sheet
• Profit/Loss statement
• Fees
• Specific client files
• Proof of latest ADV delivery
• Proof of latest privacy policy delivery
• Written agreements with custodians
• Lists of aggregate trades
• List of any trading errors
• Suitability analyses 
• Alternative investments
• Soft dollars
• Switching documents
• Wrap fee program documents
• Finders and/or Solicitor arrangements
• Private placements, underwritings, limited offerings the firm has managed or participated in.
• Privacy Policy
• Code of Ethics
• Disaster Recovery Plan / Business Continuity Plan
• Anti-Money Laundering Controls
• Cybersecurity Controls

The department may conduct any examination at its discretion.  In addition, the department conducts risk-based examinations and examinations based on consumer complaints as needed. 

Scheduled Examination

A department examiner will call in advance of an examination to notify the organization of the scheduled examination date. Although it is not required to do so, the department will attempt to accommodate previously scheduled obligations of the organization when possible in order to not interfere with the organization’s ability to conduct business. 

Unscheduled Examination

In some cases, the department may conduct an examination during normal business hours without prior scheduling. In this event, the examiner will attempt to not interfere with the licensee’s normal business practices.

1.  Leveraged and/or Inverse Exchange-Traded Funds (ETFs) and Alternative Products: The Bureau will continue to focus on the recommendation of leveraged and/or inverse ETFs and other alternative products.  Specific areas of review will include:

a. The length of time products are held in a client’s portfolio;

b. The suitability of the product for the client, including the client’s age, net worth, investment experience, investment objective, and risk tolerance;

c.  Proper disclosure of the investment strategy utilizing the investment products on the Form ADV;

d. Maintenance and enforcement of written supervisory procedures (“WSP”) that are reasonably designed to achieve compliance with the Pennsylvania Securities Act of 1972; and

e. Disclosures of material risks to clients.

2. Custody: The Bureau will review all situations where an investment advisor has custody of client assets, particularly those in which an investment adviser deducts client fees directly from a client’s account, is the trustee of a trust, participates in standard letters of authorization, or is the general partner of a pooled investment vehicle (“PIV”).  An investment adviser’s Form ADV should be current and should disclose all custody arrangements.

3. Written Supervisory Procedures (WSPs): All broker-dealers and investment advisers must establish and maintain written procedures with respect to leveraged ETFs and a system for applying and enforcing those written procedures which are reasonably designed to achieve compliance with the Pennsylvania Securities Act of 1972 and other securities laws and regulations.  Moreover, all broker-dealers and investment advisers must keep a copy of the written procedures at each location where it conducted business.  The Bureau will review all WSPs to ensure that all products traded by and/or recommended by the broker-dealer and/or investment advisor are addressed in the WSPs.  Please note: this applies to all broker-dealers and investment advisors, no matter the number of employees.

These priorities are not an exhaustive list of the examination areas of the Bureau.

Disclaimer: This information is presented as guidance to licensees regarding the usual manner in which the Department of Banking and Securities conducts licensing, examination, and compliance matters.  No legal rights, benefits or defenses are created by the posting of this guidance.  The department is permitted to conduct examinations in the manner it deems fit and may alter its approach on a case-by-case basis.  This information in no way binds the department to any specific procedure.

A compliance issue can be resolved in many ways.  Issues can be resolved through methods such as an explanation of the problem through a phone call, a required plan of action with follow-up reports back to the department, a signed consent agreement with the inclusion of fines or any other method the department deems appropriate.

The department makes every effort to resolve a compliance issue in the best possible manner.  However, if a resolution cannot be reached, the Department will issue a formal enforcement action, such as a Cease and Desist Order or Order to Show Cause, to address the issue.