Investment Adviser and Broker Dealer Exam Guidance

The department reviews the information submitted by the applicant through the CRD/IARD before issuing a license or issuing a denial to the applicant. Once a completed application is received, it may take anywhere between a few days to a few weeks to issue a license depending on the circumstances of the applicant. Applicants may not engage in the securities business until the department issues the proper license.

Licenses automatically expire on December 31 if the license is not renewed. Licensees complete the renewal process through the CRD/IARD.  If a license expires and the licensee still engages in the activities that require a license, the licensee will be held responsible for the activity that occurred while unlicensed. The department may fine the licensee for the unlicensed activity, even if the license is eventually renewed.

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.

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.