State Regulators are Increasing Examination Activity
State securities regulators have significantly increased their examination activity in recent years, reversing a trend of limited oversight that had left many state-registered investment advisers unexamined for years or even decades. Data from NASAA and individual state regulators indicate that the number of adviser examinations conducted annually has risen substantially, with some states doubling or tripling their examination output over the past five years. This expansion reflects increased regulatory funding, enhanced examination capabilities, and a philosophical shift toward more proactive oversight of the advisory industry.
Resource Allocation and Risk-Based Selection
Examination statistics underscore the scope of this shift. According to NASAA data, state regulators collectively examined a significantly larger percentage of registered advisers in recent years compared to the prior decade. Several states that previously lacked the resources to conduct meaningful examination programs have hired additional staff, invested in examination technology, and implemented risk-based examination selection methodologies that prioritize firms with higher-risk profiles. The result is that state-registered advisers can no longer assume they will avoid examination indefinitely.
Examination Focus Areas and Trends
Coordinated examination programs, facilitated by NASAA, have become a powerful tool for state regulators seeking to maximize the impact of their examination resources. Under these programs, state regulators collaborate to examine advisers operating across multiple jurisdictions, sharing information, examination protocols, and findings. Coordinated exams are particularly effective for identifying compliance issues that span multiple states and for examining multi-state advisers whose compliance programs must satisfy the requirements of several jurisdictions simultaneously.
Coordinated Examination Programs
Focus areas in recent state examinations have consistently emphasized several key themes: compliance program adequacy, including whether firms have written policies and conduct annual reviews; Form ADV accuracy and timeliness; advertising and marketing compliance, with increasing attention to social media; custody and safeguarding of client assets; fee disclosure and billing practices; cybersecurity preparedness; and business continuity planning. Advisers should assess their compliance programs against each of these focus areas and address any gaps before receiving an examination notice.
Preparation and Record Organization
Preparation strategies for state examinations should begin long before an examination is announced. The most effective preparation is maintaining an ongoing state of examination readiness, which means keeping all regulatory filings current, maintaining organized and accessible books and records, conducting annual compliance reviews with documented findings and remediation, and regularly testing the firm's compliance policies against actual practice. Firms that treat examination preparation as a continuous process rather than a reactive scramble consistently receive better examination outcomes.
Responding to Deficiency Letters
Deficiency trends identified through state examinations provide a roadmap of the areas where firms most frequently fall short. Recurring deficiency categories include incomplete or outdated Form ADV disclosures, lack of documented annual compliance reviews, advertising materials that have not been reviewed or archived, inadequate code of ethics implementation, gaps in client file documentation, and cybersecurity programs that do not meet current standards. These trends are remarkably consistent across states and across examination cycles, suggesting that many firms continue to struggle with the same fundamental compliance requirements.
The Future of State Examination Activity
The increasing frequency and sophistication of state examinations makes proactive compliance management more important than ever. Compliance Approved helps advisers maintain examination readiness through automated filing management, compliance testing tools, examination preparation checklists, and a centralized platform for organizing the books, records, and documentation that examiners will request. Our goal is to make the examination experience a confirmation of the firm's strong compliance posture rather than a source of anxiety and remediation costs.