What You Need to Know
According to the North American Securities Administrators Association (NASAA), 44% of regulatory exams conducted in 2013 resulted in deficiencies related to the firm’s contracts or advisory agreements.
The most common contract deficiency was not in the content of the contracts, but instead the faulty execution of them. In cases where the actual content of the contracts were deficient, the most common issues were:
Why You Should Care
Apart from regulatory issues, inaccurate advisory agreements have the potential to negatively impact your firm or your relationship with your clients by increasing business risk, creating the potential for personal liability and creating confusion among clients.
Improperly executed contracts create both regulatory and legal risk, and in some cases financial risk. Documenting and adhering to the fee terms and calculation methods in your advisory agreements will ensure that you are getting paid the correct amount by your clients. Performing a review of your existing agreements gives you a chance to find discrepancies before a regulator does.
Maintaining an updated version of all contract templates (both current and prior versions) serves as an effective control so that your firm is always using the most recent version with new clients.
To ensure that your firm is keeping up with regulatory requirements and industry best practices in this area: