SRO remains overarching concern; many advisors haven't finished their ADVs; anxiety rises about 'the switch'

March 11, 2011 — 3:26 PM UTC by Elizabeth MacBride


Scott E. Richter, managing director of JP Morgan Asset Management, was one of the few speakers at the IAA’a annual compliance conference with a Wall Street firm in his title, and at a time when most people are still stuck hashing and reshashing advisor regulation, one of the few with a novel thought:

“How many of you have read the study (on oversight?),” asked Richter, who is also associate general counsel. “It’s only about 50 pages. It’s well worth reading. This train has not yet left the station. They’re stoking the engine and calling for people to get on board. There’s still an opportunity to influence this.”

He gave a clear-eyed view of the SRO question, during a panel at the Investment Adviser Association conference. While the SEC staff has offered three possibilities to improve oversight of advisors (in the study Richter mentioned), some people believe that because of the anti-government sentiment in Washington, D.C. this year, Congress may opt to authorize an SRO. FINRA has been lobbying to be that entity. See SEC presses case for user fees in much-anticipated report to Congress.

He questioned how well FINRA would do the job of regulating advisors because of its long connections to the broker-dealer world.

“If you’re good with a hammer, every problem starts to look like a nail,” he said. “There are some who disagree with that. Some had long careers at FINRA. Some are commissioners of the SEC.”

After that session, while I was in line for a mid-morning coffee, I heard one advisor say to another: “I didn’t know FINRA was that serious of a possibility.”

The hot topics

The overarching concern of conference goers was the chance that the SEC will delegate oversight of advisors to an SRO – either FINRA or another organization, or maybe even more than one.

The IAA flashed it on the screen as one of the three big issues of 2011, along with harmonization of broker-dealer and investment advisor regulation, and the switch to state oversight of about 4,200 firms with assets between $25 and $100 million.

With the first rule-makings on harmonization not expected till next year, the hot topics at the conference were were the SRO issue, anxiety over the Switch, and the looming deadline for ADV forms. See: What advisors should know about the next sweeping change: the switch from SEC oversight to state regulation.

The IAA has 500 member firms managing a combined $10 trillion of assets. Its member firms tend to be larger, older wealth management firms and those with a lot of institutional business. Its annual conference is known for the wide array of SEC staff attending as speakers and panelists.

Blake Stuart of the Boston-based North American Management Corp., attorney Stephanie Darling, who has an office in Rising Sun, Md., and Gwen Reinke of San Francisco-based Blum Capital Partners
Blake Stuart of the Boston-based North
American Management Corp., attorney Stephanie Darling,
who has an office in Rising
Sun, Md., and Gwen Reinke of
San Francisco-based Blum Capital Partners

Jennifer B. McHugh, senior advisor to SEC Chairman Mary Schapiro gave the luncheon keynote, summarizing the SEC’s actions this year and encouraging advisors to give feedback. In a panel on enforcement and examinations, John Walsh, chief counsel, Office of Compliance, Inspections, and Examinations, emphasized the degree to which examiners and enforcers rely on e-mails to find wrongdoing and material for a prosecution.

“It’s the biggest single challenge for compliance professionals,” he said.

ADV forms

The IAA devoted a 1.5 hour panel to filling out the ADV forms. At the end of the day, much of the work-related talk at the cocktail hour was about the technicalities of filling out the forms.

“You can’t sit through enough of it,” said Gwen Reinke of San Francisco-based Blum Capital Partners.

Many advisors seem to have done almost everything – but delayed posting the ADV forms until they came to the conference to hear what others were doing. See: See: Now, the SEC wants you to be a writer, too?.

“I have a lot of clients who are 80% done,” said Stephanie Darling, who has an eponymous law firm in Rising Sun, Md.

Janice Bennett of Milbank Winthrop & Co., a New York City-based wealth management firm that manages about $500 million, said she comes to the conference each year.

Brian Tsai, of Manhattan-based IMC Asset Management, Cathy Stores of Schwartz Investment Counsel in Bloomfield Hills, Mich., and Janice Bennett of Manhattan-based Milbank Winthrop & Co.
Brian Tsai, of Manhattan-based IMC Asset
Management, Cathy Stores of Schwartz Investment
Counsel in Bloomfield Hills, Mich., and
Janice Bennett of Manhattan-based Milbank Winthrop
& Co.

At her eight-person firm, it’s become her responsibility to figure out compliance issues. She likes to look not only at the technical manuals from their legal advisor, but to hear what other firms and compliance offers are doing.

This year, she said, “There were a whole lot of regulations coming to fruition.”

The Switch

Anxiety over the switch is clearly rising, judging by the number of questions directed to Patricia Struck, Wisconsin state securities regulator.
She noted that the deadlines have been gradually moving.

“The transition schedule originally was to be a one-year process. There have been additional grace periods … each advisor registered with the SEC has until July 21 to file an amendment on form ADV reporting its AUM,” she said. Those with AUM in the $25-$100 million range are required terminate SEC registration by Oct. 19th.

However, she said she wouldn’t be surprised if the July 21 deadline were pushed back. See: See: It’s looking official: Advisors switching to state oversight to face many more audits.

The SEC has decided not to offer a flexible cap on AUM so that states don’t have to constantly switch back and forth between the states and the SEC, instead saying that an advisor’s AUM should be decided on one day a year, and that should determine where to register for the year.
The advisors moving to state oversight represent a total of $258 billion in AUM, she said. See: See: Wondering whether to register with the states or the SEC? It’s a moving target..

It’s not clear what will happen to advisors in New York, which does not have a state securities regulator. Quizzed on that point, Struck said that she didn’t know what the solution would be, but said that she expected that it would eventually be clear on the IARD which states don’t have securities examination regimes.

Proliferating compliance firms

There are plenty of compliance firms rising to meet the new regulatory challenges. Last year, there were a scant handful of compliance firms with booths in the small exhibit space. This year, there were nearly a dozen.

The National Society of Compliance Professionals, which also had a booth, has grown from 1,800 to 1,850 since the middle of last year, says Eric Cieplik, membership development manager. It’s now launching a Hedge Fund and Investment Advisors compliance primer.

FrontLine Compliance has grown from 6 people to 10 people in the past year, said president Amy Lynch. The firm, in existence since 2006, focuses on firms with $500 million to $2 billion in assets and has offices in Washington and New York. “We’re a boutique firm,” said Lynch. She’s been shifting some resources from the broker-dealer side to the advisor side to deal with the rush of ADV business.

Mentioned in this article:

National Society of Compliance Professionals (NSCP)
Association, Compliance Expert, Conference
Top Executive: Judy Werner

FrontLine Compliance, LLC
Consulting Firm, Compliance Expert, Regulatory Consultant
Top Executive: Chip Arvantides

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