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Wondering whether to register with the states or the SEC? It's a moving target.

New York advisors still left to wonder who has power over them

Monday, December 20, 2010 – 2:22 PM by Lisa Shidler
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Melanie Senter Lubin: Advisors should get their ADV form ready to filed by March 31 and also make sure they know which states they’re going to need to file with.

The switch to state oversight is starting to look more like a ping-pong game for advisors whose assets hover around the $100 million mark.

The SEC surprised many when its recently released guidelines did not include a buffer zone allowing advisors to chose state or SEC registration if their assets climb just above $100 million.

Instead, advisors are being asked to, each year, take a snapshot of their assets, and if they are even at $101 million, switch their registration to the SEC. The next year, if assets had fallen to $99 million, the firm would have to switch back to state registration. Advisors have to file the ADV form 90 days after their fiscal year ends, which for most is March 31.

Opinions are divided about how onerous this will be for advisors.

David Tittsworth, executive director of the Investment Adviser Association, said he is still sorting out whether this issue that will be problematic. So far, he thinks it shouldn’t be.

“The SEC seems to be saying we know there are going to be fluctuations that will happen and they just want a one-time snapshot,” he said. “It doesn’t strike me as something that’s outrageous.”

Still, advisors will need to pay close attention if their assets fluctuate, said Skip Schweiss, president of TD Ameritrade. He points out that if advisors do see wide fluctuations in their assets they would have to switch again and would need to be prepared for that in the following year.

“When this legislation came out it seemed so black and white, but it’s really complicated. Since there’s no longer a buffer on the assets, advisors really have to watch out for it and make sure they make changes,” he said.

“The switch” requires investment advisors who have between $25 and $100 million assets and operate in fewer than 15 states to file with their states instead of the SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It’s looking official: Advisors switching to state oversight to face many more audits. Currently, only advisors with less than $25 million are registered with the states – and those whose assets are between $25 and $30 million chose whether to register with the states or the SEC.

Deadline extension

The SEC estimates that 4,100 of the agency’s 11,850 advisors will be required to make the switch. The original deadline for making the switch is July 21, but the SEC added an extension giving advisors until Oct. 19.

Advisor Penny Mandell recently went through the arduous process of switching her registration from the state of Idaho to the Securities Exchange Commission when her startup’s assets grew above $25 million.

If she reaches her goal of getting $100 million in assets by next summer, she can continue her SEC registration. But Mandell worries that normal market fluctuations could drop her assets below $100 million, forcing her to switch back to state registration again.

“If we lose a few big clients or the market falls, then we’re under that threshold,” said Mandell, principal of Summit Creek Capital, an upstart RIA firm based in Ketchum, Idaho, that the industry veteran began in July. “I don’t want to keep switching back and forth.”

The SEC said it’s not necessary to offer a buffer because advisory firms don’t need to make a change if their assets fluctuate throughout the year. Advisors will assess their eligibility for registration annually.

Sweet spot

Reaching $100 million in assets is a sweet spot for which many advisors strive. Daniel Bauer, advisor with AllSquare Wealth Management LLC, whose firm is based in Albany, N.Y., hopes to reach that goal by the end of 2011. Currently, the firm has $65 million in assets.

He’ll happily switch his registration a few times if it means his company has grown.

“I’m not going to lose sleep on it,” he said. “Once we hit $100 million I want to keep sailing forward. I don’t intend on going back.”

How do you decide your AUM?

The SEC also clearly defined what an advisor can use to calculate assets. The SEC’s definition of assets could mean that advisors’ assets are larger than what they currently report.

Under the SEC’s proposal, advisors must include assets for portfolios which have proprietary assets and even those in which they don’t get commission – which often includes assets they manage for relatives. The SEC also says advisors must also include assets of foreign clients.

The guidance regarding specifics of how advisors should calculate assets under management is good, because many firms use sticky accounting at best, said Brian Hamburger, founder and managing partner of MarketCounsel, a compliance consulting firm.

“I’m all for clarity. Advisors can’t just decide what’s going to be included on their own,” he said. “Right now, we find advisors use one number for marketing and another number goes to the SEC.”

Despite the additional clarity, there are some advisors that simply want to stay registered with the SEC, said Thomas R. Westle, an attorney with Blank Rome LLP. Because some advisors don’t want to register with their states, he predicts more mergers and rollups will happen as a result.

“You’re going to see advisors be really creative about this,” he said. “They’ll figure out ways to divide up profits and losses.”

States preparedness?

The top concern of many advisors has been the requirement to register in multiple states.Frustration mounts: Experts, RIAs identify six most important unknowns about the switch to state oversight.

Now, the North American Securities Administrators Association is working on establishing a coordinating review program, where states communicate on the comments section in part II of the form.

For instance, the program is looking to streamline the process so an advisor registering in multiple states won’t have to deal with agencies that don’t communicate with one another.

Advisors should sit tight and wait for guidance from the states next, Melanie Senter Lubin, the securities commissioner in Maryland, which oversees 540 advisory firms. She expects about 200 additional advisory firms to register in Maryland next year as a result of the rule change.

The primary documents many states expect to receive are: Forms ADV Parts 1A, 1B and 2, and Form U4 (for individuals) — all through the IARD. On top of those documents, advisors will also have to include investment advisory agreements and solicitors’ agreements, as well as documents about privacy and supervisory procedures.

Lubin said advisors should get their ADV form ready to be filed by March 31 and also make sure they know which states they’re going to need to file with. Then, advisors need to contact the states.

“It isn’t quite as difficult as some people have suggested it’s going to be,” she said.

Confusing law

States are clearly working to bulk up their resources, but there are still some questions in states that have unique laws making it difficult to follow the legislation. For instance, New York has a confusing law that makes some question whether state securities regulators have the power to examine advisors.

“New York continues to remain a big question mark,” Hamburger said. “It’s very clear they have a different securities act than any other state.”
Under the SEC’s proposed regulations, it asks states to indicate whether they can follow the Dodd Frank legislation. Wyoming is also unique because that state doesn’t even have a law requiring registration for investment advisors.

Reporter Matthew Robinson contributed to this article.


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Mentioned in this article:

TD Ameritrade
Asset Custodian
Top Executive: Tom Nally

Summit Creek Capital
RIA Serving Endowments/Foundations
Top Executive: Duncan Morton III




Peter Mafteiu

Peter Mafteiu

December 30, 2010 — 12:34 AM

It may be a rude awakening too for firms that go from SEC to State registration / supervision late in 2011. The home state can then “review” ADV disclosures (require modfication), review advisory contracts (require modification), polcies & procedures, advertising, etc.

In addition, if the adviser is a general partner and adviser to a private (hedge) fund, it even gets more interesting. Washington state is one that I know well; the regulations are designed to protect citizens, that is for sure (which is then felt as burdensome to the adviser / general partner of the Fund). Compliance is difficult!

Be slow to make the change, that is for sure!

Elizabeth MacBride

Elizabeth MacBride

December 22, 2010 — 3:51 PM

Thanks Chuck! I adjusted the story to clarify.

Chuck Lowenstein

Chuck Lowenstein

December 22, 2010 — 3:18 PM

Just a minor correction. Twice, the article states that the current law requires IAs with AUM of $25 million or less must register with the states, e.g., “Currently, only advisors with $25 million in assets or less are required to register with the states.”

Almost, but not quite. The law requires those with LESS than $25 million to register with the states. Once the IA has reached $25 million, registration is optional with either the states or the SEC. At $30 million, SEC registration becomes mandatory.

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