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Compliance expert Cathy Vasilev says many of her clients are beginning to worry about whether they will be able to register with the states by the July 21 deadline.

EXOS Partners, a San Francisco-based RIA with just under $100 million AUM, occupies what its chief compliance officer ruefully calls a sore spot.

It is just small enough to fall into the pool of advisors — $25 million to $100 million AUM — that are being forced to switch to state oversight under the Dodd-Frank reform bill. It’s also large enough that making the switch is going to be a complicated, months-long task.

The firm has clients in 12 different states — so Jeff Schnitz, who is also a managing director, will need to register the firm in all of them.

“Let’s put it this way. I wouldn’t turn down the chance to add clients in three more states,” he says, taking note of the exception that allows RIAs that would have to register in 15 states to remain within the SEC’s oversight.

With many RIAs staring down the onerous task of registering in multiple states, while coping with a new, more demanding ADV form, frustration is mounting at the lack of information from the SEC and the lack of uniformity among the states. See: What advisors should know about the next sweeping change: the switch from SEC oversight to state regulation

First shred of SEC info

In fact, it was only a few days ago that the SEC posted the first shred of information about the switch to state oversight. That shred of information was the news that the commission plans to release its proposed rules between October and December.

“That is not helpful at all,” says Cathy Vasilev, vice president of Red Oak Compliance, a nine-person compliance firm based in Austin, Texas. She says many of her clients are beginning to worry about whether they will be able to file their registrations in time.

“We’re kind of in a hurry up and wait-and-see, which is frustrating. This affects their ability to do business.”

So far, the state of affairs regarding the switch – which by law advisory firms must do by July 21, 2011 — could be summed up in one word: confused.

There’s been little information coming from the SEC, which is generally believed to be swamped by the many other studies and rulemakings required under the Dodd-Frank reform bill. The North American Securities Administrators Association has promised a web site with information, but it’s not yet posted.

Its annual conference, which begins Sunday, may offer some information to advisors. RIABiz will be there. Some securities regulators have begun holding meetings in their states to offer guidance to advisors, but many of the ground rules remain unclear. Here is the article about that conference: It’s looking official: Advisors switching to state oversight to face many more audits

Dual registration requirements

The most difficult issues are clearly those surrounding the dual registration requirements, that call for advisors with an office or five or more clients in a state to register in it. An advisory firm that would be required to register in 15 or more states under the law can opt to remain SEC-registered; there’s also an exemption for advisory firms with institutional clients. It’s not clear to what extent registering in a state subjects an advisor to the different state regulations.

“The issue requires a legal analysis,” says David Massey, deputy securities administrator in North Carolina. “I’m pretty confused myself.”

Investment advisors and compliance professionals identified a litany of other unknowns.

Among them:

How will a $100 million advisor be defined? Will the SEC or the individual states build a swing amount into their number, so that advisors who, because of market conditions have $110 million in AUM at some point in the year and $90 million at another point, don’t have to switch registrations? Denise Voigt Crawford, Texas Securities Commissioner and president of NASAA, said that’s what would likely happen. But Vasilev said that the typical scenario has been that an advisory firm registers with the SEC or the states based on AUM on Dec. 31 of each year.

What does registering in a state mean? Under FINRA’s IARD system, an advisory firm can register online fairly easily. But can a firm register in multiple states through IARD? The site itself says that advisors who are dually registered in more than one state should check with their jurisdictions. Schnitz said about half of states require different paperwork in addition to the online IARD registration.

If you are registered in more than one state, do you have to worry about complying with the books and records requirements in all of the different states, or are you covered by your home state provisions? At a recent informational session in Asheville, North Carolina, Massey told advisors that they only had to comply with books and records requirements for their home states. “That would be great, if it were the case everywhere,” says Vasilev. “It’s not widely accepted.”

What about the SEC’s new custody rule? Each state may have different custody rules, which may or may not conform to the SEC’s new custody rule. Jeff Clark, chief compliance officer of Broyhill Asset Management in Lenoir, N.C., is particularly thinking of that question. Under the SEC’s new rule, his firm is required to have an audit by a Big Six firm. The firm falls under the related party requirement because one of its partners is a general partner at a hedge fund. North Carolina, on the other hand, does not have a similar rule.

This is particularly confusing, he says, because the change happens in the middle of the year. For half the year, his firm will be covered by the SEC custody rule; for half the year, it will be covered by North Carolina rules. Which should he follow? He’s trying to figure out a way to go with the North Carolina version, because the audit is likely to cost his firm $30,000 – $40,000.

Presumably, a question like this would be answered when the SEC issues its proposed rules to cover the transition.

Will the deadline remain firm at July 14, 2011? That is becoming a more pressing question. In some states, according to compliance experts, it takes as much as six months to work through the registration process. If the SEC’s proposed rules aren’t issued until December, and aren’t approved for a couple of months after that, advisory firms may not have much clarity about what they should do until February or March.

How much will states share resources? The answers on this point have differed, and it is a particularly pressing question for New York, which doesn’t have the authority to regulate investment advisors. Denise Voigt Crawford suggested that neighboring states would cover New York advisors; my calls to Connecticut and New Jersey produced the equivalent of a surprised “really?” on the part of those regulatory offices.

Other regulators and compliance experts, meanwhile, have said that they forsee most cooperation on training issues and joint investigations. But NASAA’s memorandum of understanding, signed by all the states, offers the option of having NASAA pay for an investigation in cases where a state doesn’t have the resources. Click here to see a copy of the memorandum.

What’s an advisory firm to do? At the moment, there are only two pieces of super-solid advice floating around. First, is sit tight. Second, is to call your state securities regulator.

“I think the best way to find anything out is to pick up the telephone,” Massey said. “My agency much prefers that route, of working with a firm ahead of time.”

RIABiz has a list of state securities regulators’ contact information, here.

Mentioned in this article:

Red Oak Compliance Solutions
Compliance Expert, Regulatory Consultant, Tech: Other
Top Executive: Stephen Pope

Todd E. Schwartz

Todd E. Schwartz

October 27, 2010 — 3:56 PM

Hello Elizabeth-

Any other developments since this article you are aware of?

Thanks in advance.


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