State securities regulators, SEC issue first solid answers on some commonly asked questions for 4,000 advisors in limbo

September 28, 2010 — 3:58 AM UTC by Elizabeth MacBride

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Brooke’s Note: It remains astounding how much needs to happen to bring 4,000 advisors to state oversight and how little that is known. The concerns expressed last week still hold sway. See: Frustations mount: Experts, RIAs identify six most important unknowns about state oversight

Mid-sized advisors who switch to state oversight are likely to be audited more often – probably about every three years — than they were as SEC-regulated advisors. That’s based on numbers released yesterday by the North American Securities Administrators Association at its annual conference.

While much remains unclear about the switch to state oversight of about 4,000 RIAs with between $30 and $100 million AUM, the state regulators for the first time yesterday put some hard numbers on audit schedules and the resources states are bringing to the task.

John Walsh, director of the SEC’s Office of Compliance Inspections and Examinations, also gave advisors one piece of solid advice:
“There’s nothing in the act or the rules that prevents an advisor from registering with the SEC and a state,” he said. “This is an option that people might want to hear about.”

Working out switch rules

His statement seemed an acknowledgement of advisors’ growing frustration with the length of time it is taking the SEC and the state regulators to work out the rules governing the switch. The SEC recently said it would issue proposed rules between October and December, but the rules won’t be approved until sometime next year, Walsh said.

Advisors need to have switched their registrations by the July 21 deadline, and many advisors will need to register in multiple states. For contact information for state securities regulators, click here.

Even yesterday, the state regulators offered little state-specific information to enable advisors in different locales to know what to expect under their new regulatory regime. Most state securities divisions are seeking more money from their states to hire more staff (Michigan, for instance, is seeking to jump from three staff people to six). The state regulators will also be overseeing advisors that are considerably more complex than the smallest firms that they have long overseen.

Andrea Seidt, securities commissioner for Ohio, reported on a NASAA survey of its members. About 300 people, a mix of regulators, advisors and service providers, attended the conference. Seidt said forty-two states are on regular audit cycles; about half of them on a 1-3 year exam cycle and the other half on a cycle of six years or less.

Not on exam cycle

She would not give the names of the eight states that aren’t on a regular exam cycle, though two of them are clear: Wyoming, which doesn’t register advisors, and New York, which does investigations for cause. She also said Ohio regulators have been working with officials in another state to aid their securities regulation program, but she wouldn’t identify which one.

NASAA has yet to provide a state-by-state accounting of how many regulators there are in each state. Though, for the first time yesterday at its conference in Baltimore, Seidt put a collective number on state resources, saying that the states have 400 staff devoted to licensing and examination. So far in fiscal 2010, the states have done more than 2,400 advisor examinations and more than 1,500 broker-dealer examinations.
In contrast, the SEC aimed to examine the advisors it identified as high-risk once every three years. Overall, it was auditing fewer than 10% of advisors a year.

In 2009, the SEC had 796 employees (or full-time equivalents) devoted to inspections and examinations. Walsh said the 4,000 advisors moving to state oversight represented about a third of the SEC’s load.

NASAA debuted a web site that provides some answers to frequently asked questions. RIABiz has copied the answers below:

Q: When does the new AUM threshold for investment advisers become effective?

A: The provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act raising the threshold for SEC registration for investment advisers to $100 million becomes effective July 21, 2011.

Q: Will there be any guidance as to when advisers can begin registering with states?

A: Yes. NASAA is in regular communication with the SEC and expects that the SEC will issue guidance for advisers who will be switching from SEC registration to state registration. Check the NASAA website regularly.

Q: Should investment advisers that are currently state registered and close to exceeding or expect to exceed the old $30 million AUM threshold very soon switch their registration to the SEC?

A: Currently, advisers who are approaching the assets under management threshold for SEC registration should switch to the SEC at the appropriate time.

Q: Should advisers begin registering with states now?

A: Advisers can initiate registration with a state now, but should check with each state to make sure that the state will not object to the adviser’s concurrent registration with a state and the SEC. Advisers may want to wait until after January 1, 2011, to start registering with states in order to avoid paying multiple renewal fees.

Q: Has a timeline been published for the various rules that will need to be adopted or amended as a result of Dodd-Frank?

A: Yes. The SEC has published a timeline for the rulemaking that will be undertaken as a result of the Dodd-Frank Act. The timeline can be found on the SEC’s website here. According to this timeline, the SEC plans to issue proposed rules for the implementation of the new AUM threshold between Otober and December 2010.

Q: What is the implementation schedule for Part 2?

A: According to the SEC Release IA-3060, new Part 2 becomes effective October 12, 2010. States will determine the implementation schedule pursuant to their rules and statutes and you should check with the appropriate states.

Q: Where can I find the new Part 2?

A: NASAA will be updating the Investment Adviser and Forms sections of the NASAA website to include the new Part 2. We will also include a pdf version of the form for use by advisers.

Q: Can an investment adviser register in more than one state using IARD?

A: Yes. All states use Form ADV for the registration of investment advisers. However, advisers should check with the states in which they are registering to determine what other materials, if any, a state may require to complete registration.

Q. Will I have to pay additional fees because of the switch?

A: Each state will be governed by their statutes and rules regarding fees. You will need to check with the Securities staff in each state to determine what fees will be required.

Q: Will I have to file Form U4 amendments for my investment adviser representatives?

A: No. Because the firm’s IARD number associated with the investment adviser representative does not change, there should be no effect on the existing U4 filings. However, some investment adviser representatives that may have been exempt from registration with a federal covered adviser may now need to be registered with state securities regulators.



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