Investment advisers who must migrate from regulation by the Securities and Exchange Commission to state oversight now will have extra time to make the transition.
Investment advisers who must migrate from regulation by the Securities and Exchange Commission to state oversight now will have extra time to make the transition.
Under the rule approved today by the SEC, advisers with assets under management between $25 million and $100 million have until March 30 of next year to certify their AUM and until June 28 to complete the switch to state registration, if they need to do so.
Under the Dodd-Frank Act, the transition was to begin by July 21, the first anniversary of the measure's being signed into law. This spring, the SEC indicated that it would delay the switch to give itself more time to prepare the Investment Adviser Registration Depository for the change.
The SEC's action last week should help ease some concerns about the timetable.
But some observers anticipate yet more delays and uncertainty over dates.
“There's a chance the [new] date … won't be the real date,” said Zachary Gronich, owner of RIA In A Box, a compliance consultancy, due to issues both state and federal regulators still have to sort through.
Some states, for example, have requirements of RIA firms that the SEC doesn't, he said, and it's unclear whether newly registered state advisers will be able to meet those new standards in time.
“Some states will make some noise about [needing more] time to bring on more people” to handle the influx, said Dan Bernstein, Director of Professional Services at MarketCounsel, a consulting firm.
Other states might want advisers to switch sooner, Mr. Bernstein said.
In a change bound to please advisers, though, the SEC said the rule would be amended to provide a buffer of from $90 million to $110 million, to prevent advisers from having to frequently switch between SEC and state registration.
In its original switch proposal from last fall, the SEC proposed doing away with the $5 million buffer that advisers have with the current $25 million threshold.
The rule also delays until the end of March the Dodd-Frank requirement that advisers to private-equity funds and hedge funds register with the SEC. In addition, the agency approved a definition of family offices that exempts them from SEC registration.
The commissioners split, 3-2, on the rule to implement exemptions to the private-fund adviser rule. Commissioners Kathleen Casey and Troy Paredes dissented, asserting that the SEC was seeking too much information from venture capital funds even though they are exempt from registering with the agency.
The switch delay gives more breathing room to states as they prepare to take over the monitoring of 3,200 of the 11,500 advisers currently registered with the SEC.
“The states are in a pretty comfortable position right now,” said David Massey, deputy securities administrator in North Carolina and president of the North American Securities Administrators Association Inc. “The switch is going to be a done deal. We're ready to go.”
NASAA spokesman Bob Webster said he's gotten no indication states will need even more time. "Up until April we were working on the assumption that the switch would be complete by October 19, 2011 and we were fine with that," he said in an email. "We're not hearing from our members that they want mid-sized advisers to register sooner than the new rule requires."
During the SEC meeting, agency staff members identified three states that have indicated that they do not subject midsize advisers to exams — New York, Minnesota and Wyoming.
As a result, about 350 midsized advisers in these states will remain SEC-registered. On June 24, however, a spokeswoman for the Minnesota Department of Commerce said the state would examine advisers with AUM between $25 million and $100 million.
Some skeptics assert that states, many of which are struggling with severe budget deficits, will not be able to handle the extra adviser-examination work.
“Some states have more frequent exams than the SEC,” Mr. Bernstein said. “Others not at all. And there aren't many in-between. “
NASAA has said that 94% of states conduct routine on-site exams of advisers.
“No way,” Mr. Bernstein said. “We're just not seeing it.”
Mr. Massey is confident that states will provide robust adviser regulation.
“The state regulators are nimble and able to adjust,” he said.
He noted three NASAA initiatives that are helping them prepare. First, the organization has made available to state examiners software that they can download to laptops to make adviser reviews faster and more efficient. Secondly, it has made available for download on its website a risk-assessment program.
Finally, NASAA is sponsoring “road shows” in which regulators meet with advisers in town-hall-type forums.
“It's kind of like a bonding experience,” Mr. Massey said.
He added that the SEC and NASAA also have developed a collaborative relationship for implementing the switch.
“NASAA and the SEC have been working cooperatively to make this a seamless transition,” Mr. Massey said. “It's been a good experience. We're always trying to figure out ways to better interact with our fellow regulators.”
SEC Commissioner Elise Walter expressed concern that the SEC's moving midsize adviser oversight to the states highlights the agency's own lack of resources for adviser examinations.
She noted that the original estimate of 4,100 advisory firms making the switch had been revised down to around 3,200.
It “further accentuates the need to address this issue now,” said Ms. Walter, who favors establishing a self-regulatory organization for advisers.
“The SEC says it audits 11% of firms, but we've [registered] 150 SEC firms over the last seven years, and not 10 of those firms have been audited,” Mr. Gronich said.
Ms. Casey and Mr. Paredes are skeptical of the reporting requirements for venture capital firms. Even though such firms are not required to register with the SEC, they still must provide information about the funds the adviser manages, potential conflicts of interest and the disciplinary history of advisers.
“The [rule] charts an increasingly regulatory course forward,” said Mr. Paredes, who worries that the SEC will create an environment for venture capital funds that hinders “capital formation, innovation, entrepreneurship and jobs.”
SEC Chairman Mary Schapiro welcomed the addition of private funds to the SEC agenda, asserting that overseeing them will make the enormous pools of capital more transparent.
“Today's rules will fill a key gap in the regulatory landscape,” Ms. Schapiro said.
Even as the SEC acted, however, the House Financial Services Committee approved a bill that would exempt from SEC registration private funds that do not carry leverage at a greater than 2 to 1 ratio.
Pushing back the registration date will help funds prepare for their new regulatory world, according to Jeannie Lewis, compliance and regulatory principal at Deloitte Asset Management Services.
“The extension to March 30, 2012, is going to be much appreciated by the industry,” Ms. Lewis said. “It gives them more time to come into compliance.”
Dan Jamieson contributed to this story
