Like many other areas of the sweeping Dodd-Frank financial regulatory reform law, the transfer of some investment advisers from SEC oversight to state regulation has gone from hurry up to wait.
Under Dodd-Frank, advisers who have between $25 million and $100 million in assets under management were to transfer their registrations from the Securities and Exchange Commission to the states by July 21, the one-year anniversary of the law's enactment. At the same time, advisers to private funds were supposed to have registered with the SEC.
But in an April 8 letter, Robert Plaze, associate director of the SEC's Division of Investment Management, said that the agency would not be ready to execute the changes by midsummer and that the deadline for the switch likely would be extended to the first quarter of 2012.
In the letter to David Massey, the deputy securities administrator in North Carolina and president of the North American Securities Administrators Association Inc., Mr. Plaze said that the Investment Adviser Registration Depository system must be reprogrammed to accept advisers' transition filings.
“Those no longer eligible for commission registration (i.e., midsize advisers) would have a grace period providing them time to register with the appropriate state regulators and come into compliance with state law before withdrawing their commission registration,” Mr. Plaze wrote.
State officials and compliance experts are telling advisers not to change their registration status until the SEC promulgates a final rule on the switch.
In an interview, Mr. Plaze said that the agency will issue the switch regulation before July 21, while moving the compliance deadline toward the end of the first quarter of 2012.
BREATHING ROOM
“Advisers are going to require time to come into compliance,” he said. “This [letter] recognizes that. We'll give them some breathing room.”
Advisers now can step back and reassess their situation.
“Anyone who's contemplating switching doesn't need to worry about making their filings until late in the year,” said Melanie Lubin, Maryland's securities commissioner and chairman of the NASAA switch project. “They should wait until the final SEC rules come out. Then they'll have adequate time.”
Steve Thomas, South Dakota's former chief compliance examiner and director of Lexington Compliance, is giving similar guidance to his clients.
“Get your paperwork in order and don't worry about all the switch stuff until [the SEC] gives a drop-dead date,” he said.
Few observers were surprised by the extended timeline, because it is apparent that the SEC is straining to keep up with the more than 100 rulemakings and nearly 20 studies mandated by Dodd-Frank. Many of them are due between July and December.
“Not one human being honestly believed that [the July 21 switch deadline] was going to happen,” said Zachary Gronich, owner of RIA In A Box, a compliance consultancy that owns Lexington Compliance. “The SEC was not ready for it. The states were not ready for it. We told [clients] to wait. And now it looks as if it's going to save them some money.”
The SEC's change of pace on the switch reflects an effort by the agency to tread carefully through Dodd-Frank's implementation, according to Ms. Lubin.
“I think it was an ambitious undertaking to get it all done [by July 21] because there are a lot of moving parts,” she said. “I think it's more important that it's right than it's quick.”
But Brian Hamburger, managing director of MarketCounsel, speculates that the SEC is slowing down the timeline to accomplish a broader goal of moving the burden of adviser oversight to a self-regulatory organization.
In a January report on adviser oversight mandated by Dodd-Frank, the SEC presented three recommendations to Congress: authorize the SEC to impose user fees to fund more adviser oversight, authorize an SRO or allow the Financial Industry Regulatory Authority Inc. to extend its reach to advisers who are dually registered as broker-dealers.
“For the short term, [the switch delay] provides welcome relief for investment advisers,” Mr. Hamburger said. “It appears the SEC is using this break to reinvigorate their effort to change the regulatory scheme for advisers.”
Mr. Plaze dismissed the notion that there is any underlying message.
“This is wholly independent of any legislative effort,” he said. The larger questions surrounding adviser oversight were “simply not a consideration.”
What the SEC was trying to do was give itself a better opportunity to review feedback on both the switch and the private-adviser registration, he said.
Much of that input focused on the registration — a new requirement under Dodd-Frank meant to enable the agency to monitor large, opaque capital pools for potential systemic risk.
The agency also will push back private-adviser registration to the first quarter of 2012, “given the time needed for advisers to register and come fully into compliance with obligations applicable to them once they are registered,” Mr. Plaze wrote in the April 8 letter.
Rajib Chanda, a partner at Ropes & Gray LLP, said that the SEC wants to ensure that it offers a comprehensive set of rules addressing both the inflow of advisers under its aegis — the private funds — and the outflow, namely the smaller advisers reverting to the states.
“They want to take a holistic approach,” Mr. Chanda said. “They don't want to do things piecemeal.”
Like midsize advisers, private-fund advisers are being counseled to proceed with their preparations for registration, such as compiling the information they must provide to the SEC and setting up their compliance programs.
But M. Holland West, a partner at Dechert LLP, said he doesn't expect that private advisers will register with the SEC until they see more details about the deadline.
E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.
