Faced with the prospect of gaining jurisdiction over 4,200 registered investment advisory firms, state regulators are scrambling to make sure they have the resources to handle a handoff.
Faced with the prospect of gaining jurisdiction over 4,200 registered investment advisory firms, state regulators are scrambling to make sure they have the resources to handle a handoff.
California, for example, is considering charging its 317,000 brokers and advisers a $25 annual registration renewal fee. The cash-strapped state, which could have nearly 1,600 investment advisory firms added to the 3,135 firms it already supervises, is estimating that the new charge would raise $8 million a year in additional revenue.
Texas, which oversees about 1,200 firms, has already received permission from its Legislature to add 10 examiners to its staff of 18 to cover an additional 900 advisory firms that are now registered with the Securities and Exchange Commission. And Michigan, which oversees 450 advisory firms, hopes to increase its staff of examiners to 15, from six, if it has to assume responsibility for 100 additional firms.
With many states beginning their legislative sessions next month, the push to secure funding ahead of the transition from federal to state oversight will likely gather speed.
“Quite a few states will seek and receive additional funding to address the additional investment adviser examinations,” said Denise Voigt Crawford, Texas' securities commissioner and president of the North American Securities Administrators Association Inc.
Financial services reform legislation in the House and companion draft legislation being considered in the Senate would increase the asset threshold for SEC oversight of investment advisers to $100 million, from $25 million. That's would result in state regulators' gaining oversight of about 4,200 of the 11,300 firms now registered with the SEC.
Until 1997, all financial advisers were regulated by the SEC. But as the number of firms grew, federal regulators found themselves stretched thin and unable to examine the firms on a regular basis.
Consequently, Congress intervened and passed the National Securities Markets Improvement Act of 1996, which put the states in charge of regulating firms with less than $25 million in assets.
The push to raise the asset threshold is intended to allow the SEC to focus its supervisory efforts on larger firms and to examine those firms more frequently. The SEC examines about 9% of its regulated advisory firms annually.
While the states favor having more control, many face substantial budget shortfalls that are likely to get in the way of regulatory oversight.
“We'll have to deal with it, hopefully with additional resources,” said Preston DuFauchard, California's corporations commissioner. “We should be able to tolerate it.”
California's projected $20 billion budget deficit for fiscal-years 2009 through 2011 will not directly affect the Corporations Department, which handles securities regulation, Mr. DuFauchard said.
“The budget problems exist primarily in general fund departments,” while the Corporations Department is self-funded from fees collected by industries it regulates.
Still, he added, “all departments are experiencing similar pain.”
If California is unable to impose the new renewal fee, the state is considering charging fees for routine exams of the firms it regulates, Mr. DuFauchard said.
Currently, the state charges for non-routine exams, such as exams generated from complaints. Mr. DuFauchard declined to provide an estimate for how much a routine exam would cost, but he did say it would be based on the time spent by examiners.
California is also considering basing its exam cycle on risk, rather than adhering to a three-, five- or 10-year exam cycle, Mr. DuFauchard said.
More emphasis would be placed on examining advisory firms, since broker-dealers are also overseen by the Financial Industry Regulatory Authority Inc., he added.
Texas' contingency appropriation for 10 new examiners would cost $934,000 per year for fiscal 2010 and 2011. The state Securities Board budget is $7.8 million for each year, including the money for the extra examiners. The state also would be likely to examine its new advisory firms more heavily than brokerage firms, at least at first, since the SEC has not been able to examine advisory firms frequently, said Ms. Crawford.
“If I decide that there is an area of the state that has more of these investment advisory firms and maybe I better look at them because the SEC hasn't looked at them in 15 years, I'll just say we're not going to do these broker-dealer exams right now,” she said.
As a result, brokerage firms would likely be examined less frequently than they are under the state's present two- to three-year exam cycle, Ms. Crawford added.
In addition to seeking more funding from their legislatures, state regulators are trying to figure out other ways of dealing with the extra workload.
The North American Securities Administrators Association Inc. has drawn up a proposed memorandum of understanding, under which participating states would be able to ask for additional resources from other states.
“That's beefing up our examination team if we need it,” said Linda Cena, Michigan's securities director.
Regulators are also examining state adviser registration databases to determine whether any of the larger advisory firms that would come under their jurisdiction pose risks with which the states have little experience, said Patricia Struck, Wisconsin's securities administrator and chairman of NASAA's investment adviser unit.
“It's going to change the assessment of risk,” she said. “They'll be more risky.”
E-mail Sara Hansard at shansard@investmentnews.com.
