Financial advisers who live by the maxim “the early bird catches the worm” might want to think twice before getting a head start on making the switch to state registration.
Next summer, some 4,200 registered investment advisers will be required to switch from Securities and Exchange Commission oversight to state jurisdiction. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 increases the threshold for assets under management that determines whether a firm will be under SEC jurisdiction to $100 million, from $25 million.
The deadline for making the move is July 21, but some advisers are electing to make the transition sooner in hopes of avoiding an administrative logjam.
“I really wanted to get this off my list of things to do,” said Mike McGervey, president of McGervey Wealth Management, which is aiming to file registration documents with Ohio and Pennsylvania by the end of the month. “We want to be in the system months before the deadline approaches.”
McGervey Wealth Management oversees $50 million in assets.
Zachary D. Gronich, chief executive and lead compliance consultant at RIA in a Box, a registered investment advisory consulting firm, said that he is working with about 20 firms that want to file their paperwork early.
“Advisers feel that if they're going to have to do it, they want to get it done now,” he said.
Meanwhile, officials in the Securities Regulation Division of California's Department of Corporations also reported that a number of advisers have already filed paperwork related to the switch.
Although getting ahead of a rule change is often commendable, in this particular case, advisers who rush the changeover may be making a serious mistake. The SEC and the North American Securities Administrators Association Inc. are still hammering out the final details of how the transition will work and what exactly will be expected of advisers.
“Trying to file it now is like picking your cards before you even know what the game is,” said Brian Hamburger, founder and managing partner of MarketCounsel LLC.
“There's absolutely no rush. I find it humorous that advisers want to be ahead of the curve on this,” Mr. Hamburger said.
Advisers who file their change-over paperwork too early, he said, will likely have to amend it as the deadline draws nearer.
Also being worked out are the mechanics for making the transition. The common wisdom is that advisers should hold on to their SEC registration until they receive confirmation that they are registered in their state or states of domicile.
That means that there likely will be an overlap in which an advisory firm is dually registered with the SEC and the state.
“Any firm can apply at any time for both registrations,” said Bob Webster, director of communications for NASAA. “There is nothing in the [Investment Adviser Registration Depository] to block dual registrations and we are not aware that there will be an issue with the states.”
For their part, states are moving to prepare their staff members for a spike in registrations next year.
Advisers' worries about delays in processing the necessary paperwork are largely overblown, said Patricia Struck, administrator of the Wisconsin Securities Division.
“Advisers shouldn't be concerned about a backlog,” said Ms. Struck, whose state oversees nearly 300 registered advisers and expects to add another 50 under the new rules. She has asked advisers not to file until next year.
“There's no reason for them to panic. It's not necessary,” Ms. Struck said.
Indeed, the documentation that most advisers will be required to submit to state regulators will be the same that they were required to provide to the SEC, said Melanie Senter Lubin, the securities commissioner in Maryland, which oversees 540 advisory firms.
“We're not asking advisers to create new documents,” said Ms. Lubin, who expects about 200 additional advisory firms to register in Maryland next year as a result of the rule change. “We're asking to review things they'll already have on file.”
The primary documents that many states expect to receive are: Forms ADV Parts 1A, 1B and 2, and Form U4 (individuals) — all through the IARD. Then there are investment advisory agreements and financial planning or solicitors agreements, as well as documentation related to supervisory procedures and privacy policies.
WHY PAY TWICE?
Another reason to avoid filing early is related to costs, said Christopher D. Kosifas, president of Business Compliance Partners, a consulting firm.
RIAs must register with states in which they are domiciled and in every state where they do business. If they do that this year, they will pay licensing fees in each state for the entire year — for the firm and for each adviser. Then they'll have to pay these fees again next year.
Fees vary from state to state, but it isn't unusual for states to charge $200 for an advisory firm's registration and an additional $100 for each adviser.
“States don't charge a la carte. They'll charge you for the entire year,” Mr. Kosifas said.
“Why would an adviser want to pay twice if they don't have to do that?” he said.
Although it may be a no-brainer, any firm considering a significant merger or acquisition also should delay filing for state registration for as long as possible — particularly if there is a chance that a deal would push it past the $100 million threshold for SEC registration.
Certainly, advisers shouldn't merge with others simply because they want to avoid making the switch, said David Canter, executive vice president of practice management at Fidelity Investments. But he pointed out that now is the perfect time for advisers to evaluate their firms with an eye toward expansion.
“This may present opportunities for smaller firms that are looking to be tucked into the SEC and are inclined for an acquisition,” Mr. Canter said.