Compliance expert: 'Switch' will dramatically undercut oversight

Hamburger doubts NASAA over frequency of exams; will state ‘buddy system' help?

Oct 13, 2011 @ 10:59 am

By Mark Schoeff Jr.

When he starts talking about investment adviser oversight, it doesn't take long for Brian Hamburger to make clear that he favors Securities and Exchange Commission regulation.

Not only does the founder and managing director of MarketCounsel, a compliance consultant, oppose a self-regulatory organization for advisers, he also questions whether states have the capacity to take on the 3,200 advisers with assets under management of less than $100 million who will transfer to their authority from the SEC next summer.

The so-called “switch” is mandated by the Dodd-Frank financial reform law. It is designed to ease pressure on the commission, which says it needs a substantial budget increase in order to implement Dodd-Frank and fulfill its market-monitoring and investor protection duties.

The SEC says it can conduct examinations of only about 9% of the nearly 12,000 investment advisers currently registered with it. When the smaller advisers move to the states, the SEC will start to oversee advisers to private equity and hedge funds.

Mr. Hamburger, however, doubts assertions by the North American Securities Administrators Association that states will be able to examine advisers more frequently.

Like the federal government, many states are facing budget constraints. Some are ready for their increased-adviser-oversight responsibility but most are not, according to Mr. Hamburger.

“We fear there will be pockets where there is complete lack of regulations or enforcement of regulations,” Mr. Hamburger said Wednesday at the MarketCounsel Member Summit in Coral Gables, Fla. “In some states, you will never undergo a regulatory exam.”

One of the conference attendees was a state securities administrator, who countered that states are ready for the “switch.”

Alabama Securities Commissioner Joseph Borg said that his agency reviews every investment adviser in the state every three years. He's confident that states will examine advisers more frequently than the SEC does.

He acknowledged that some states may encounter difficulties with their new adviser oversight responsibilities but that other states are ready to help them out.

For instance, Alabama will take up some of the slack for Georgia, if Georgia runs into trouble. That kind of buddy system will occur around the country in a program established by NASAA.

“When you put 50 states together and share resources, as we will under the compact we signed, that solves a lot of the problem,” Mr. Borg said.

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