Fewer RIAs switching to state regulation

Strong 1Q makes it easier to reach $90M threshold and remain with SEC

Apr 15, 2012 @ 12:01 am

By Dan Jamieson

The market's strength last quarter turned out to be a godsend for investment advisory firms struggling to meet the $90 million asset threshold for remaining registered with the Securities and Exchange Commission.

The S&P 500's 12% rise in the quarter coincided perfectly with a March 30 deadline for filing updated ADV forms and meeting the SEC minimum under the Dodd-Frank Act — $100 million, less a $10 million buffer — to stay under the regulatory um-brella of the commission.

As a result of the rally, it looks as if fewer advisory firms than expected will be making the switch to state registration.

By April 5, 1,914 advisory firms had indicated on their updated forms that they were no longer eligible to register with the SEC, according to commission spokes-man John Nester. That is well under the estimated 3,200 that regulators expected would be making the switch.

But observers noted that the final number of financial advisers who may have to register with the states could be higher. These borderline advisers are due to complete that process by June 28, the date by which the switch-overs must take place.

“Some advisers just haven't filed the annual [ADV] amendment on time” to meet the March 30 deadline, said Daniel Bernstein, director of research and development at MarketCounsel LLC, a compliance consultant. “That could be in the hundreds” of advisory firms, he said.

Some of those tardy filers will be firms that will be switching regulators, Mr. Bernstein said.

And some advisers had already moved to state registration and pulled their SEC registrations, and thus were not counted in the latest tally, observers said.

But clearly, strong markets helped quite a few advisers meet the SEC minimum, bolstering efforts by advisers themselves to boost assets.

“Some [advisers] worked on really building their businesses up, and the markets definitely helped,” said Cindi Hill, founder of Hill Compliance Advisors, a consultant.

“I had three [adviser firm] clients I thought would have made the switch. None did,” she said. “They made a concerted effort to make the $90 million number.”

“The markets are up pretty significantly from when these [SEC switch] rules went into place,” Mr. Bernstein said. “And more advisers have been aggressively pursuing assets.”

Almost uniformly, advisers registered with the SEC wanted to remain with the commission, observers said. Advisers want to avoid registering in multiple state jurisdictions, many of which have differing regulatory requirements.

WJM Financial LLC, an advisory firm, made the threshold by reaching $95 million in assets, partly because of the bull market but mostly by making sure to retain clients and get referrals, said Jean Fullerton, a partner at the Bedford, N.H., firm.

In addition, “having that [$10 million] buffer was a big deal for us,” she said, referring to the leeway the SEC gave to advisers already registered with the commission. The buffer allowed firms such as hers to stay with the SEC with slightly less than $100 million in assets.

Liberal rules for counting assets also helped.

Advisers could look back 90 days prior to filing their updated ADV and pick the day from which to calculate the market value of their assets. As the bull market powered onward last quarter, some “took the bid” once they reached the needed threshold.

WAYS TO MAKE THE CUT

Mr. Bernstein had one client who reached $91 million on a particular day during the quarter.

“When we had enough, we took it,” Mr. Bernstein said.

The SEC also let advisers count the full value of a margin account, without subtracting margin debt, Ms. Hill said.

And smaller advisers were helped by being able to include personal assets and non-fee assets handled for family and friends as part of their regulatory assets under management, said Peter Mafteiu, principal of Sound Compliance Services LLC, a consulting firm.

Advisers also changed contracts with subadvisers, giving them the power to hire and fire managers to whom they referred clients.

That way, subadvised assets could be counted toward the regulatory minimum, Mr. Bernstein said.

“When clients were close [to the minimum], we went through the regulatory definitions step by step” to find extra assets to count, Ms. Hill said.

djamieson@investmentnews.com

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