At least one regulatory agency has begun cracking down on investment advisers for misstating their assets under management, and industry experts predict others will follow.
Both the Securities and Exchange Commission and state regulators are scrutinizing information submitted on ADV forms for suspect asset levels, as well as other potential problems, sources said.
Last month, Massachusetts filed what might be the first action for inaccurately reporting assets. Regulators there claimed CCR Wealth Management LLC of Westborough, Mass., overstated its assets for several years prior to June, when it filed to switch to state oversight as a midsize adviser.
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The state is seeking to deny registration to CCR.
In the complaint, regulators say that when CCR sought to register in Massachusetts, the state began a detailed review of its regulatory filings with the SEC.
That is when the state noticed that CCR showed assets under management of “precisely $25 million” for a number of years, despite changes in the number of clients, said Brian McNiff, a spokesman for the Massachusetts Securities Division.
When the division sought details on the firm's assets, CCR replied that it had included brokerage accounts in its assets under management number, the state said in its complaint.
Broker-dealer assets don't count as advisory assets.
CCR's most recent ADV form, filed in July, reports just $7 million under management.
Massachusetts “will not be the only state that ultimately spends a lot more time on reviewing filing documents” and opening cases, said Steve Thomas, director of compliance at RIA in a Box LLC, adding that he already has one adviser client in trouble for reporting too high a figure.
The SEC, too, is reviewing ADV filings for compliance and risk assessment, he added.
“I do think there will be more of these types of [AUM] cases out there,” said Patrick Burns, who works with advisers at an eponymous law firm. “The new [cases will be advisers] trying to round up their [asset] numbers, to get to stay with the SEC.”
Most midsize advisers looked for ways to meet the $90 million threshold set by the SEC to remain with it under the Dodd-Frank law.
Indeed, that is what Massachusetts claims CCR was doing for several years prior to Dodd-Frank by reporting the old SEC threshold of $25 million in assets.
“They were just trying to stay away from us, and [to stay] at the SEC,” Mr. McNiff said.
Phone calls to CCR weren't returned.
A spokesman for the SEC didn't respond to a request for comment.
Industry observers expect to see other types of actions against midsize advisers, especially as states begin to conduct regular audits of the estimated 2,800 firms that have switched to state oversight.
djamieson@investmentnews.com Twitter: @dvjamieson
