State regulators to midsize shops: No need to hire compliance consultants

Midsize advisory firms that are now under the oversight of state regulators don’t need to hire expensive consulting firms to manage the transition. They do need to take the transition seriously, however, according to Michigan’s securities director.
Speaking on Tuesday as part of an InvestmentNews webcast, Linda Cena warned against taking the regulatory changes too lightly.
“If an adviser missed the [June 30] deadline and is now deregistered by the SEC, they are an unregistered adviser,” she said. “The most important part is to be registered, and if you’re not registered, cease all business immediately.”
The webcast focused on helping those advisory firms with assets of between $25 million and $100 million navigate the changeover from federal to state-level regulatory oversight. Prior to the Dodd-Frank financial reform law, advisory firms with more than $25 million registered with the Securities and Exchange Commission.
Ms. Cena was joined on the panel by industry consultants Brian Hamburger, founder of MarketCounsel, and Steven Thomas, director of compliance at RIA in a Box LLC.
Among the issues discussed: the distinction between assets under management and assets under advisement.
“We’ve had some rather interesting situations,” Mr. Thomas said. “Including both AUM and AUA is a typical problem that we’ve found.”
He added that the issue of AUM “is being closely reviewed [by regulators], so you need to make sure you’re doing it properly and you have proper and precise reasons for doing it that way.”
While he acknowledged that regulators will allow advisers to report assets rounded to the nearest $100,000, he said he applies the “pull-the-trigger law” to any questions regarding AUM and AUA.
“If you are not actually pulling the trigger and making the trades on the advice you are giving, you cannot count it as assets under management,” he said.
Mr. Hamburger concurred with the importance of accurate and clear reporting with regard to assets under management or advisement. “There’s been confusion, and that continues,” he said. “There’s also been a strong motivation to lie about AUM to try and bring in new business.”
What’s new now, he added, is that there might be a temptation for advisers to adjust their assets artificially to try to quality for SEC registration.
“The only thing that’s new here is, some advisers want to try and select their own regulator,” Mr. Hamburger said. “But there’s no reason to lie about your AUM.”
On the matter of working with state regulators, as opposed to the SEC, the panel agreed that advisers are likely to discover a mixed bag of organizational structures and cooperation.
“There are gaps in regulatory oversight in some states, and those are the states where we see problems,” Mr. Hamburger said. “But we’re not seeing the problems in the states that are reaching out and being proactive.”
Ms. Cena said her office has started holding meetings and seminars for advisers to help clear up confusion and gather feedback from the industry. “I know many states have increased, or are in the process of increasing, their regulatory efforts as a result of Dodd-Frank,” she said.
Ms. Cena often gets questions from advisers about the regulatory-exam process at the state level.
“We don’t always give advance notice, but sometimes we do, and when we do, we will give you a list of items to gather before an exam,” she said. “The exams can last from one day to a couple of weeks.”
On the issue of compliance manuals, even for a one-person shop, Ms. Cena said there are no specific rules, but there needs to be a real effort made by the adviser to establish compliance standards.
“I can tell you what we’re not looking for is a compliance manual that’s still sealed in the plastic,” she said. “We want to see something specific to the firm, but we don’t think there’s a need to hire an expensive consultant to develop a compliance program.”