State securities cops' plates may soon be fuller

Under financial-reform bill, 4,200 firms now regulated by the SEC would be overseen by states

Apr 4, 2010 @ 12:01 am

By Dan Jamieson

An additional 4,200 investment advisory firms regulated by the Securities and Exchange Commission will fall under the purview of state regulators if the Senate passes the financial-reform bill.

The bill — passed by the House in December — would move the threshold for firms regulated by states from $25 million in assets or less to $100 million or less. The same provision is in the bill that the Senate is expected to take up when it reconvenes next week.

“Assuming the Senate enacts a bill, [the new asset threshold] is highly likely,” said Neil Simon, vice president of government relations at the Investment Adviser Association.

“If there's any [financial-reform] legislation at all, [the new threshold] will be in it,” said Denise Voigt Crawford, Texas' securities commissioner and president of the North American Securities Administrators Association Inc.

The House legislation and the Senate bill have basically the same provisions for a higher threshold, Mr. Simon said; therefore, the proposals will not be altered during House-Senate negotiations to finalize legislation.

Industry observers said they are not aware of any organized opposition to raising the asset ceiling, even though concerns have been raised about states' ability to take on additional advisory firms.

SEC Chairman Mary Schapiro said last fall that she would not be opposed to raising the threshold to $100 million but questioned whether states might be stretched to handle more advisers.

Furthermore, unlike health care legislation, the basic idea of financial reform has some bipartisan backing. Within days after the controversial health legislation won approval last month, key Democratic and Republican members of the Senate Banking Committee said they expected the Senate to pass a financial package.

The Obama administration was also quick to make financial legislation its next priority.

Some advisers look forward to the threshold change.

“I prefer state registration,” said Frederick “Fritz” Harnsberger, founder of Marathon Investment Programs in Santa Barbara, Calif. Mr. Harnsberger, whose asset level is close to $25 million, has avoided expanding his business in order to remain under California jurisdiction. With a higher threshold, he feels he could grow his asset base.

“State examiners are helpful,” he said. “They offer advice on areas where you're amiss. They ask for lot of information, and if you [can quickly] give it to them, a lot of times, [the audit] lasts for just a day.”

Raising the $25 million threshold was contemplated by the 1996 law that split adviser regulation between the states and the SEC, and established the asset ceiling, Mr. Simon said.

The National Securities Market Improvement Act of 1996 gave the SEC authority to revise the asset threshold, but the SEC has never done so, he said.

The Investment Adviser Association estimates that an additional 4,200 to 4,300 advisory firms would fall under state jurisdiction with a higher threshold.

“That would bring the number of federal investment advisers to the level it was in 1996, to about 7,200,” Mr. Simon said.

Proponents of the higher threshold have claimed that it would lighten some of the burden on an overstretched SEC.

For its fiscal year ended last September, the SEC examined less than 10% of federally registered advisers, according to an agency report. In a normal year, the SEC examines about 33% of firms that have been identified as high-risk, but in fiscal 2009, only 22% of high-risk firms were examined.

That leaves many of the smaller SEC-registered firms virtually untouched, Ms. Crawford said.

“In Texas, even with no increase in our appropriations, we could do better than the SEC,” she said. “We have a five-year [exam] cycle.”

Taking on more advisers is “simply not going to be a problem” for states, she said.


Others aren't so sure.

“We're concerned about lack of uniformity and resources from state to state,” said Dave Bellaire, general counsel at the Financial Services Institute Inc., which represents independent-contractor broker-dealers.

“Nearly every state is going through difficult budget discussions this year,” Mr. Bellaire added. “There isn't a mechanism in either the House or Senate bills that provides the funding to states that need more resources” to examine advisers.

“I don't think states can make [overseeing more advisers] a reality without federal funding,” said Chris Winn, co-founder of MainStay Consulting Group LLC, which works with advisers and brokers who go independent. “Some states have one or two people in their securities departments.”

Putting more advisers under state oversight “is just shifting the problem from one overburdened agency to another overburdened agency,” Mr. Winn said.

The Consumer Federation of America has not taken a position on the asset threshold issue, said Barbara Roper, its director of investor protection. But the group opposed the state-federal split of advisers under the 1996 act “because no one was checking then to see if states had adequate resources,” she said.

“Congress continues to inadequately fund SEC oversight of investment advisers,” Ms. Roper said.

Ms. Crawford of NASAA said the states are up to the task. For one thing, as more advisers register with states, those local jurisdictions will see an increase in registration fees, she said. And some states will be raising fees, although not necessarily in response to a possible influx of more advisers, Ms. Crawford said.

California officials might propose an adviser renewal fee. The state does not have such a fee now.

The state anticipates that a change in the asset threshold would boost the number of investment advisory firms licensed by California to about 4,500, an increase of 1,358 from the 3,142 it currently regulates, Mark Leyes, a spokesman for the California Department of Corporations, wrote in an e-mail.

Meanwhile, states are circling their wagons in anticipation of an adviser influx. So far, 36 states have signed on to an agreement to assist one another with investment adviser exams. NASAA will fund the costs of joint exams on a case-by-case basis, according to the agreement.

“If one state has a lack of experience in a certain area or has funding issues, other states will help them out,” Ms. Crawford said.

E-mail Dan Jamieson at


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