'Switch' deadlines still could be in flux

Jun 26, 2011 @ 12:01 am

By Mark Schoeff Jr. and Dan Jamieson

The SEC's action last week in setting new deadlines for midsize financial advisers' switch to state registration should assuage many about the lack of a clear timetable.

But some observers still are anticipating yet more delays and uncertainty over the changeover deadlines.

Advisers with assets under management of $25 million to $100 million now have until March 30 to determine their continued eligibility for Securities and Exchange Commission registration. Originally, under the Dodd-Frank Act, the transition was to begin by July 21 this year.

Additionally, they have until June 28, 2012, to complete the switch to state registration, if needed.

This spring, the SEC indicated that it would delay the switch dates. Last week's approval of the amended rules made the delay into next year official.

“But there's a chance the [new] date ... won't be the real date,” due to issues that both state and federal regulators still have to sort through, said Zachary Gronich, owner of compliance consulting firm RIA In A Box Inc.

Some states, for example, have requirements of registered investment advisory firms that the SEC doesn't, he said, and it is unclear whether newly state-registered advisers will be able to meet those new standards in time.


“Some states will make some noise about [needing more] time to bring on more people” to handle the influx, said Dan Bernstein, director of professional services at MarketCounsel, a consulting firm.

Other states might want advisers to switch sooner, Mr. Bernstein said.

In one change bound to please advisers, though, the SEC said the rule will be amended to provide a buffer range of from $90 million to $110 million to prevent advisers from having to switch back-and-forth between SEC and state registration.

In its original switch proposal last fall, the SEC proposed doing away with the $5 million buffer with the current $25 million threshold.

Industry commenters urged the SEC to restore the buffer.

The switch delay also gives more breathing room to states as they prepare to take over the monitoring of about 3,200 of the 11,500 advisers currently registered with the SEC.

“The states are in a pretty comfortable position right now,” said David Massey, deputy securities administrator in North Carolina and president of the North American Securities Administrators Association Inc. “The switch is going to be a done deal. We're ready to go.”

NASAA spokesman Bob Webster said he's gotten no indication that states will need any more time.

“Up until April, we were working on the assumption that the switch would be complete by Oct. 19, 2011, and we were fine with that,” Mr. Webster wrote in an e-mail.

During the SEC meeting, commission staff identified three states that do not subject midsize advisers to exams — New York, Minnesota and Wyoming.

As a result, about 350 midsize advisers in these states will stay SEC-registered. On Friday, however, a spokeswoman for the Minnesota Commerce Department said the state would examine advisers with AUM between $25 million and $100 million.

Some skeptics assert that states, many of which are struggling with severe budget deficits, will not be able to handle the extra examinations.

“Some states have more frequent exams than the SEC, but others not at all,” Mr. Bernstein said.

NAASA has said that 94% of states conduct routine on-site exams of advisers.

“No way,” Mr. Bernstein said. “We're just not seeing it.”

Mr. Massey is confident that states will provide robust adviser regulation. “The state regulators are nimble and able to adjust,” he said.

At the SEC meeting last week, commissioner Elisse B. Walter expressed concern regarding the commission's own lack of resources for adviser examinations. She noted that the original estimate that 4,100 advisory firms will make the switch has been revised down to around 3,200.

It “further accentuates the need to address this issue now,” said Ms. Walter, who favors establishing a self-regulatory organization for advisers.


“The SEC says it audits 11% of firms, but we've [registered] 150 SEC firms over the last seven years, and not 10 of those firms have been audited,” Mr. Gronich said.

The rule approved by the SEC last week also delays until March 31 the Dodd-Frank requirement that advisers to private-equity funds and hedge funds register with the SEC. In addition, the agency ap-proved a definition of family offices that exempts them from SEC registration.

“The extension to March 31, 2012, is going to be much appreciated by the [private-funds] industry,” said Jeannie Lewis, compliance and regulatory principal at Deloitte's asset management division. “It gives them more time to come into compliance.”

The commissioners split 3-2 on the rule to implement exemptions to the private-fund-adviser rule. Commissioners Kathleen Casey and Troy Paredes dissented, asserting that the SEC was seeking too much information from venture capital funds, even though they are exempt from registering with the commission.

Even as the SEC acted, however, the House Financial Services Committee approved a bill that would exempt from SEC registration private funds that do not carry leverage at a greater than 2 to 1 ratio.

E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com and Dan Jamieson at djamieson@investmentnews.com.


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