Delays mar switch to state registration

Jun 24, 2012 @ 12:01 am

By Dan Jamieson

Hundreds of midsize SEC-registered investment advisers are likely to miss this Thursday's deadline for completing their switch to state oversight, as mandated by the Dodd-Frank Act.

Sources said that many of the estimated 2,400 advisers who have to switch — those with between $25 million and $90 million under management — have procrastinated in filing their paperwork with the states. And now they face a longer-than-normal wait in getting those registrations approved by overworked regulators.

“Of the states we talk to, there's an unprecedented” number of pending applications from advisers who are switching registrations, said Will Bressman, chief executive of RIA In A Box, a compliance consulting firm.

Over the past two months, the Securities and Exchange Commission sent alerts to about 1,500 midsize advisers who hadn't yet filed for registration in their home states, commission spokesman John Nester said.

The consequences faced by advisers who don't make the deadline aren't clear, except that they will face what he described as “deregistration proceedings” in an e-mail last week.

That reiterates a warning that the SEC has made in several messages to tardy advisers, urging them to file with their state regulators immediately.

Although the SEC must talk tough to make its point, industry observers don't see the commission rushing to act.

“My guess is [that late filers are] just going to sit there as SEC-registered advisers” until states approve them, said Daniel Bernstein, director of research and development at Market-Counsel LLC, a compliance consultant.


“There's going to be some wiggle room, especially if you can show you've made the [state] filing,” he said.

“But those who haven't begun the process [until] after the deadline won't be looked upon as favorably,” said Joey Brady, general counsel for the North American Securities Administrators Association Inc., which represents state and provincial regulators.

One of the issues is that state regulators don't know how long it will take the SEC to complete its part of the withdrawal process.

“We've been told that the SEC will start working on the terminations on June 29, so we don't know what they'll do or how long the [SEC withdrawal] process is,” said Al Hughes, chief of registration in Virginia's securities division.

“We want to be very careful about saying anything about extensions or extra time,” said Mr. Brady, who noted that states have added extra people to get registrations reviewed and completed.

Bigger states with the most advisers have the heaviest backlogs, observers said.

Texas, for example, is giving conditional approvals to advisers, Mr. Brady said. “It allows an adviser to have a conditional registration so they can work while they get deficiencies resolved,” he said.

Other states are considering something similar, Mr. Brady said, and many have added to their staffs to get registrations reviewed and completed.

Compliance consultants confirm that with the extra help, states have been fairly quick in responding to questions and approving applications, so the final number of delinquent advisers may be less than some fear.

“We've got a high volume, but not as high as we planned for,” said Mark Leyes, spokesman for the California Department of Corporations.

As of last week, the state counted 465 midsize advisers either already approved or in process, with another 60 expected to file shortly, Mr. Leyes said.

In Virginia, most applications filed by early April have been approved, said Mr. Hughes, who added that the state won't meet the deadline for applications that arrived after that, and that about 70 advisers with pending applications have been told that approvals will be delayed until as late as Aug. 29.

“Last week, we received 14 more” applications, Mr. Hughes said.

If an advisory firm withdrew its SEC registration before becoming state-registered, it could not legally advise clients or charge fees, compliance experts said.

“It is never a prudent business practice to place your business in a position where a regulator can unilaterally terminate your ability to conduct business because you've failed to register properly,” said Bryan Hill, president of RIA Compliance Consultants Inc.

At the very least, he said, advisers should apply for state registration before the deadline so they can show an effort toward compliance.


Part of the delay in approval, compliance consultants said, is that the states — unlike the SEC, where midsize advisers were largely overlooked — are giving their new adviser charges a close look. State regulators are in the spotlight to ensure that midsize firms are supervised, especially as Congress considers a competing self-regulatory organization for the task.

“It's rare you get an immediate stamp of approval” from a state, Mr. Bernstein said.

Most states want to see more information than advisers typically gave the SEC, compliance sources said.

“Some [states] may not be able to meet the [June approval] deadline, but they won't sacrifice the quality of their reviews” to meet it, Mr. Bressman said.

And states know that a lot of midsize advisers haven't been examined by the SEC, said Cindi Hill, founder of Hill Compliance Advisors, so she and others are warning newly state-registered RIAs to be ready for in-office exams.


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