CONFERENCE CALL: STATE REGULATORS GETTING THEIR ACT TOGETHER — SEPARATELY, OF COURSE

Advisers have a more rigorous examination process to look forward to, now that provisions of the Investment Adviser’s Supervision Coordination Act are seeping into regulatory procedures.

Whether a practice is small and now regulated exclusively by state officials or larger and under the watch of the Securities and Exchange Commission, all advisers should prepare for an increase in scrutiny under the law, which is a section of the National Securities Markets Improvement Act of 1996.

Counting to $25 million

The SEC will preface its examination by making sure an adviser actually has the $25 million-plus under management required to register with the agency, reported Robert Stirling, senior associate with National Regulatory Services Inc., at the third annual Jack White & Co. National Advisor Conference in San Diego late last month.

“We’re still finding some confusion as to what assets the $25 million threshold applies to,” said Mr. Stirling. His Lakeville, Conn., company specializes in compliance and registration services for investment advisers and broker-dealers.

To come up with the requisite assets under management, advisers are supposed to count only assets that are under “continuous and regular” supervision or management.

If a portfolio has 50% or more of its assets in securities, it could be counted. Periodic management — once a quarter, for example — wouldn’t count, Mr. Stirling said. Assets in a financial plan also wouldn’t figure into the total unless they were actually managed by the adviser.

Advisers who meet the SEC threshold can look forward to audits that will focus on a particular concern, such as soft dollar issues. Mr. Stirling also expects the SEC to make sure advisers are addressing year 2000 computer problems.

States are increasing enforcement programs to meet their new responsibilities under the National Securities Markets Improvement Act of 1996. What each state will be interested in is anyone’s guess, but the number of state audits likely will
increase and they’ll be stricter.

Look for many states, for instance, to become more active in enforcing net capital requirements. That’s something the SEC doesn’t impose on its advisers, Mr. Stirling said.

And some states aren’t doing it either. New York, for instance, has continued its practice of less-active enforcement, Mr. Stirling said.

New York also doesn’t have any book and record requirements for advisers. Mr. Stirling recommended that to be safe, advisers follow SEC regulations in areas that their states don’t regulate, such as the federal agency’s ban on the use of testimonials in advertising.

Also, he advised, remember that the SEC can still go after anyone for fraud.

ohio ready to pounce

And the states might look harder than the SEC has. Ohio, one of the four states that does not yet regulate advisers, expects prosecutions of financial misdealings by money managers to pick up substantially once a pending bill establishing state oversight is passed.

The 13 such cases prosecuted since 1990 “are the only ones that were brought to our attention,” said Thomas Geyer, Ohio securities commissioner, “since SEC has had jurisdiction until now.”

Knowing when it’s necessary to register in additional states is still a problem, Mr. Stirling said.

Most states allow advisers to have up to five clients in a state before they come under another state’s jurisdiction. But some on the Eastern Seaboard allow 10 and New York still allows as many as 40.