DELAY IN NATIONAL ADVISER LIST LEAVES STATE OFFICIALS IN DARK: LITTLE CHANCE OVERSIGHT AID FOR LOCAL REGULATORS CAN BE ONLINE BY DEC. 31 DEADLINE

Federal and state regulators aren’t likely to deliver on a promise to build a new national electronic registry for investment advisers by yearend.

That spells a major problem for the states, which under a Federal law passed last year now have sole regulatory authority over the 24,000 advisory firms that oversee less than $25 million, and their 225,000 sales reps. (The Securities and Exchange Commission regulates only advisers with over $25 million.) The delay makes it harder to track compliance records of advisers that set up shop across state lines.The database, which is being jointly developed by the SEC and the Washington-based North American Securities Administrators Association was to serve as a key oversight tool for the states, given their new role.

Last summer, the state regulators’ group, known as NASAA, projected that the electronic system would be up and running some time this year. But delays in hiring an outside consultant – as well as a greater appreciation for the complexity of the project – have led both the SEC and some NASAA officials to concede the database isn’t likely to be rolled out until at least next year.

The investment adviser database is expected to operate like a new and improved version of NASD Regulation Inc.’s Central Registration Depository, an electronic master file of work histories and disciplinary records for 556,024 registered stockbrokers. That 17-year-old system, which is currently being upgraded, took about two years to develop. In addition to helping regulators police investment advisers, consumers also will have access to advisers’ background information and disciplinary records.

Not surprisingly, the delay has already resulted in some finger pointing.

“The goal was to have it up and running by the end of this year,” says Richard Cortese, deputy commissioner of the Vermont Departmentof Securities and chairman of a NASAA steering committee on the database. “The fact that it’s gotten on a slower track is more attributable to the SEC not fi
nalizing its contract with the consultants. We would like it up by early 1999 at the latest.”

a daunting task

But SEC officials say NASAA was overly optimistic in its projections. “There are complications involved that not all the parties may have had an appreciation for early on,” says Robert Plaze, associate director of the SEC’s division of investment management. “We have to be very careful that this system is built right.”

The delay will further complicate an already daunting task facing state regulators. Legislatures in four states – Colorado, Iowa, Ohio and Wyoming – still haven’t passed laws empowering state officials to regulate investment advisers. The SEC continues to supervise all advisers in states without adviser oversight laws. Other states are working to close loopholes in existing laws. New York, for example, is changing a clause that exempts advisers who manage less than $25 million in assets and have fewer than 40 clients from state and federal oversight.

Some state regulators are frustrated over what they see as a lack of progress in moving the project forward. “This is beginning to be very problematic for the states, and I wish that NASAA would have talked to some of us about it,” says Robert Newtson, Illinois’ assistant secretary of state and director of securities. “It inhibits our ability to find out from other states if particular individuals have had problems in those jurisdictions before we register them in our jurisdiction.”

The delay appears to center around the SEC’s hiring of a consultant to design the system. Industry sources say the agency is expected to hire Mitretek Systems Inc., a McLean, Va.-based research firm that has worked with the SEC on its EDGAR electronic filing system for corporate documents. It will then hire an operator of the system.

SEC ‘working hard’

Another possible stumbling block: The SEC is redesigning its Form ADV which advisers use to register with the agency. The new form will be used as a templat
e for the electronic database.

“We are working on it very hard right now,” says the SEC’s Mr. Plaze. “We are developing a plan and specifications for the system. That requires the examination of technical and practical issues between the SEC and the states. There’s been a regular series of productive meetings working to resolve these issues.”

Another sticking point is cost. Though financial planners and other trade groups hope the new electronic database will result in reduced compliance costs, they have spoken out against a system that would result in higher licensing fees than current state rates, which average about $200 annually. “We’d like those fees to remain the same and the system be more efficient and interface with the NASD system,” says Duane Thompson, director of government relations at the Institute of Certified Financial Planners in Denver.

But while the SEC and NASAA grapple with the task of developing their database, some states are designing their own interim databases. Illinois regulators are registering advisers and their sales reps, but their database doesn’t include individuals’ disciplinary histories.Other states which haven’t yet begun registering advisers are devising backup plans. “We have a number of different contingencies planned if (the national database) doesn’t happen,” says Colorado Securities Commissioner Philip Feigin. “We can borrow another state’s software or contemplate a delay in licensing advisers,” he adds. Under legislation pending in Colorado, Mr. Feigin won’t be required to begin licensing advisers until January 1999.

To be sure, some states won’t be affected by the delay. “It will be great to have a national database to track people who move from state to state and have clients in other states, but it’s not holding us up,” says Wisconsin securities administrator Patricia Struck. The state’s been using a proprietary database for 14 years.