Advisers preparing for threshold switch: NASAA

Like many aspects of the financial-regulatory-reform legislation that became law July 21, the provision that increases the threshold for state regulation of investment advisers doesn't go into effect for another year. Advisers, however, are already trying to determine how the change will affect their businesses, with many seeking guidance from the North American Securities Administrators Association Inc. “We weren't expecting them to raise questions so early,” said Patricia Struck, administrator of Wisconsin's Division of Securities and chairwoman of NASAA's investment adviser section. “They want to be prepared.” Under the new law, advisers who have assets under management up to $100 million will fall under state regulation. Those with more than $100 million in assets will be overseen by the Securities and Exchange Commission. Currently, states regulate only advisers with assets under management up to $25 million. The most frequently asked question so far, according to Ms. Struck, is: Can advisers register with their state immediately or do they have to wait? The second most popular is: Will they have to pay two fees? The answers to both, as well as to many other queries, follow a similar theme. “We're working with the SEC to develop a protocol for that,” Ms. Struck said. The intense interest is adding momentum to NASAA's effort to communicate with advisers about the change. It is developing a plan to ease the transition that covers legal, operational and adviser database issues. The most important component is outreach. The organization is devoting an entire panel of its annual meeting in Baltimore in late September to questions surrounding the “switch,” as it's being called. Questions have cropped up at recent events as well. David Tittsworth, executive director of the Investment Adviser Association, recently appeared in a TD Ameritrade Inc. webcast in which many questions revolved around the transition. Mr. Tittsworth said that about 36% of the 400 participants were advisers with assets under management of between $25 million and $100 million. He couldn't serve as an oracle that day. “There are no complete answers right now,” Mr. Tittsworth said. One thing that is clear is that the provision is meant to ease the burden on the SEC, which is taking on additional responsibilities for monitoring hedge and private-equity funds to reduce systemic risk. The change in the AUM registration threshold is estimated to move about 4,000 advisers from SEC oversight to the states. Currently, the SEC doesn't focus on smaller advisers very often. The agency examines about 10% of advisers overall annually. Denise Crawford, Texas' securities commissioner and NASAA's president, said that more than 3,000 advisers have yet to be reviewed. “We're excited about getting to examine some of these investment advisers who have never been examined before,” she said. Skeptics wonder whether state regulation will be any more effective for smaller advisers than SEC oversight. Gilbert Davis, a partner at Sims Moss Kline Davis LLP, pointed out that many states are struggling with substantial deficits. Georgia tried to close its budget gap last spring in part by laying off securities regulators. “A lot of states aren't gong to be able to step up and handle the increased workload,” Mr. Davis said. “You're going to have this shift in burden without an offsetting decrease in responsibility, as you have with the SEC.” Regulation will come only in response to investor complaints rather than being preventative in nature, according to Mr. Davis. “You'll end up with a situation where [examinations are] even less frequent or nonexistent in a substantial portion of the states,” Mr. Davis said. Ms. Struck and Ms. Crawford contend that securities oversight is a regulatory priority for states and won't suffer under their jurisdiction. “No one is worried about [the transition],” Ms. Crawford said. “It's the same thing we've been doing; it's just more of them.”