State securities regulators are meeting next week to begin planning for the examinations of more than 3,000 investment advisers expected to come under their jurisdiction next year.
State securities regulators are meeting next week to begin planning for the examinations of more than 3,000 investment advisers expected to come under their jurisdiction next year.
Financial-reform legislation passed Wednesday by the House and expected to be taken up by the Senate in mid-July would shift oversight of advisers managing between $25 million and $100 million of assets to the states. Currently, those advisers are regulated by the Securities and Exchange Commission.
The transition would occur one year after the president signs the bill.
“We're meeting to figure out what needs to be in place,” said Patricia Struck, administrator of Wisconsin's Division of Securities and head of the North American Securities Administrators Association's investment advisor section. “We're breaking it down to see what tips we can offer advisers for keeping their registrations in place as they transition, what kind of exam programs will be most effective and what kinds of risk assessment we should concentrate on.”
Her comments came after Carlo di Florio, director of the SEC's Office of Compliance Inspections and Examinations, questioned the ability of some states to handle their expected new tasks, particularly in light of severe budget constraints.
“If they don't have effective exam programs, the advisers would come back into our own portfolio,” Mr. di Florio said last week at an asset management symposium sponsored by the Regulatory Compliance Association.
The SEC is analyzing the proposed legislation to determine how many advisory firms will move from the commission's jurisdiction, he said. In addition, the commission is sharpening its risk-identification processes and information gathering to streamline exams of larger firms remaining under its jurisdiction.
Denise Voigt Crawford, securities commissioner of Texas and president of NASAA, bristled when told of Mr. di Florio's remarks. “The primary reason that states are being given this authority is that there are over 3,000 investment advisers that the SEC has never examined,” she said. “It really seems questionable that they would be able to take this on when they never did it before. Clearly, the states can do better.”
In an interview, Mr. di Florio said he didn't mean to imply that the SEC will be challenging the states or analyzing whether they pass muster. “There's going to be a very collaborative process, but if they don't have the [exam] programs we'll continue to be responsible,” he said.
“The challenge is we don't necessarily know that right now. We're going to go through the process together of understanding where the states are, the number of investment advisers below the new threshold and where they are doing business,” Mr. di Florio said.
The only way advisers who manages less than $100 million can remain under SEC jurisdiction, according to the reform bill approved by the House and Senate conference committee, is to be registered in at least 15 states.
The SEC will not be participating in NASAA's initial meeting next week on the transition, Mr. di Florio said.
A handful of states do not authorize their securities regulators to examine investment advisers, while the state of Wyoming doesn't have a registration requirement. NASAA officials said they have been working for more than six months on contingency examination plans in preparation for the legislation. Forty-five state securities divisions have signed a memorandum of understanding agreeing to help out with examination responsibilities in nearby states if needed, and others are expected to follow, Ms. Crawford said.
“Neighbors can help each other,” she said. “We frequently band together on enforcement efforts, and we will do the same under the new law.”
Most states will not be strained by their new responsibilities, said Ms. Struck, noting that Wisconsin will likely add about 50 advisers to its current examination caseload of almost 200.
She also insisted that the new responsibilities will better protect investors, since more advisers will be examined and states use upfront screening processes. Moreover, state oversight won't place additional burdens on advisers, Ms. Struck said. She noted that, contrary to popular perception, states work from the same Form ADVs and rely on the same registration databases that the SEC uses.
“We are planning outreach to advisers to explain the differences and how we can make their lives easier,” she said. “Nobody wins if we make it harder.”
