N.Y. advisers in limbo because state doesn’t do exams

The Dodd-Frank regulatory-reform law aims to reduce the SEC’s examination responsibilities by shifting some 4,000 investment advisers to state registration, but New York state may gum up the law’s intent.

The new law requires most advisers with under $100 million in assets to register with the securities commissioner in the state where they maintain their principal office — provided that the state has registration authority and an examination program. The SEC now oversees advisers with as little as $25 million in assets under management.

The problem is that New York, despite its Wall Street-centric tax base, doesn’t conduct exams, several lawyers said.

“We haven’t pushed New York about this in the past, because who cares if clients are being examined? But now we really need guidance because it could be difficult to know where to register over the next year,” said Dan Bernstein, director of professional services at Market Counsel, a legal and regulatory consultant to independent investment advisers. “They’ve never put in writing that they don’t have authority do exams, but history and practice seems to support that view.”

Under the new asset threshold, about 350 New York-based advisers will leave Securities and Ex-change Commission’s jurisdiction — making it one of the largest state contingents affected by the law, according to the Investment Adviser Association.

“The answer about where they register is unclear,” said David Tittsworth, the IAA’s executive director. “It’s highly likely that the SEC will, in time, issue some sort of transitional rules that will deal with this and other questions.”

In June, Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations, said that if states “don’t have effective exam programs,” the SEC could take transferred advisers “back into our own portfolio.”

SEC spokesman John Nester declined to elaborate on the issue.

“We are working closely with the states to assure a smooth and effective transition,” he wrote in an e-mail. He referred questions about New York’s authority to do exams to the Investment Protection Bureau of the state attorney general’s office.

Richard Bamberger, a spokes-man for New York Attorney General Andrew Cuomo, declined to comment pending responses from lawyers at the Investment Protection Bureau.

At issue is Section 352 of the New York General Business Law, better known as the Martin Act, which gives the state attorney general wide latitude to prosecute fraud related to investment advice, but doesn’t discuss routine exams. That spares New York-registered advisers from undergoing exams and appears to put the state at odds with the Dodd-Frank bill.

The new asset thresholds under Dodd-Frank are aimed in part at remedying the fact that the SEC has fallen far behind in its schedule of examining advisers. But the question about New York’s authority to conduct exams is only one of many being raised about states’ abilities to pick up the slack.

Texas Securities Commissioner Denise Voigt Crawford, president of the North American Securities Administrators Association Inc., has called the SEC’s alleged failure to examine more than 3,000 investment advisers “frightening” and said that states can do a better job.

Some 45 states have signed a memorandum of understanding, saying that they will cooperate in easing the examination burdens of neighboring states. Given today’s strained budgets, however, there are many questions about the feasibility of such cooperation.

“The question is: Who’s going to fund these exams? Because all the states are broke,” said Paul Schwartz, director of licensing at the Pennsylvania Securities Commission.

Pennsylvania has not helped New York on exams in the past and is unlikely to do so, he said.

Mr. Schwartz estimated that his state, whose governor recently issued a no-travel edict for state employees, will add about 150 advisers to its exam rolls as a result of Dodd-Frank.

Ralph Lambiase, director of the securities division of the Connecticut Department of Banking, said that though he would assist in another state’s investigation of a broker, he has never conducted exams of advisers for other states and doesn’t plan to do so. Connecticut’s exam load will rise by about 135 advisers, or 35%, with transfers from the SEC, he said, and the state expects to devote longer staff hours to examining the newcomers because their businesses tend to be more complex than current registrants.

The new law “was probably intended to ensure that the midsize investment advisers turned over to the states would at least be subject to some level of oversight,” said Ward Hinkle, a partner at Hodgson Russ LLP. “Given the purposes of the act, it is difficult to believe that Congress intended to create a loophole for New York investment advisers or that the SEC in administering the act will stretch to find one.”

Meanwhile, advisers and their lawyers are waiting for guidance. The deadline for the transfer of smaller advisers appears to be next July, but even that isn’t clear, Mr. Tittsworth said.

E-mail Jed Horowitz at [email protected].

Related Topics: Securities and Exchange Commission