SEC not ready to throw the switch on 'the switch'

Investment advisers who have between $25 million and $100 million in assets under management probably will have until 2012 to switch their registration from the Securities and Exchange Commission to their states. Under the Dodd Frank financial reform law, advisers who fall in that AUM range have to sign up for state oversight by July 21, the one year anniversary of the measure's enactment. Advisers to hedge funds and private-equity funds also have to register with the SEC by that date. But in an April 8 letter, Robert Plaze, associate director of the SEC's Division of Investment Management, wrote that the deadline for the transition likely will be extended until the first quarter of 2012 for both groups. He noted that the SEC is likely to promulgate regulations governing each provision by July 21. Compliance, however, is being delayed. The five SEC commissioners must approve the new time frame. Observers said that it is almost certain that they will do so. It's not clear, though, exactly what the new deadline will be. In a letter to David Massey, deputy securities administrator in North Carolina and president of the North American Securities Administrators Association Inc., Mr. Plaze said that the Investment Adviser Registration Depository system must be reprogrammed to accept advisers' transition filings. That process will take until the end of the year. “Those no longer eligible for commission registration (i.e., mid-sized advisers) would have a grace period providing them time to register with the appropriate state regulators and come into compliance with state law before withdrawing their commission registration,” Mr. Plaze wrote. Similarly, the SEC will consider pushing back the private-adviser registration to early 2012 “given the time needed for advisers to register and come fully into compliance with the obligations applicable to them once they are registered,” Mr. Plaze wrote. The timing and the breadth of the deadline extension, which could total up to nine months, caught experts by surprise. They said that the move reflects how the SEC is scrambling to implement more than 100 Dodd Frank rules — many of them with midsummer deadlines. “The regulators, who are under tremendous pressure, need to get the regulatory framework right,” said M. Holland West, a partner at Dechert LLP. “Time was just running out.” Rajib Chanda, a partner at Ropes & Gray LLP, said that officials at the SEC probably are taking a step back to ensure that the agency offers a comprehensive set of rules addressing both the inflow of advisers under its aegis — adding the private funds — and the outflow — the smaller advisers reverting to the states. “They want to take a holistic approach,” Mr. Chanda said. “They don't want to do things piecemeal.” The securities administrators' organization says that it will help advisers adjust to the new timeline. “NASAA has committed to implementing ‘the switch' in active coordination with the SEC,” Mr. Massey wrote in an e-mail statement. “NASAA members continue to plan to handle the mechanics of the transition in accordance with the schedule that the commission ultimately adopts.” Mr. West said that he is advising private-fund clients to proceed with their preparations for registration, such as compiling the information they must provide to both the SEC and planning compliance programs. He doesn't expect that the private advisers will register with the SEC until they see more details about the timeline. “Unless an adviser has a compelling business reason to register early, they likely will wait until closer to the new compliance date,” Mr. West said. The delay could provide an opening for opponents of private-adviser registration. Rep. Robert Hurt, R-Va., has introduced a bill that would exempt private-equity funds from the registration requirement. “People who are lobbying against it will have more time to marshal their resources, take potshots at it and get it undone,” Mr. Chanda said.