The shifting of thousands of investment advisers to state regulation is months away, but the Securities and Exchange Commission is busily laying the groundwork for the transition.
On Nov. 19, the commission issued a likely timetable for “the switch,” as it's come to be known. Under the proposal, investment advisers will have until Aug. 20 — or 30 days after the deadline stipulated by Dodd-Frank — to file an amended Form ADV. Advisers will have until Oct. 19 to register with a state and withdraw from SEC oversight.
The agency will also provide a 30-day grace period starting July 21 for advisers to file a new ADV and another 60 days to withdraw from SEC registration.
Of course, it's not entirely clear how many firms actually will be making the changeover. As mandated by the Dodd-Frank law, investment advisers with less than $100 million in assets under management will transfer from SEC oversight to state supervision. The current threshold is $25 million.
While the SEC estimates that about 4,100 of the agency's 11,850 registered advisers will be required to submit to state supervision, that number is not set in stone. The reason is that advisers calculate assets under management differently.
The commission is trying to clear up the confusion, however. For starters, the SEC's proposal states that advisers who currently have more than $30 million in assets under management — $25 million plus a $5 million buffer — would not have to register with the SEC during the transition process.
UNIFORM METHOD
Moreover, the agency is also proposing a uniform method of calculating assets under management, which are defined as those for which an adviser provides “continuous and regular supervisory or management services.”
Under the SEC proposal, advisers would be required to include proprietary assets, assets managed without receiving compensation, assets of foreign clients and accrued unpaid liabilities in their AUM calculations.
“We are proposing these changes in order to preclude some advisers from excluding certain assets from their calculation and thus remaining below the new assets threshold for registration with the commission,” the SEC wrote in the proposed rule.
Steve Thomas, director of Lexington Compliance and the former chief compliance examiner for South Dakota, welcomes the effort to establish a uniform AUM calculation.
“Very rarely did any of the people that I examined have an accurate number for AUM,” Mr. Thomas said.
For instance, fixed-income products and annuities can create discrepancies in asset totals. Buying and selling bonds might qualify, but it is unclear if buying and holding them does.
“A lot of people with fixed portfolios are counting a lot of AUM and they technically should not be,” Mr. Thomas said.
The SEC's proposal also calls for advisers of private funds to use fair market value in determining the size of their pools of capital. The SEC wants a stricter accounting of assets under management to monitor more effectively advisers who might pose a threat to the financial system.
And in truth, the idea of shifting midsize investment advisers from SEC oversight to the states is designed, in part, to free up more of the commission's resources so that it can better monitor private funds.
Indeed, the SEC commissioners this month issued a draft regulation implementing a provision of Dodd-Frank financial reform law that requires advisers to private-equity and hedge funds to register with the SEC by July. The SEC will take public comment on the rule for 45 days.
Under Dodd-Frank, private-equity and hedge funds must supply the SEC with information about the amount of assets they hold, their investors and their advisers' services to the fund. They also must identify five categories of “gatekeepers” — auditors, prime brokers, custodians, administrators and marketers.
Funds of less than $150 million, as well as
venture capital funds, don't fall under the mandate. Nonetheless, they must provide to the SEC a range of record-keeping information about their advisers, owners and affiliates, private funds the adviser manages, potential conflicts of interest and the disciplinary history of their advisers.
“We have sought information that we believe would assist us to identify the advisers, their owners and their business models,” the SEC said in its proposed rule. “The items that we have proposed would also provide us with information as to whether these advisers or their activities might present sufficient concerns as to warrant our further attention in order to protect their clients, investors and other market participants.”
SEC Chairman Mary Schapiro welcomes the addition of private funds to the SEC's portfolio, saying that prior to Dodd-Frank, they were “out of sight and unknown to regulators and the public.”
Meanwhile, the SEC is continuing to hammer out details about the switch with the North American Securities Administrators Association Inc.
“We are working closely with the state securities authorities to assure an orderly transition of investment adviser registrants to state regulation,” the SEC said in the proposed rule.
E-mail Mark Schoeff Jr. at [email protected].
