State regulators and compliance experts are at odds about whether the states will be ready to take over regulatory responsibility for thousands of small investment advisers in March, some compliance experts said.
Under the Dodd-Frank financial reform law, states will assume responsibility for regulating advisers who have less than $100 million in assets under management. The Securities and Exchange Commission will continue to regulate advisers with more than $100 million.
The change, known in the industry as “the switch,” was to have occurred in July, but the SEC delayed it until next March so that it could update an electronic adviser database.
But even with the extra time, some compliance experts are questioning whether the states will be ready.
“We fear there will be pockets where there is complete lack of regulations or enforcement of regulations,” Brian Hamburger, founder and managing director of MarketCounsel, a compliance consultant, said last Wednesday at the MarketCounsel Member Summit in Coral Gables, Fla. “In some states, you will never undergo a regulatory exam.”
The regulatory reshuffling is intended to ease the SEC's workload and make room for hundreds of private fund advisers the SEC must now monitor under another provision of the law.
Mr. Hamburger doubts that states will be ready for the additional 3,200 advisers who will transfer to their authority from the SEC.
The additional advisers represent a 25% increase in the number already overseen by state regulators, Jack Herstein, president of the North American Securities Administrators Association.
Like the federal government, many states are facing lean budgets. Some states are ready for their increased adviser oversight responsibility but most are not, according to Mr. Hamburger.
NASAA countered that states can handle their expanded portfolios.
“I'm very confident,” said Mr. Herstein, who also serves as assistant director of the Nebraska Department of Banking and Finance. “The majority of states have said they're ready for the switch now, even though it won't come for another five months.”
Mr. Herstein told an audience at a Financial Services Institute Inc. event last month in Washington that states increased the number of exams they performed from 2,054 in 2006 to 2,463 in 2010.
One reason the SEC is handing over the small and midsize advisers is because it examines annually only about 9% of the nearly 12,000 advisers currently registered with the agency.
The states, however, don't have a much better examination track record than the SEC, according to Duane Thompson, president of Potomac Strategies LLC.
“In some states, there are advisers who have never been examined,” he said.
The situation won't improve without more money, which is tight because most states are in some form of fiscal distress.
“They're not necessarily going to have increased resources to examine investment advisers unless states appropriate money to their securities departments,” Mr. Thompson said.
But Mr. Herstein said that's exactly what's happening.
Many state securities divisions are receiving appropriations to hire extra examiners.
“I know the states will have a lot better record than 9%,” Mr. Herstein said.
Joseph Borg, Alabama's securities commissioner, said that his agency reviews every investment adviser in the state every three years.
He acknowledged that some states may encounter difficulties with their new adviser oversight responsibilities but that other states are ready to help them out.
For instance, Alabama will take up some of the slack for Georgia if the latter runs into trouble. That kind of buddy system will occur around the country in a program established by NASAA.
“When you put 50 states together and share resources, as we will under the compact we signed, that solves a lot of the problem,” Mr. Borg said.
In addition to that memorandum of understanding, NASAA has developed tools that allow regulators to review applications of advisers required to register in multiple states, instituted uniform examination procedures and produced risk analysis software to help states rapidly review and rank adviser registrants.
But life may not change much for individual advisers, no matter which regulatory regime they have to follow.
Ronald Evans, an investment adviser representative with Hopkins Financial Advisors LLC, said that his firm hasn't been examined by the SEC in its 10 years of existence.
“We've been flying under the radar with the SEC, and I don't know that it's going to be much different with the states,” he said.
“We're running our business on a fiduciary responsibility. With that, we're not averse to an examination, whether it's by the SEC or the state,” Mr. Evans said.
Email Mark Schoeff Jr. at [email protected]
