Some 4,200 advisory firms can expect more oversight and higher costs under legislation that would remove them from SEC oversight and place them under state regulation.
The Investor Protection Act of 2009, which the House Financial Services Committee is expected to approve this week, contains an amendment offered by Committee Chairman Barney Frank, D-Mass., that would raise the threshold for SEC registration of investment advisory firms to $100 million, from $25 million.
That would result in state regulators' gaining oversight of about 4,200 of the 11,300 firms now registered with the Securities and Exchange Commission. The act also contains new rules to harmonize regulations between broker-dealers and investment advisers.
Under Mr. Frank's amendment, “examinations could happen more frequently and more rigorously” for firms moving to state regulation as well as for larger firms remaining under the SEC, said John Gebauer, managing director of National Regulatory Services, a financial services compliance consulting firm. Currently, the SEC examines about 9% of its regulated advisory firms annually.
If it is able to concentrate on larger firms, the SEC will have more time to conduct exams, Mr. Gebauer said, noting that states currently examine advisory firms more frequently than it does.
The bill also contains provisions to more than double funding for the SEC over the next five years, raising the budget to $2.25 billion in fiscal 2015 and authorizing the commission to impose fees on investment advisory firms to cover the cost of inspecting and examining the firms for which the agency retains jurisdiction.
For firms moving from SEC to state registration, regulation would likely become more complicated and expensive. Many of those firms would have to register with more than one state, said Peter Savarese, senior regulatory counsel for National Compliance Services Inc., which serves about 600 advisory firms.
Currently, SEC-registered firms need not register in states in which they have few clients.
State-registered firms with locations in more than one state will find themselves subject to different state requirements concerning custody rules, capital requirements, advisory contracts and privacy regulations, Mr. Savarese said.
“This is going to put a great burden on the advisers who can least afford it,” he said.
Nevertheless, some advisers said that they think that state regulators are easier to deal with than the SEC.
“I felt when I became SEC- registered that I was being sent into the ozone,” said Anne Gibson, owner of Gibson Financial Solutions LLC, which manages about $45 million and became SEC-registered two years ago.
When she started her business in 2001, Ms. Gibson said, she found state securities regulators to be “very helpful. They gave training to the state [registered investment advisers]. They want advisers starting out to get off on a good foot.”
David Blain, president of D.L. Blain & Co. LLC, thinks that investment advisory firms would be better off with a state licensing system similar to that applicable to doctors, lawyers and accountants.
“I am for the state doing it on a principal basis,” he said.
Mr. Blain agrees that states work better with advisory firms.
“The state is here to help the advisers comply. With the SEC, their job is just to come in and find something wrong with what you're doing,” Mr. Blain said.
D.L. Blain, which manages about $45 million, moved from state to SEC registration just this year, so he may have to move back.
But others worry that the states won't have adequate resources to oversee advisory firms properly.
“The SEC's operations are much larger than the states', and I wonder whether the states can do it,” said Hank Hanau, president of HFH Planning Inc., which manages $40 million. “There's no state that is not broke.”
Indeed, SEC Chairman Mary Schapiro voiced such concerns last week in New York at the annual meeting of the Securities Industry and Financial Markets Association.
“I don't want to just pass the problems around the map” when it comes to regulating advisers, she said.
For their part, state regulators said that they are ready to take on the additional responsibility of overseeing more advisory firms.
“States have both the will and the ability to regulate,” Texas Securities Commissioner Denise Crawford said in a statement issued last week by the North American Securities Administrators Association Inc., the group of state regulators of which she is president.
“It's clear that states have done a much better job at deploying their limited resources” than the SEC has, she said.
Associations that represent financial advisers are willing to support moving more advisers to the states.
“So long as the outcome is that the regulators have the resources to properly oversee all the advisers under their jurisdiction, where they draw the line is less important to us,” said Dan Barry, director of government relations for the Financial Planning Association.
“We have a fairly good comfort level that the states do a nice job,” said Nancy Hradsky, special-projects manager for the National Association of Personal Financial Advisors.
E-mail Sara Hansard at [email protected].
