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Advisors Do The SEC-State Registration Switch


With deadlines bearing down for certain federally registered investment advisors to transition to state regulation, advisors have a host of concerns and questions, experts say.

"I haven't heard anyone say 'I'm very happy to be leaving the SEC and going to my state," says Todd Cipperman, of Cipperman & Co., a Wayne, Pa.-based firm that provides compliance services.

The changes were set in motion by the 2010 signing of the Dodd-Frank Act, which delegated to the states responsibility over advisors with between $25 million and $100 million of assets under management.

Advisors with less than $25 million of assets under management are prohibited from SEC registration if their principal office and place of business is in a state that regulates advisors-that means every state except Wyoming. Investment advisors with more than $100 million of assets under management will typically continue to be registered with the SEC.

As a result of the law, it's expected that 3,200 advisors who are currently registered with the Securities and Exchange Commission will have to withdraw their SEC registrations and register with securities authorities in states where they do business.

Zachary Gronich, founder of consulting firm RIA in a Box, in New York, notes that advisors face very ambitious deadlines under the transition requirements. The new rules went into effect for new applicants in July. All other advisors must typically file assets-under-management information with the SEC by March 30 unless they have exemptions, and by June 28, they must be registered at the state level and out of the SEC.

"To which I say, 'Madness,'" says Gronich, who predicts last-minute deadline extensions. "Absolutely impossible."

Deadlines, cost and inconvenience are key concerns for advisors. But beyond that, advisors face uncertainty because of the distinct sets of rules under which various states regulate advisors.

State rules are inconsistent on a range of issues, ranging from exactly which advisors must be licensed to how much experience advisors must have.

"There are lots of peculiarities in the states' laws," says Cipperman. "I think that kind of inconsistency and uncertainty makes people nervous."

One big question for investment advisors in New York State: New York has no examination program. Thus, advisors based there must register with the SEC whatever their asset levels. The unresolved question, says Cipperman, is whether advisors registered in other states will have to register with the SEC if they do business in New York.

Naturally, the more states in which advisors do business, the more mismatched rules are a concern. In January, the North American Securities Administrators Association announced a coordinated review program meant to ease the process for advisors practicing in multiple states.

NASAA says its Investment Adviser Coordinated Review Program provides advisers switching their registration to between four and 14 states with an easier way to navigate that switch. (Under Dodd-Frank, investment advisors registered in 15 or more states can remain with the SEC.) The program is also meant to facilitate cooperation between states to resolve potential issues with applicants.

But Gronich says the program isn't as streamlined as it sounds, because participants must still compile and send the required documents to the relevant states.

"It's outrageous that all the states have different sets of requirements," he says. Gronich says he's gained business because of the difficulty multi-state advisors face in getting fully registered.

Advisors registering with states typically have to assemble a stack of papers-including literature, ads, brochures, business cards and PowerPoint presentations, he explains.

"It's an actual day of your business life that you're going to have to take out to compile this junk," he says.

Pulling together all the paperwork and making the transition can cost a much as $10,000 to $20,000, says Cipperman.

"It's a real pain," he says.

Naturally, a key concern for advisors has to do with the likelihood that they'll be examined under the new arrangement. It's widely understood that lawmakers' intent in passing the legislation was to get more advisory firms examined more often.

But the extent to which that will happen is now unclear because of states' budget cutting. "Presumably, smaller advisors have not been getting reviewed [by the SEC] because they're small, but they're more likely to be reviewed now," says Cipperman. "It'll be interesting to see, empirically, whether they'll have the resources to do exams and enforcement."

Gronich believes that advisors transferring to state registration are more likely to be audited, fiscal austerity notwithstanding. "Even with budget cuts, I still think you have a better chance," he says.

The reason: States can examine advisors far more cheaply than the SEC can. State regulators patrol a smaller turf; they can often send an examiner in a car to do an examination, while the SEC would have to fly an examiner to the same location-and put them up in a hotel.