State Registered Investment Advisers Should Expect Increase in Examinations After the Switch

June 21, 2012

As we have discussed in a previous newsletter article, investment advisers switching registration from the U.S. Securities and Exchange Commission (“SEC”) to state securities regulators are likely to see an increase in examinations. According to the North American Securities Administrators Association (“NASAA“), “firms switching to state regulation for the first time can expect thorough inspections generally on a more frequent basis than they may have experienced before.”

The switch is a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Under the law, investment advisers with between $25 and $100 million in assets under management are required to make the move to state regulation.  According to NASAA an estimated 3,200 investment adviser firms are making the switch.

Many investment advisers making the transition from federal to state registration may not have much experience with regulatory examinations. According to testimony earlier this year from SEC Chairman Mary Shapiro the SEC examined only about 8% of investment advisers in 2011.  She further testified that “about forty percent of registered investment advisers have never been examined.” State investment adviser examination numbers are drastically different.  John Morgan, Securities Commissioner for the State of Texas, recently testified that “a majority of states examine investment advisers at a rate that is on average at least once every four years.”

The testimony from these two securities regulators demonstrates a stark difference. Investment advisers making the switch from the SEC to state registration should familiarize themselves with state investment adviser regulations in preparation for the examinations.

All SEC registered investment advisers had until March 30, 2012, regardless of their firm’s fiscal year end, to file an amendment to their Form ADV Part 1 to report their reason for eligibility to remain SEC registered or to report that they are no longer eligible for SEC registration. If your investment adviser was subject to the filing requirements and has not filed, immediate action must be taken to comply.

All SEC registered investment advisers that report they are no longer eligible for SEC registration have until June 28, 2012, to file an ADV-W to withdraw their SEC registration. All SEC registered investment advisers that must withdraw their SEC registration and “switch” to the appropriate state securities registration will need to be approved by the appropriate state regulators no later than June 28, 2012.

Investment advisers switching to state registration need to make sure that their compliance programs are updated to comply with the applicable state investment adviser regulations.  RIA Compliance Consultants can help your firm update its compliance program or perform a mock regulatory review to test your firm’s readiness for a regulatory exam.  If you would like to discuss how RIA Compliance Consultants can assist you, please contact your consultant if you are an existing client or click here to schedule a time to speak with one of our consultants if you have not previously worked with RIA Compliance Consultants.

Posted by Bryan Hill
Labels: Examination, NASAA, SEC, Switch from SEC to State