With a June 28 deadline long past by which mid-sized registered investment advisors had to switch their registrations from federal to state jurisdiction, regulators are beginning to crack the whip--sort of.
The Securities and Exchange Commission recently identified nearly 300 RIAs that had failed to transfer their registrations from the SEC to the states where they practice. The move was required as part of Dodd-Frank regulatory reforms; advisors with $25 million to about $100 million in assets who functioned under SEC oversight were mandated to make the move, allowing the federal agency to focus its oversight on larger practices.
But the SEC isn't lowering the boom just yet. It recently announced that those RIAs who were out of compliance had until Dec. 17 to finish what should have been completed nearly six months earlier. After that date, the SEC may elect to cancel the registrations, effectively barring the advisors from practicing legally. It may also allow individual hearings at which advisors could make their arguments against transferring to state oversight.
"The regulations are the regulations, and non-compliance with them is non-compliance, subject to all the usual remedies," SEC spokesman John Nester says.
Regulators are choosing to accentuate the positive, portraying the transition as a successful collaboration between the SEC and state oversight agencies. The SEC says that more than 2,300 mid-sized advisors have transferred their registrations thus far.
“The vast majority of switching advisers have made a smooth transition to state regulation and we are committed to working with those firms that continue to diligently pursue their state investment adviser registrations,” says A. Heath Abshure, Arkansas securities commissioner and president of the North American Securities Administrators Association.
Earlier this year, not everyone was so sanguine about the outcome. Some industry observers felt that mid-sized advisors with a material presence in multiple states would have a difficult time meeting the oversight requirements of all those states.
But RIAs with significant numbers of clients in multiple states are typically big enough, in terms of assets under management, to remain with the SEC. Also, NASAA set up a coordinated review program that was aimed at streamlining the state registration process for advisors with business in four or more states.
Patrick J. Burns, a Beverly Hills, Calif., attorney who handles compliance issues for financial advisors, says some of his clients are among the 300 that the SEC is threatening to sanction. In some cases, he says, state regulators are behind in processing RIA applications; they tend to be more diligent in reviewing the applicants' ADV forms and client agreements.
In other cases, some newly formed RIAs had expected to meet the $100 million threshold for SEC oversight, only to fall short in the final weeks of the application process. In those cases, Burns says, they have to start a fresh application with the states.
Advisors who have made good faith efforts to abide by the rules will fare better, Burns predicts.
"I think (regulators) are more understanding if somebody is transitioning between federal and state regulators and they've just gotten caught up in all this," he says. "I think what they don't have a lot of sympathy or patience for is people who are just now starting the process of moving over to the states."