RIA state registration looms for smaller firms

Posted by RJ & Makay on March 19, 2012

adv-forms, advertising-and-testimonials, assets-under-management, concert-wealth-management, investment-advisors, nasaa-state-regulators, ria, sec

RIA state registration looms for smaller firms

About 3,200 mid-sized Registered Investment Advisors (RIAs) will be transitioning this year from Securities and Exchange Commission (SEC) oversight to register with the states where they conduct business, according to a March 14 Registered Rep article.  The switch will be a big change for these firms that typically averaged about one visit every 11 years from SEC auditors.

State oversight will be more rigorous, with many states requiring audits within the first year of registration.  States’ capital requirements and additional reporting requirements vary, and RIAs with clients in multiple states will face different and sometimes overlapping rules. Some RIAs are even considering joining a larger firm to qualify to stay with SEC oversight.

RIA firms with $25 million to $100 million in assets under management (AUM) have until March 30 to file amended ADV forms stating their AUM, and until June 28 to complete registrations with their home states and other states where they do significant business.

The new oversight rules came out of Dodd-Frank mandates that were designed to relieve SEC oversight of mid-sized firms so the agency could concentrate limited resources on larger-firm oversight.

Handling the demands of multiple states will be a “nightmare” for advisors, said Mark Tibergien, chief executive officer of Pershing Advisor Solutions.  “Lets say you’re doing business in 12 states, all of whom do things differently, have their own forms, their own processes, their own audit reports….it will be horrible.  It’s hard enough already for advisors to keep up with compliance.”

Under state jurisdiction, RIA firms will have reporting requirements to customers, such as outlining fees, that the SEC allows to come from custodians.

“If you have hundreds of clients, you now have to send out hundreds of statements,”  says Patrick Burns, a Beverly Hills, California attorney who specializes in compliance issues. “Most advisors don’t see the point of doing that if [their clients] get a statement from their custodian anyway.”

Maryland Securities Commissioner Melanie Lubin is not too concerned about the new regulation requirements.  The state requirements “are very consistent, if not the same,” as federal requirements, Lubin said.  Most advisors who are switching to state regulation have business exclusively in their home state and won’t need to register with multiple jurisdictions, according to the North American Securities Administrators Association (NASAA).  The NASAA is administering a coordinated review program for advisors that must register in four or more sates.

The following questions sum up Lubin’s perspective of what a typical look at advisors’ documents will entail: 1) Are you disclosing what you’re required to disclose to your clients? 2) Are your documents internally consistent? 3) Does your contract say what your disclosure says? and 4) Are you setting up requirements that are consistent or inconsistent with the regulations?

But for David Samuels, dropping his own RIA to join corporate RIA Concert Wealth Management, with over $1 billion in assets, made business sense.  He gets back office support as well as the SEC umbrella.  “I’m looking down the road.  For my size [increased compliance] is going to really cut into the profitability and into the joy and the fun of the business….with the SEC, we feel we know what we’re getting.”

To prepare for a visit from either SEC or state regulators, compliance experts suggest that:

  • Advisors prepare and share with examiners a PowerPoint slideshow describing the scope of their business
  • To avoid restrictions on testimonials and advertising, remember that a website is advertising
  • If an advisor has multiple state registrations, there may be conflicts between the requirements of the different states
  • Advisors have a trade error log, even if the business has never made a trading error

RJ & Makay




The long goodbye (http://registeredrep.com/news/finance_long_goodbye/?NL=09-RGRa&Issue=09-RGRa_20120317_09-RGRa_299&YM_RID=darin@rjandmakay.com&YM_MID=1298801).  Registered Rep, March 14, 2012

At SSG, a focus on compliance, including expert advice for state- and SEC-registered RIAs (http://www.advisorone.com/2012/03/02/at-ssg-a-focus-on-compliance-including-expert-advi).  AdvisorOne, March 2, 2012

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