Threshold Rising
There's been much talk about raising the asset threshold separating state- and SEC-registered investment advisors. Looks like it might finally happen.
As the debate over financial services reform raged on as of press time, both the House and Senate versions contained proposals to boost the threshold for SEC registration from $25 million to $100 million. If enacted, this would shift oversight responsibility for 4,200 SEC-registered advisors to the states. That's 40% of the total number of advisors currently registered with the SEC.
The rationale is that putting more advisors under the states' purview would free up the SEC to go after bigger fish. At the same time, investment advisors with less than the $100 million in assets would be examined more frequently by the states than they have been under the SEC.
While the number of RIAs has increased over the past five years by 33%, from 8,623 to 11,500, the staff dedicated to examining advisors and mutual funds has decreased over the same period by 13%, from 489 to 425, according to the SEC. That means only a small number of advisors get examined every year.
In a letter sent last month to Sen. Christopher Dodd (D-Conn.), chairman of the Senate Committee on Banking, Housing and Urban Affairs, SEC Commissioner Mary Schapiro said the measure "could substantially improve the examination and oversight" of the advisors the SEC oversees.
But Schapiro cautioned that regulatory responsibility would shift regardless of whether a state actually registered or examined advisors, creating gaps that could be exploited.
Perhaps she was referring to New York state, which doesn't have an investment advisor examination program (though it does have attorneys general who aggressively go after financial services industry miscreants).
"I find it interesting that the SEC would send that letter knowing full well that there are more than 3,000 investment advisor firms they've never examined," says Denise Voigt Crawford, Texas securities commissioner and president of the North American Securities Administrators Association (NASAA). "I think the states can do better than that."
But critics contend that cash-strapped states don't have the resources to boost their examination staffs to handle the increased workload.
Crawford acknowledges this, but says states could raise fees to provide more resources to do the job. In addition, she says states with larger examination resources-such as Texas-can share resources with less-endowed states. Texas has 14 full-time examiners for both investment advisors and broker-dealers, and Crawford says a rider in her agency's appropriation lets it hire up to ten additional examiners if the threshold limit is raised.
Crawford says NASAA earlier this year rolled out a memorandum of understanding to address the regulation and examination of RIAs by state examiners. Among other things, it encourages states with larger examination staffs to share resources with smaller states.
Zachary Gronich of RIA in a Box, a New York City-based RIA consulting company, believes geographical proximity makes state examiners better equipped to oversee smaller firms, which is better than flying in examiners from SEC headquarters in Washington, D.C.
If the threshold change becomes law, Ron Pearson of Beach Financial Advisory Service in Virginia Beach, Va., a firm with roughly $50 million AUM, will be happy to leave the SEC's grasp. "I can't wait till they raise the limit and I can go back to Virginia," he says.