(Dow Jones) The Securities and Exchange Commission could be stuck with policing hundreds of New York-based advisors for longer than Congress envisioned when it passed financial reform earlier this year.
The state has no program for examining advisors' businesses, an activity that is shifting to state from federal control nationwide in July 2011 for advisors who manage between $25 million and $100 million in assets. Meeting that deadline could be tricky for New York, where plans for an exam program apparently haven't yet even been drawn up.
Advisors of that size now are registered with the SEC, which said it can retain oversight in cases where a state lacks a program. That New York would be one of those states is in some ways disconcerting: It is, after all, home to U.S. financial markets and of the biggest adviser scandal in history, Bernard Madoff's Ponzi scheme.
New York regulators would oversee about 350 additional advisors under the change, according to the North American Securities Administrators Association, or Nasaa, an organization of state regulators.
Larger advisors fall under the jurisdiction of New York State Attorney General Andrew Cuomo who, under the state's Martin Act, can investigate them in instances of alleged fraud. The law, however, is unclear about that office's-or even the state's-authority to conduct routine exams. And officials don't seem anxious to discuss the question.
Calls by Dow Jones Newswires to New York State offices, including those of the New York State Banking Department and Gov. David Patterson, about the question of examinations were often referred to other offices or ignored. A spokesman for the New York Attorney General said only that the office is "assessing the situation."
Even if the question of how a periodic exam program would be carried out, and by whom, is worked out, money issues pose another issue. New York State lawmakers, stymied by a $9 billion budget gap, passed a $136 billion budget earlier this month, more than four months late. New taxes on clothing, footwear and other items could mean little public support for funding examinations of investment advisors, many of whom work in the lucrative hedge-fund industry and deal with big-money investors.
"There are so many unemployed [people in the state]. Social programs may get higher priority," said George Brunelle, a New York-based securities lawyer.
A bare-bones program that would cover between six and ten examinations annually would require a minimum of 35 examiners and cost around $7 million, estimated Brunelle, the former legal head of a surveillance unit of the New York Stock Exchange.
"There are just too many other programs where there are genuine human needs," he said.