The Securities and Exchange Commission has raised its original $100 million level for transitioning advisors to state regulatory oversight, but reaction is mixed whether the $10 million ceiling bump up will significantly impact financial advisors.
As part of last summer's Dodd-Frank bill, investment advisors with between $25 million to $100 million in assets under management will be switched from federal to state registration by July 21, 2011. But the SEC last week increased its threshold to $110 million, a move that caught some people by surprise.
"That's a little bit of mystery," says Patrick Burns, an attorney and president of Advanced Regulatory Compliance Inc. in Beverly Hills, Calif. ''I haven't seen any dialogue from any SEC final meetings. They kind of just slipped that in there and said 'pursuant to our authority under Dodd-Frank we've decided to move it up to $110 million.'''
Burns predicted that upping the threshold to $110 million will have little impact on RIAs. However, he is withholding judgment on the Dodd-Frank Act overall.
"The devil will be in the details," Burns said. "We'll have to see what comes out in the interpretation of Dodd-Frank because this whole $110 million thing doesn't seem to be that controversial, but the fact some things were left to the discretion to implement later on, that's where some of the details will start to come out."
Some RIAs said that the SEC's move to up the threshold to $110 million caught them pleasantly by surprise.
Zachary Gronich of RIA in a Box, a New York City-based RIA consulting company, says another twist in the new rule is that if a firm is monitored by the SEC, the law allows it to stay under SEC supervision until it goes below $90 million.
"That's entirely new, there never used to be such a weird wrinkle like that," Gronich says. That said, he adds that he and several of his clients like the new format.
"You don't have withdraw and register with the state until you are down to $90 million," Gronich said. "A lot of our clients that called said, 'We're really going to be right there. We're really going to have $93 million to $95 million. And if we have a good week in the market, I'm over $100 million.'''
Gronich predicts that a number of financial advisors who favor SEC supervision versus state supervision will attempt to find creative ways to bring enough money into their firm to say under the SEC umbrella. He says he always tells his clients who are on the monetary threshold to go under SEC monitoring because the odds of being audited by the SEC "have always been tremendously low," Gronich says.
State securities regulators claim they're better positioned to examine advisors in their jurisdictions more frequently than the SEC currently does. But due to varying budgetary and manpower constraints, not all state regulators are created equal.
"Texas is in a phenomenal position to handle their auditing--they've staffed up big time and will have no trouble dealing with the influx of firms to monitor," Gronich says, adding that Florida and California may not have the manpower to handle any auditing influx.
Advisors with their principal office and place of business in Minnesota or New York, and who have assets under management of $25 million or more, will remain registered with the SEC since these states do not have investment advisory examination programs.
-- Jim McConville