States regulators commonly find RIAs deficient for inconsistencies in these disclosures, and their penchant for checking all of these details may add to an RIA firm's registration complications.

Also, if one state asks an RIA to amend the ADV, it could trigger a string of revisions when the firm is registered in multiple states. Consider an RIA based in New York that also must register in Arizona, Florida, California and Texas. Let's say the firm submits its ADV to New York and its registration is approved. If one of the other states, meanwhile, requires a change to the firm's fee policy and related disclosures, Winn says the firm will be required to resubmit its ADV to all of the other states, too. "A single state's request for a revision in an RIA's ADV could trigger a cascade of changes in other states and a re-review of a state's approval of an RIA's registration," he says.

A firm with less than $100 million in assets under management might still have a saving grace-it can register with the SEC instead of the states if it is registered in 15 states or more. The problem is that firms with less than $100 million are very unlikely to be registered in that many places. There are likely only five or ten states in which such a firm has enough clients to register.

Adding to the challenge state regulators are facing is the fact that RIAs are concentrated in just a handful of states. Texas, for instance, will see the number of RIA registrations double from 1,000 to 2,000. California, New York, Florida and other populous states are going to be disproportionately hit with new registrations, and these are the very states facing the most serious fiscal shortfalls.

In California there are just two full-time registration examiners, and yet the state is expected to see the number of RIAs soar in 2011. Of the 4,200 firms in the U.S. moving to state regulation, 15% are registered in California-some 600 firms. Making matters worse, California recently re-imposed furloughs on state workers because of its budget crisis. Examiners can only work four days a week during the first three weeks of each month.
Meanwhile, as financially stressed states face an avalanche of new registrations, Form ADV itself-the bedrock of RIA regulation in which an advisor discloses all material facts and conflicts of interest-has changed.
RIAs must for the first time submit a new, easy-to-read Part II of Form ADV. Before, they could easily fill in checkboxes, but the form now requires prose. You can expect that these smaller RIAs, not known for their keen writing skills, are going to have difficulty getting the wording just right and in accordance with the wishes of state regulators.

Such a major change to the Form ADV could not have possibly been more poorly timed. It means advisors will have to rewrite key disclosure documents at the same time they are switching to state regulation. It's a glaring example of how government sometimes makes rules without thinking about the consequences.

Keep in mind that the number of sub-$100 million RIAs is rising. On average, more than 200 new state and federally regulated RIAs have registered every month this year, according to Julie Cooling of RIA Database. The influx of new RIAs has been fueled by Wall Street wirehouse layoffs and broker defections. In addition, some independent advisors affiliated with broker-dealers are leaving corporate RIAs owned by their broker-dealer to start their own RIA shops.

As this regulatory mess unfolds, state securities regulators remain unsung bureaucratic heroes. These regulators are usually part of a state's department of corporations or work under the authority of the state's attorney general. As a young reporter in the 1980s and 1990s, I covered the activities of state securities bureaus for over a decade and found these government employees to be unique in their mission to protect investors. The SEC attracts more headlines, but state prosecutors wield significant power. In many states, securities departments can file criminal charges, unlike the SEC, which is limited to filing civil complaints.

State regulators concede they have a huge challenge ahead of them. The NASAA, the organization for state regulators in all 50 states as well as Canada, Mexico and the U.S. Virgin Islands, is hurriedly planning for the rush of registrations. Denise Voigt Crawford, its president, concedes there will be challenges, specifically because of the differences in rules among the states.

"In almost every aspect of Dodd-Frank, there needs to be rule-making," she says. "We have people in NASAA looking at all of this and devising uniform rules as we speak."