December 29, 2011

SEC to State Transition

Attention: Mid Size Advisors!

As 2011 comes to a close, many of you are busy planning for the new year. Don’t forget to add SEC to State transition planning to your list.

In July 2010, President Obama signed the Financial Reform Bill into law as the Dodd-Frank Act, which set forth rules to require “mid-size” SEC advisors that are under $100 million in assets under management to transition their registration with the Securities and Exchange Commission (“SEC”) to the one or more state regulators based on the applicable state laws. The SEC postponed the dates for compliance from the July 2011 timeframe to 2012, which is nearly upon us. This regulatory change is estimated to affect approximately 3,200 advisors, which is more that 25% of those currently registered with the SEC. 

The final amended rules provide for a bit more flexibility than the initial July 2010 plan as it  was originally signed into law. While the threshold for which investment advisers must register with the SEC will still move to $100 million, the SEC pushed back the compliance dates into 2012 and created a “buffer” in an attempt to avoid unnecessary back and forth filings. They also hoped to reduce the confusion around this transition with the additional time and communication on the matter. While the additional time and the buffer will certainly be helpful to advisors, the final rules certainly do not alleviate the confusion!

The “Buffer”

The amended rule now includes a provision for a buffer of $10 million above or below the $100 million threshold to avoid unnecessary frequent SEC and State switches based on market swings. An advisor must register with the SEC if it exceeds $110 million in assets under management. The buffer also provide for existing SEC advisors whose assets may temporarily drop to remain SEC registered if their assets do not drop below $90 million. So where’s the confusion?

And the critical dates for compliance...
  • July 21, 2011 to January 1, 2012 -- An existing mid-size investment advisor registered with the SEC will be required to remain registered with the SEC (Note that some states are recommending an early switch to manage workflow.  However, the SEC expects you to remain registered until 2012).
  • July 21, 2011 to January 1, 2012 -- Any existing state investment advisor with assets between $25 million and $100 million will not be permitted to register with the SEC and must remain registered with the state(s).
  • July 21, 2011 to January 1, 2012 -- Any new investment advisor with assets between $25 million and $100 million will not be permitted to register with the SEC and must remain registered with the state(s).
  • Fall 2011 -- Some state regulators are encouraging mid-size advisors that do not expect to remain eligible for SEC registration in 2012 to begin their transition. Now is the time to fully understand your registration status and options.
  • January 1, 2012 -- If you are currently registered or have a registration pending with the SEC on or after January 1, 2012 you must file an amendment to your ADV no later than March 30, 2012 to indicate eligibility to remain SEC registered.
  • January 1, 2012 -- Also effective January 1, 2012, mid-size advisors registered with the SEC that are no longer eligible for SEC registration can begin filing amendments to their ADV indicating their ineligibility.
  • January 1, 2012 to March 30, 2012 -- An existing SEC advisor may select the date for calculation of the “regulatory assets” provided the date is within 90 days of the filing. The SEC has also added the flexibility in determining what constitutes regulatory assets to include proprietary accounts and the accounts of family where no fees are charged.
  • March 30, 2012 -- Deadline to file the above mentioned amendment to Form ADV.
  • June 28, 2012 -- 90 days following the March deadline, all advisors must be properly registered with the applicable state regulators and withdraw their SEC registration. Note: If you don’t withdraw on June 28, 2012, the SEC cautions it will do if for you. Make sure you are not put out of business!
When to transition?
If your firm is a mid-size advisor, you need to take a realistic self-assessment now. What is your current situation? What do you expect your assets under management to be in Q1 2012? 

With so many firm’s transitioning, major backlogs are a certainty. For instance, California expects in excess of 900 transitions alone. Of the 3,000 advisors, many will be required to register in several state jurisdictions. Facing this enormous task, the understaffed securities division is asking advisors to start their transitions this fall and remain dually registered for a short period of time.

To help guide you in the planning, we created a table of actionable dates based on various scenarios:

Who does not transition?
  • Investment advisors are to remain SEC registered if exempt or excluded in a state where their principal office is located.
  • Mid-size investment advisors with their primary place of business in New York and Wyoming are excluded from the transition as they are not subject to examination by state regulators.
Investment advisors required to register in 15 or more states can register with the SEC. Be careful here. This means that you would required to register, not voluntarily deciding to register in 15 states!


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