More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
We all know by now that the assets under management threshold to remain registered with the Securities and Exchange Commission will be raised to $100 million. This registration hurdle has created great consternation for advisors throughout the country. The effective date is most probably July 1, 2011, but the details, including parameters for transition from SEC to state registration, have not yet been finalized or published by the Commission. A Commission release should be forthcoming in the next month or so. Based upon current SEC guidelines, do you have $100 million of “assets under management” to remain SEC registered? It depends on whether you have “qualifying” assets under management.
The most often overlooked (and misunderstood) determination of qualifying assets is if the advisor provides “continuous and regular supervision or management services” (i.e., the advisor has discretionary authority or has ongoing responsibility to recommend and arrange purchases and sales of securities for a client) for the securities portfolio.
Generally, advisory accounts that are managed by an investment advisor on a discretionary basis qualify for SEC registration purposes. However, what about non-discretionary assets or assets that are allocated by the advisor among separate account managers? Do these assets qualify for “continuous and regular supervision or management services?” Do these advisors have qualifying assets for SEC registration purposes? Fortunately, the SEC has previously provided (which could potentially be subject to modification by the SEC in its anticipated pending release) the following guidance:
1. Non-Discretionary Assets Will Qualify IF: (a) the advisor has an ongoing responsibility to make recommendations, based upon the needs of the client, as to specific securities or other investments the account may purchase or sell; and (b) if such recommendations are accepted by the client, the advisor is responsible for arranging or effecting the purchase or sale; and (c) at least quarterly, the advisor provides continuous and regular supervision of the underlying assets thereafter.
2. Separate Account Manager Assets Will Qualify ONLY IF: The advisor has the discretionary authority to hire and fire managers and reallocate assets among them. Thus, based upon current guidelines, an SEC advisor who has transitioned a substantial portion of his assets to separate account managers, and wants to remain SEC registered, should make sure that either: (a) he retains discretionary authority to hire or fire the separate account managers without first obtaining client consent; or (b) he has retained at least $100 million of other qualifying assets under management.
Unfortunately, the understanding of the above criteria has been uneven by regulators. Some states have been referring advisors with more than $30 million under management to the SEC, without first ascertaining whether the assets qualify for SEC registration-specific purposes. Moreover, the SEC, upon its subsequent review of the advisor, has at times disregarded its own registration guidelines, and encouraged or required state advisors who do not appear to maintain qualifying assets to transition to SEC registration—all the more important for the SEC to provide clear guidance reconfirming existing guidelines or establishing new guidelines for qualifying assets. By so doing, an advisor can make a reasoned determination as to whether or not he can remain SEC registered or will need to transition to state registration.
Thus, in the upcoming months, as an advisor may increase his assets under management or change the manner in which he manages assets (e.g., transitions to separate account managers, increases or decreases the frequency of account reviews), he should be mindful as to whether the increase or change will have an impact on registration status.
Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, broker-dealers, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at email@example.com.