More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Securities and Exchange Commission (SEC) says that while it fully intends to adopt final rules by July 21 implementing three provisions of Dodd-Frank involving the “switching” of advisors to state registration, as well as private fund and venture capital fund advisors’ registration with the SEC, the agency will lengthen the date for complying with such rules.
Robert Plaze, associate director of the SEC’s Division of Investment Management, told David Massey, president of the North American Securities Administrators Association (NASAA), in a April 8 letter that the SEC will finalize rules by July 21 on requiring those advisors with less than $100 million in assets under management (AUM) to switch to state registration; requiring advisors that rely on the private advisor exemption to register; and exempting from that requirement certain venture capital fund advisors as well as advisors to private funds with less than $150 million in AUM in the U.S.
Under Section 410 of Dodd-Frank, “mid-sized advisers”—those having between $25 million and $100 million of assets under management--will have to withdraw from registration with the SEC and register with one or more states pursuant to state law. Plaze explained in the letter that once the SEC adopts its final rule, the Investment Adviser Registration Depository system (lARD) will require “re-programming to accept advisers’ transition filings.” Because the re-programming process will take until the end of the year to complete, he continued, the SEC “expects that the Commission will consider extending the date by which mid-sized advisers must transition to state regulation such that all SEC-registered advisers would be required to report their eligibility for registration with the Commission in the first quarter of 2012.”
Those mid-sized advisors that are no longer eligible for Commission registration, Plaze said, “would have a grace period providing them time to register with the appropriate state regulators and come into compliance with state law before withdrawing their Commission registration.”
In response to Plaze’s letter, Massey (left) said that “NASAA has committed to implementing the ‘switch’ in active coordination with the SEC” and that “NASAA members continue to plan to handle the mechanics of the transition in accordance with the schedule that the Commission ultimately adopts.”
Section 403 of Dodd-Frank Act also repeals, as of July 21, the private adviser exemption in section 203(b)(3) of the Advisers Act and will require advisors relying on that exemption--including advisers to many hedge funds and other private funds--to register with the Commission, Plaze explained in his letter.
In addition, the Dodd-Frank Act provides some new exemptions, Plaze said, such as for advisors to venture capital funds and advisors to private funds with less than $150 million in assets under management in the United States.
“Those new exemptions require Commission rulemaking,” Plaze said, and “we anticipate that the Commission will issue those final rules” by July 21. “However, given the time needed for advisers to register and come fully into compliance with the obligations applicable to them once they are registered, we expect that the Commission will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”