More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Next week, on June 22, at 10:00 AM, SEC Commissioners will gather at their hearing room—in the big building next to Union Station in Washington, D.C., and within shouting distance of the U.S. Capitol—to vote on rules that literally will re-shape the profile of the investment advisory universe.
The so-called “Sunshine Act” notice announcing the meeting states the SEC will consider rules “to give effect to provisions of Title IV of the Dodd-Frank Act that…increase the statutory threshold for registration of investment advisers with the Commission [and] require advisers to hedge funds and other private funds to register with the Commission…”
So what does this mean in plain English? Why should investment advisory firms care?
When implemented, the new rules will dramatically alter the composition of investment advisory firms under SEC jurisdiction. Thousands of smaller advisors will switch from SEC to state registration. At the same time, a significant number of unregistered “private fund advisors” (hedge fund and private equity advisors) will register with the SEC.
As it stands now, there are about 11,500 SEC-registered investment advisors. By and large, these are firms that manage at least $25 million in assets. Firms with less than $25 million in AUM are regulated by the states.
The $25 million AUM dividing line was first established by Congress in 1996 and had never been adjusted until the Dodd-Frank Act came along. Dodd-Frank increased the threshold for SEC registration to $100 million in assets. In January, the SEC staff issued a report estimating that this change in the law will require about 4,000 SEC-registered advisors—those with between $25 and $100 million AUM—to “switch” from SEC to state registration and regulation.
In addition, so-called private fund advisors that manage at least $150 million in AUM will be required to register with the SEC under the Investment Advisers Act. The SEC staff estimated that this will add about 750 investment advisors to the SEC’s registration list.
Here’s how the numbers will work out after the Switch (using SEC staff estimates from January):
- 11,500 SEC-registered investment advisors (currently)
- Minus 4,000 advisers that will switch from SEC to state registration
- Plus 750 newly registered private fund advisors
- Equals: 8,250 SEC-registered investment advisers (after the Switch)
Based on these estimates, the total number of advisory firms subject to SEC rules will have decreased by almost 30%. That
should help the agency in its efforts to achieve a more robust inspection program for advisory firms.
However, the SEC does not have an easy road ahead. First, it appears that the SEC’s estimates in January may be off. It is likely that the number of advisors between $25-$100 million AUM will be fewer than 4,000 and many observers believe that the 750 estimate for private fund advisors is too low. Even if the initial estimates are accurate, it’s very likely that total assets under management will grow. At the same time, the SEC is assuming other new responsibilities under Dodd-Frank, such as overseeing 1,000 newly registered “municipal advisors,” as well as undertaking various duties relating to those who engage in derivatives and swaps activities. The bottom line is that the SEC will be stretched thin.
The Switch will not be fully implemented until the end of Q1 in 2012. It will be interesting to see the final numbers. In addition to changing the profile of the advisory profession, the numbers could have a profound effect on potential legislation that Congress may consider, such as whether to authorize the SEC to designate one or more self-regulatory organizations (SROs) for investment advisors.
As always, I welcome your thoughts and observations…