More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- 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.
When the Dodd-Frank Act was passed on July 21, 2010, the intent was to create a foundation for financial regulatory reform. With an aim toward improving accountability for the oversight of investment advisor firms, the Act assigned a greater level of oversight responsibility to state regulatory authorities. The Act created a new category for investment advisor firms having between $25 million and $100 million in assets under management. These advisors, labeled “mid-sized advisors,” shall be directly impacted by the Act’s initiative to transfer a significant portion of the oversight responsibilities for investment advisor firms from the SEC to state regulators.
On June 22, 2011, the SEC issued a release that explains how existing rules have been modified to facilitate the transition of oversight responsibilities from the SEC to state regulatory authorities for approximately 3,200 investment advisors. The release confirmed that, as prescribed by the Act, on July 21, 2011, the SEC’s assets under management threshold for registration increased from $25 million to $100 million. However, mid-sized advisors who were registered with the SEC as of July 21, 2011 must remain registered with the SEC until Jan. 1, 2012.
Furthermore, all advisors who are registered with the SEC as of Jan. 1, regardless of their annual amendment filing deadline, are required to file an amendment to their Form ADV Part 1A no later than March 31. The purpose of the amendment filing is to alert the SEC as to which advisors are no longer eligible for SEC registration. Those advisors who are no longer eligible have until June 28, 2012, to register with the appropriate state regulators and withdraw their SEC registration. The SEC intends to cancel the registration of advisors no longer eligible for SEC registration who fail to file an amendment or withdraw their registrations in accordance with the rule.
After Jan. 1, advisors who qualify for SEC registration based upon their assets under management shall benefit from a new asset buffer. Under the new rules, advisors who have $100 million or more in assets under management qualify for SEC registration, but need not register with the SEC until their assets under management reach $110 million. Also, once an advisor qualifies for SEC registration based upon his or her assets under management, that firm need not withdraw its registration unless its assets under management drop below $90 million.
Not all mid-sized advisors will be forced to seek state registration. Advisors who have their principal place of business located in a state that does not require that their firm to be registered as an investment advisor must register with the SEC. Furthermore, if a mid-sized advisor is required to register in the state in which his or her principal office is located, but would not be subject to an examination as an investment advisor by the state regulator, the mid-sized advisor must register with the SEC.
Advisors may still be eligible for SEC registration if they qualify for an exemption from the prohibition on SEC registration. Aside from the removal of the exemption for nationally recognized statistical rating organizations and the modifications made to the pension consultant and multi state advisor exemptions, all other exemptions remain unchanged. The pension consultant exemption has been modified to increase the required pension assets under advisement from $50 million to $200 million. The multi state advisor exemption has been modified to decrease the number of states an advisor would be required to register in to qualify for the exemption. Previously an advisor was required to be registered in 30 jurisdictions to qualify; the new rules reduce the number to 15.