More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
The switch in mid-2012 from federal to state jurisdiction for advisors with assets under management in the $25 million to $100 million range may be fraught with uncertainty, particularly for those who have to cope with regulators in multiple states.
Some reports imply that state registrations will be a lot tougher on advisors, with regulators approaching them in an adversarial manner, but most state regulators themselves say that such is not really the case.
Instead they would prefer to offer guidance and help advisors comply with regulations, rather than come down on them like a ton of bricks for violations, and many are working very hard to make that happen.
However, state regulators are pressing advisors making the switch over to not put it off, and to not be afraid to pick up the phone and ask for help.
Maryland Securities Commissioner Melanie Lubin, who is overseeing the switch for the North American Securities Administrators Association (NASAA), says that while “there are some different requirements between state and federal” regulation for advisors, nothing is “particularly difficult. They’ll have to focus on investment advisor representative registration,” she adds, “because that’s a little broader for state advisors than federal requirements.” It’s too soon to say, she adds, which—if any—specific areas might present the most problems for advisors making the switch.
And while she expects new registrants to receive more deficiency comments on their Form ADV Part 2—because it has recently been revamped—that too is something advisors should not worry about. They should expect to get comments even if they have done Part 2 for the Securities and Exchange Commission and not had any feedback on it, because the states conduct a “more robust review” than the SEC. Plus, she says, the SEC doesn’t have a review process outside of an audit. Of particular interest, she says, will be contracts, the way advisors answer the questions in Part 2, and internal consistency.
She offers two suggestions for advisors: First, make the switch sooner rather than later, apply for state registration first and then withdraw federal registration, so that regulators will have time to process the applications. Second, if you have questions, pick up the phone and call the jurisdiction about which you have questions. “We’re accustomed to talking to our registrants and answering questions,” she stresses.
Linda Cena, Michigan securities director and chair of the investment advisor section at NASAA, echoes both those suggestions, and points out that most states have gone out of their way to provide training and information so that advisors won’t find it such a difficult process to switch over.
Cena says that more than half the states have done switch workshops, in an effort to help advisors familiarize themselves with new requirements and processes; Michigan, her home state, has done four of them. It’s an opportunity, she adds, for advisors to meet the regulators face to face and get to know the people they will be working with.
Whether it’s the coordinated review—an advisor who plans to register for four or more states can go through this process, and Lubin says regulators will get on the phone together and try to resolve conflicts, inconsistencies, or differing requests so the advisor finds it easier to comply with multistate requirements—or the examination process. Cena says that Michigan has held workshops to guide advisors through step by step. “When a firm leaves one of our meetings, they feel a lot more at ease,” she says.
NASAA also holds workshops and training sessions for examiners so that the examiners will understand how to deal with firms larger than those they are accustomed to working with. Cena too stresses the importance of registering early: “Please don’t wait till the last minute; the sooner you get [forms] in, the better”—and calling to ask for help. “Do not be afraid to reach out to your regulator,” she says. “We’re the local cop on the beat; we’re here for you to call with questions.” Regulators would far rather walk a firm through a process and ensure that it’s done right than to penalize them afterwards for doing things incorrectly.
Cena says that while advisors will find more regulations under states than SEC jurisdiction—“We have to do consumer protection. That’s our job”—they will also find better customer service, and are probably not used to just being able to pick up the phone and call for guidance. “We know our firms,” she says, and adds that in her state, at least, regulators put on seminars on topics that advisors ask for: exams, registration, new forms, even business continuity plans, bringing in attorneys and other outside experts to provide information.
About that “cop on the beat” characterization? Cena says that about a year ago story appeared in the press about how a regulator in one state went after an advisor in another state. “Now why would we do that?” she asks. What the story didn’t say, she added, was that the firm had “closed its doors and run,” opening up shop in a different state rather than face an audit from its state regulator. “So of course we won’t ignore that,” she says.
Says Cena: “Our goal is to bring them into compliance. We know this is a difficult time [for advisors making the switch]. If there is an enforcement issue, it’s because there’s a more serious problem.” If a firm is trying to comply, that’s a completely different situation than a firm that is doing something wrong, and regulators will react accordingly.