D-Day Has Arrived for the ‘Switch’ From Federal to State Registration

SEC plans to contact firms operating without state registration to see if they have a good reason for failing to complete the process

Thursday marked the deadline for advisors with assets of between $25 million and $100 million under management to switch from federal to state jurisdiction. While overall things have gone smoothly, there are, as might be expected, some stragglers.

Not among state regulators, however. Bob Webster, spokesman for the North American Securities Administrators Association (NASAA), said in an interview that “states have been working on this for two years now, preparing—actually, even prior to Dodd-Frank’s passage,” which would make it a more-than-two-year effort.

States have been proactive, Webster said, with “a pretty aggressive outreach to to the investment advisor community, hosting workshops and seminars to help switching advisors become familiar with” all the requirements and to educate them on how to go through the process. They’ve also worked hard, he added, to help regulators get to know the RIAs coming over from federal registration. Such efforts were previously reported by AdvisorOne.

“The 'switch' is the single largest regulatory event involving a coordinated effort between states and the SEC. It’s been a very cooperative effort, and by and large, things have gone smoothly,” Webster said. “From what we’re hearing from our members, we know the states are working as hard as they can to get registrations reviewed and deficiencies resolved.”

NASAA has been recommending to advisors that they need to be prompt when responding to state deficiency notices to help speed up the registration process. It has also said “all along” not to file Form ADV-W until advisors have registered with states so as not to be put in the position of not being registered somewhere.

Although the Securities and Exchange Commission has said it will review its population of advisors once the deadline has passed, and that it will “share that information with us,” Webster said that it was unlikely that errant advisors would be deregistered “the next day. That said,” he added, “advisors shouldn’t think they have extra time to file; they need to move expeditiously on this.”

The SEC plans to contact firms operating without state registration to see whether they have a good reason for failing to complete the process. “If they have a valid reason,” said Webster, “the matter ends there. If not, the SEC would begin the de-registration process.”

One reason could be that a firm was trying to boost its AUM to the $100 million level to remain registered with the SEC. Also, some firms have merged with others, and still others have gone out of business. “We’re expecting about 2,500 to come over from federal to state registration,” Webster said. “The initial estimate was about 4,000 and then the SEC cut it to 3,200; it’s been a bit of a moving target as the investment advisor population shifts—either through mergers or through seeking additional assets.”

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