During a recent rare Friday open meeting (on Nov. 19), the SEC approved several key proposals designed to implement provisions of the Dodd-Frank law that amend the Investment Advisers Act. While there were no big surprises, the new proposals will affect every investment advisory firm in some fashion.
When you start digging into the 300-plus pages of proposed rules, you quickly realize there’s something for everyone. As usual, the devil is in the details and these new proposals have lots of devils to watch for when the final rules are issued next year. Here are some highlights:
1) The Big Switch From SEC to the States
One of the biggest changes is the “switch” to state registration and regulation by thousands of smaller advisors. In 1996, Congress passed a law dividing regulatory responsibility for investment advisors between the SEC and the states. It established $25 million in assets under management (AUM) as the dividing line and preempted states from regulating SEC-registered investment advisors. The basic premise of the law was that smaller firms are essentially local in nature and are thus best regulated by the states, whereas larger firms tend to have greater potential interstate commerce implications and thus should be regulated by the Feds. In my view, this allocation of regulatory responsibilities has worked well.
The SEC has explicit authority to increase the $25 million level, but it has never exercised this authority. Dodd-Frank changes it in a big way: by increasing the $25 million level to $100 million (for some unknown reason, the new law refers to these small firms as “mid-sized advisors”).