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Dodd-Frank: An Overview Of Pending Changes For Investment Advisors

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So, how will Dodd-Frank impact your firm? I have set forth below an overview of certain provisions that will impact the vast majority of current and pending registered investment advisors throughout the country.

The Dodd-Frank rules come into effect July 21, 2011. All investment advisors with less than $100 million in assets under management on that date will have to register with state securities commissions. In order to ease the transition, the SEC has proposed a 60-day grace period. First, in order for the SEC to assess the number of advisors transitioning to state registration, the SEC proposes that all investment advisors file a Form ADV amendment reflecting the market value of assets under management by Aug. 20, 2011 (30 days after the Dodd-Frank Act thresholds become effective). All investment advisors who were previously SEC-registered but now have less than $100 million in assets under management will be expected to file a Form ADV-W no later than Oct. 19, 2011.

New Registrants
The SEC proposes to give newly registering advisors the ability to file only with state securities commissions should their assets under management exceed $30 million but be lower than $100 million. The new proposal is intended to aid newly registering advisors in the registration process, and avoid requiring these advisors to register with the SEC only to have to transfer to state securities commissioners come July 2011.

Assets Under Management Calculations
The SEC proposes various changes to the manner in which assets under management are calculated. The SEC proposes to include in assets under management assets that an advisor currently may (but is not required to) exclude, such as assets managed without receiving compensation, and assets of foreign clients.

Switching Between State and Commission Registration
The SEC rules currently provide a $5 million buffer that permits an investment advisor who has between $25 million and $30 million in assets under management to remain registered with the states and does not require cancellation of registration with the Commission until asset levels fall below the $25 million mark. The SEC proposes to eliminate the buffer. Instead, the Commission proposes to allow an advisor to rely upon assets under management reported on the annual amendment for the entirety of the calendar year to avoid change in registration status based upon intra-year fluctuations. The Commission will maintain the rule that provides for a 180-day grace period from the advisor’s fiscal year end to allow him to switch to state registration.

Pension Consultant Exemption
The SEC proposals would increase the minimum value of plan assets from $50 million to $200 million for advisors relying on the pension consultant exemption.

Multi-State Advisors
The Dodd-Frank Act provides that a midsized advisor who would otherwise be required to register with 15 or more states may instead register with the SEC. This is a reduction from the previous rule which permitted advisors to register with the SEC if the advisor would otherwise have to register with 30 states. The previous rule also provided a buffer such that an advisor could remain registered with the SEC until the number fell below 25 states. The new rule would have no such buffer, but instead allow the advisor to assess eligibility to register with the SEC only during the annual amendment period, and rely upon the 180-day grace period if the advisor would be required to register with states.

The above reflects an overview only. Each advisor should review the proposed changes and determine how he should proceed, including whether he can (or should) maintain his current SEC registration status or, based upon the advisor’s business (the manner in which he manages assets, the number of states in which he maintains clients, etc.), it may make more sense to transition to state registration.    

Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, BDs, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at [email protected].


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