SEC Chairman Paul Atkins is moving ahead with the plan to raise the asset threshold at which midsize advisors must register with the agency, sources told me recently.
Talk of raising the $100 million asset mark "has been the buzz" since former acting Securities and Exchange Commission Chairman Mark Uyeda announced the effort in early April, Nicole Crum, leader of Sullivan & Worcester's Investment Management Group, told me Monday in a phone interview.
The SEC chairman doesn't just "casually mention things," Crum said, referring to Uyeda's comments.
Advisors who are switched from SEC regulation could face stricter rules in some states and compliance headaches if they do business in several states. Increasing the state-registered advisor population could also squeeze states' budgets and force them to regulate complex investment products.
Crum, along with other industry watchers who asked not to be identified, say the SEC is currently in talks with some state securities regulators.
How much of a priority is the switch for the agency?
"I have heard there are discussions" happening between the SEC and the states, Crum said, adding that she's gotten questions from advisors about what such a change would mean for their business. "There's either a feeling of relief or a feeling of concern."
The question is: Is the SEC "feeling it out — is it information gathering? Or are they really ready to push through and doing this?" Crum said. "That isn't clear, but it does seem to be a priority."
In talking with state securities regulators, the SEC would likely "be taking a risk-based approach or an approach prioritizing states where ... it made more sense to get more information than others," Crum added.
On the Agenda
Raising the threshold "will change the dynamic for some [firms] and I think definitely I've heard about it enough times to suspect that it remains an agenda item," Crum said.
Uyeda said at a meeting of state and federal regulators in Washington that he'd asked agency staff to evaluate the $100 million threshold as the number of large advisory firms continues to grow.
The move comes as the agency is grappling with the departures of about 10% of its staff.
In 2010, the Dodd-Frank Act required advisors with at least $100 million in assets under management to register with the SEC. The shift "removed about 2,100 firms from SEC oversight and assigned them to agencies in states where they did business," said Karen Barr, CEO of the Investment Adviser Association in Washington.
Since that time, Uyeda said, the number of RIAs has grown about 45%, to 15,411.
Of these, 8,956 advisors had between $100 million and $1 billion in AUM, up from 5,853 in 2012, Uyeda continued.
In addition, there are 4,756 advisors with more than $1 billion in AUM, compared with 2,921 in 2012, he pointed out.
Fight With States
"The SEC wants to offload the smaller advisers to the states," said Amy Lynch, founder and president of FrontLine Compliance, in an email Monday. "However, I suspect that the states will fight this as they do not have the funding to take on more advisers."
Crum questioned if the states are ready to regulate some of the complex products "that are hot right now," such as private credit and derivative strategies. "A lot of private strategies are packaged for retail investors," Crum said.
"One question I would have right now is whether or not the state regulators would be, today, equipped to deal with those things," Crum continued. "It doesn't mean they couldn't get up to speed, but my thought is — will there be a transition period?"
Chris Stanley, founder of Beach Street Legal, noted in a recent blog post that "Dodd-Frank also bestowed the SEC with rulemaking authority to raise the $100 million AUM threshold in the future (which it now appears to be taking the first steps to do)."
However, "It’s way too early to tell whether, when, and by how much the $100 million AUM threshold will be raised," Stanley said.
What It Means for Advisors
SEC-registered advisors with $500 million or less in AUM "should keep a watchful eye on the results of the SEC staff’s evaluation," Stanley added, as "transitioning back to registration with the states is a terrible outcome for a lot of reasons," which he detailed in a recent post on X.
Said Stanley on X: "It's pretty crazy that two otherwise identical advisers can be subject to such divergent rules/regs based simply on whether registered with the SEC or a state (and which state, at that)."
For instance, "many states still expressly prohibit testimonials. The SEC's marketing rule expressly permits testimonials," Stanley wrote.
What else? "Some states require re-submission of client advisory agreements if any revisions or updates are made to the standard form version, even if not undergoing an exam. The SEC simply requests such agreement versions during the course of an exam," Stanley said.
"I suspect many advisers would go to the ends of the earth to remain SEC registered… especially those that would be required to be registered in multiple states or certain states with more draconian rules," Stanley added.
Stanley said to look for potential SEC rulemaking and its accompanying public comment period.
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