Fewer Firms Make Switch to State Oversight Than Expected

April 18, 2012

As a result of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), mid-sized firms of less than $100 million in assets under management should make the switch from Securities and Exchange Commission (SEC) oversight to state regulatory oversight. Most advisers know that under the newly adopted SEC rules, mid-sized advisers that were SEC registered prior to Dodd-Frank must remain SEC registered through the first quarter of 2012, and then complete their switch to state regulation by June 28, 2012. Firms wishing to switch should have already completed the state registration process to become effective in the state or states in which the adviser is registering.

It was estimated by this time that 3,200 firms would have made the switch to state regulation. However, spokesman John Nester for the SEC announced that as of April 5, a little more than 1,900 firms claimed that they were no longer eligible for SEC registration and needed to make the switch.

In the updated ADV Form that firms had to file with the SEC in March, they had to indicate their assets under management to see whether they would remain SEC registered. The Dodd-Frank Act now requires that all advisers with less than $100 million in assets under management to register with the state instead of the SEC. Because of an SEC rule adopted last June, firms that are currently overseen by the SEC need to have only $90 million in assets under management to avoid making the switch.

One reason for the erroneous estimate is that firms may have worked to build up their business in order to reach the new asset minimum to continue under SEC regulation. According to Investmentnews, "Most SEC-registered advisers wanted to remain with the agency and many have worked to add assets to ensure meeting the threshold."

Another likely way firms are remaining eligible for SEC registration is by adding clients - regardless of the amount of assets - in multiple states. Under the same rules adopted last summer, advisers required to register in fifteen or more states are permitted to register with the SEC instead.

The final numbers of those advisers' making the switch may change as the SEC continues to work through the numbers listed in the ADVs and after it checks to ensure that the assets under management are correct. Some observers also stated to Investmentnews that the advisers who completed the switch last year may also not be included in the estimate.

Parker MacIntyre, LLC provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.