Compliance Solutions for Investment Advisers

Compliance Alert! SEC Transition Rules

Dear Compliance Professional,

This past Friday (November 19th), the SEC proposed new rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). This brief Compliance Alert addresses one aspect of those proposed rule changes – the increase in the statutory threshold for registration by investment advisers with the SEC. The SEC is soliciting comments before issuing final rules.

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Section 410 of the Dodd-Frank Act

At present, the Advisers Act generally prohibits an investment adviser regulated by the state in which it maintains it principal office and place of business from registering with the SEC unless it has at least $25 million in assets under management.

Section 410 of the Dodd-Frank Act creates a new group of “mid-sized advisers” and shifts primary responsibility for their regulatory oversight to state securities authorities. It does this by prohibiting from registering with the SEC an investment adviser that is registered as an investment adviser in the state in which it maintains its principal office and place of business and that has assets under management between $25 million and $100 million.

Unlike a small adviser, a mid-sized adviser is not prohibited from registering with the SEC:

  • If the adviser is not required to be registered as an investment adviser with the securities commission of the state in which it maintains its principal office and place of business;
  • If registered, the adviser would not be subject to examination as an investment adviser by that securities commissioner; or
  • If the adviser is required to register in 15 or more states

Transition to State Registration

Under the proposed rule (203A-5), each investment adviser registered with the SEC on July 21, 2011 would be required to file an amendment to its Form ADV no later than August 20, 2011 to report the market value of its assets under management determined within 30 days of the filing.

This filing would be the first step by which an adviser no longer eligible for SEC registration would transition to state registration. It would require each investment adviser to determine whether it meets the revised eligibility criteria for SEC registration, and would provide the SEC and the state regulatory authorities with information necessary to identify those advisers required to transition to state registration.

An adviser no longer eligible for SEC registration would have to withdraw its SEC registration by filing Form ADV-W no later than October 19, 2011. The SEC will cancel the registration of advisers that fail to file an amendment or withdraw their registration in accordance with the rule.

Key Points

The key points to understand are as follows:

There are two grace periods:

  1. The first providing 30 days from July 21, 2011 for an adviser to determine whether it is eligible for SEC registration and to file an amended Form ADV; and
  2. The second providing an additional 60 days for an adviser to register in the states and to arrange for its associated persons to qualify for investment adviser representative registration, which may include preparing for and passing an examination, before withdrawing from SEC registration.

All investment advisers – even those managing billions of dollars – would be required to file an amendment to its Form ADV by August 20, 2011.

Failure to file the amendment will result in having your SEC registration canceled.

Stay tuned for more details . . .

 

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