Metro Area Securities Regulators Prepare for Investment Advisory Switch, Part 1

March 30, 2012 marks a significant deadline for Investment Advisory (IA) firms throughout the nation.  Due to proposed regulations, which was derived, from Dodd-Frank (Wall Street Regulatory Reform and Consumer Protections Act), SEC has mandated that all mid-size IA firms deregister with the SEC and register with their principal states.  

Some speculations have been circling on whether or not this will have a significant impact on the industry and each state.  Most believe that the registration requirement will tighten enforcement procedures while others don’t believe there will be any major differences. 

In order to provide some clarification to Investment Advisory firms in the DC Metro Area, Metro Business Media sat down with the state regulators of the District, Maryland and Virginia to find out how each state is preparing for their increased involvement in the investment advisers regulation.

For the first part of this three part article, we spoke with Theodore A. Miles, Associate Commissioner for Washington D.C’s Department of Insurance, Securities, and Banking (DISB).

Can you start off by tell us a little about the Dodd-Frank Investment Adviser Act?

The mid-size firms that file with the SEC, which are firms that have assets under management of between $25 million and $100 million by December 30thof 2011, will be required to be registered with the states.  There is a margin, for firms that are above $90 million but below $110 million these firms have the option of going either way.  Firms above $110 million must continue registering with the SEC, those below $90 million will need to deregister with the SEC and register with the states.  Prior to this, there was a buffer for firms with assets under management of $25 million to $30 million, which allowed these firms to choose registration with either the SEC or the states.   So we’ve had experience with firms switching to register between the states and SEC.  It’s just that now it’s at a higher level.

How many IA firms, do you expect will deregister with the SEC and register in the District?

We are estimating between 10 and 15 firms, but we have to wait and see what the data will show; though we expect that it will be somewhere in that range, based on our earlier analysis.

What has the District done to inform the IA firms of the required registration?

Back in July we issued a bulletin that was on our website, informing the firms of the timeline. We also held a workshop in December, where we invited all the firms that we identified as potentially affected by the regulation.  We are planning to hold another workshop in early March 2012.

Do you think the District has provided enough information to their potential IA registrants?

This is something that has received a lot of coverage, and the SEC has several [pieces of] information on their website.  I think the industry is fully aware of the different requirements regarding this regulation.

What information/materials do you have available for IA firms?

We have a set of slides that we used in the workshop, which we are in the process of reviewing and adding more, so that we can make them public on our website.

Does the District have enough manpower to handle the amount of inquiries and registration?

Yes, absolutely.  We have been doing our licensing program for many years now, and the actual licensing process starts with the (IARD), electronic filings.  The procedure is very straight forward.  The District, however, has a few special requirements for licensing; additional steps can be found on our website.  The NASAA (North American Securities Administrators Association) has been running special training program for licensing and examination officials on nationwide bases, which all of our examiners have gone through the training.  Anything new is going to have surprises; it’s the unexpected that gets you.  At this point, we are confident that we have the manpower and resources to handle the process.

Do you collaborate with the adjoining states; Maryland and Virginia?

We collaborate on an ongoing basis.  If a firm is licensed in what we call a home state (state where the firm is headquartered) the District will check to see if the firm has any problems, whether there are any conditions on the license.  So we exchange information on a continuous basis.  If there is a difference in approach between one of us or another state, about something like the custody requirement, we defer to whatever the position that the home state take.

What about inspections?  We have heard from many IA firms that prior to this new rule majority of states and SEC were not as active in the examination process.  Do you believe that this will continue or should the IA community expect a visible presence from the District? 

In the District, we do exams every year.  Every firm that is registered in the District is licensed by us and examined by us. 

How many examiners do you have?

We have FOUR including the head of the Examinations Division

How often should an IA firm expect inspections from the District? 

IA firms should expect to have the District to be active in examining its registrants.

First of all, we have three types of examinations.

We do what we call a Meet and Greet Examinations, where within the first 60-90 days of being licensed in the District, we will send out a team to visit the firm; take a look at their operations, review their books and records.  If there are findings, we will share their findings with them on an informal basis, so that they can start off on the right track.

Second, we have the Full Examinations that are unannounced.  These are on a scheduled basis, internally scheduled based on our assessment of what’s important.

The third category is Caused Examinations, and these will be in response to a complaint or follow up, and they will be focused on some indication of improper activity.

Have funds been allocated to hire more individuals to help with this process?

We do have some concerns about resources, like all states.  If we see a need, for more examiners we plan on requesting additional resources. 

Finally, looking forward what valuable advice would you provide to IA firms regarding the Districts involvement in this new regulation?

The sooner the IA firms can be in contact with us, the better.  It’s just a matter of making sure that all the little details are covered, and the more time we have to work with- the better.   If firms file before the deadline, their application will be processed, but will remain in pending status till the SEC has accepted the Form ADV-W application for withdrawal.


DC statistics for Investment Adviser firms:

  • DC-based state IA firms – 22
  • DC-licensed state IA’s (other than the home state) - 67
  • DC-based Notice filers (SEC-licensed) –  39
  • Non- DC Based Notice Filers (SEC-licensed)  – 1,008 

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