Virginia Making Room for 150 Investment Advisers Due to Dodd-Frank Rule, Part 2

Approximately 55 days left, before the March 30thdeadline for mid-size Investment Advisory firms to deregister with the SEC and register with their principal states.  In Part I, of our article, we spoke with the Associate Commissioner for Washington D.C’s Department of Insurance, Securities, and Banking (DISB).  

In Part II of our report we focus on how Virginia is preparing for their increased involvement in the investment advisers regulation.

We spoke with two people from the state of Virginia State Corporation Commission’s Division of Securities and Retail Franchising; Garland Sharp, Head of the Investment Adviser and Broker Dealer Audit Program & Principal Auditor, and Al Hughes, Chief of Registration, overseas registration of IA and Broker Dealer Reps.

Have you received inquiries from the industry since the Dodd-Frank Investment Adviser Act announcement requesting mid-small size IA firms to deregister with the SEC?

Yes, we had quite a few.  There were a lot of questions about when the switch will take place, how the firms can register with the state of Virginia.  There were also basic questions about the fee.

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

We expect approximately 150 to deregister with the SEC and register with VA.

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

We have sent out informational emails.  The emails consist of bullet points addressing the Dodd-Frank IA rule.  The emails also addressed the extension of time that the SEC granted for IA firms to deregister, and steps to register with Virginia.  We intend to send another email soon to remind the firms to register early.  We have also conducted two seminars; the first one was December 2010, and the other one, was in March 2011.  Due to the number of advisers spread out over the state, we usually conduct these seminars at the request of IA firms or interested parties.   But if an IA firm makes a request we will do what we can to accommodate them.

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

We have the Registration Process Checklist, Audit Process, and Inspection Checklist which is a self help guide for audit preparation.  They can all be found on our website.

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

Yes, we have enough manpower.  We currently have four auditors dedicated to the investment adviser audits.  We are in the process of hiring another auditor as we speak. We will try to get him up to speed before the registration deadline.

How many examiners do you have altogether?

We have seven auditors, including Garland.  But with the new hire it will total eight.

What about inspections?  We have heard from many IA firms that prior to this new rule, that majority of states and the 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 Virginia? 

We are tied to a three year cycle, and we intend to carry that forward until we need to change it.  We will probably focus a little bit more heavily on the new registrants.  We want to make sure that we get all of them within a couple of years, if we can.

How often should an IA firm expect inspections from Virginia? 

We have a two step audit process; it’s either a Routineaudit or For-Cause.  We prioritize For-Cause audits over Routine audits. 

For-Cause auditsare usually tied to an investigation into consumer complaints or other evidence of non-compliance.  For-Cause audits often targets specific areas of compliance such as supervision, suitability, churning or misrepresentation.

Routine auditsfocus on national or local trends in compliance problems, and general statute and regulation compliance.

Last year we did Five (5) For-Cause audits, Ninety-Three (93) Routines.  From that, we ended with about 425 deficiencies that were corrected, as well as currently pursuing Three (3) enforcement actions.

Do you collaborate with the adjoining jurisdictions; Maryland and DC?

For the registration process, we do.  Since Dodd-Frank, we have been working more closely with trying to be more uniform, so the firm doesn’t feel they have to do separate applications for Maryland or DC.

As far as audits are concern, generally we collaborate whenever we have a For-Cause audit, where we have similar interests. 

What should the IA firm look forward to from VA as soon as they register?

As far as the audit is concern, they probably are not going to see us for at least a year or maybe two years.  We want the firms to be in business long enough to get their feet wet, to have something for us to look at in terms of their business.

In terms of registration, they can expect a lot of email communications and updates for annual renewals, annual update amendments, and issues that may come down the pike.

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

Allocate is probably not the right word.  The commission is well funded.  We have been told that as long as we can justify the needs of the position, then we can fill the position.  That is why we are adding an additional examiner right now.  If we feel that we are going to need more, than we will pursue that.

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

From the registration stand point, I would recommend that the switching advisers file their state registrations early, and not wait to the end of March.   Also, I would recommend that they not terminate their federally covered notice filing in Virginia, until they receive state approval or they won’t be able to conduct business. 


VA Documents for Investment Adviser firms (click links for documents):

VA statistics for Investment Adviser firms:

  • VA-based state IA firms – 405
  • VA-licensed state IA’s (other than the home state) - 121
  • VA-based Notice filers (SEC-licensed) –  273
  • Non- VA Based Notice Filers (SEC-licensed)  – 1,555

Stocks, Trading and Investing