SEC Associate Director Robert Plaze’s April 8th letter to David Massey, President, North American Securities Administrators Association, Inc. (“NASAA“) states, “We anticipate that the Commission will complete its implementing rulemaking by July 21, 2011 in accordance with the Dodd-Frank Act, but expect in connection therewith that the Commission will consider providing additional time for investment advisers affected by these provisions to come into compliance.”
Will the SEC Pushback the Registration Deadline for Private Advisers?
SEC Associate Director Robert Plaze’s April 8th letter to David Massey, President, North American Securities Administrators Association, Inc. (“NASAA“) states, “We anticipate that the Commission will complete its implementing rulemaking by July 21, 2011 in accordance with the Dodd-Frank Act, but expect in connection therewith that the Commission will consider providing additional time for investment advisers affected by these provisions to come into compliance.”
Using our own sort of mosaic theory, we would deduce that the SEC is highly likely to push back the dates, and that this is an attempt to save the agency grief by disclosing this now rather than waiting until the last minute and ticking off firms that rushed to the finish line (or starting line…depending on your POV.) The statement above, and specifically, “in connection with”, appears to be saying that the SEC may wait to simply include the extended compliance date in the final rule release.
Where does that leave us? We know that firms will need to file at least 45 days prior to the registration deadline. As we get closer to early June without “official” indication pushing back the date (or issuance of the final rule release), the regulators risk back-lash. The SEC has done a pretty good job in addressing Dodd-Frank related issues swiftly and timely. We understand that acting hastily could result in unintended consequences, but time is running out and the industry needs clarity. While the SEC’s Dodd-Frank calendar indicates the final rule will be issued May-July, this has to happen in May.
What about the Mid-Sized Adviser Quandary?
We will know more once all states have responded to the SEC on whether or not they have an examination program. The SEC has requested responses by May 5th fom the states. This is a critical determining factor in assessing whether mid-sized advisers will register with the SEC or the state(s). This seems quite backwards considering the SEC’s Study on Enhancing Investment Adviser Examinations, released earlier this year.[1] The study describes the evolution of investment adviser regulation over recent years and the current and evolving situation in light of Dodd-Frank. It describes a situation in which the SEC is expected to have fewer registered investment advisers once those advisers with less than $100 million in AUM move to state registration, providing some relief to an already burdened SEC staff whose numbers have not kept pace with the increase in registrants in the last decade. It appears the SEC assumed in their study that most states do have an examination program and hence most mid-sized advisers will be regulated by the states. Thus, despite the apparent assumptions, we won’t know this definitively until after the May 5th deadline when states are required to respond. Again, while the SEC’s Dodd-Frank calendar indicates the final rule will be issued May-July, this has to happen in May. In our opinion, the SEC also must provide ample time for firms to comply with the adopted rule(s).
Should We Expect a Self-Regulatory Organization for Advisers?
For many years, broker-dealers have been subject to regulation by FINRA. FINRA serves as a Self-Regulatory Organization (“SRO”). Broker-dealers are examined by both the SEC and FINRA with the SEC providing oversight of FINRA’s activities including examination of various FINRA district offices. With an investment adviser SRO in place, it is likely firms would be examined more frequently and the SEC would be subject to less pressure. However, the SEC would have additional examination responsibility over the new SRO.
The Study on Enhancing Investment Adviser Examinations discussed excluding certain types of advisers, such as investment company and private fund advisers, from SRO regulation. This is predicted to account for about one- third of registered advisers. While the SEC does not oppose an investment adviser SRO in the study, it does list many of the potential drawbacks and pitfalls. The SEC notes strong opposition from many segments of the industry, including investment advisers. The SEC recognizes that having an investment adviser SRO would introduce additional costs although the study does not quantify these costs. The additional layer brings an entire new level of bureaucracy (our word, not the SEC’s). The SEC suggests that there may be multiple SROs for investment advisers or even a SRO with authority that is distinct from FINRA’s. For example, FINRA currently has rulemaking authority as well as examination authority over broker-dealers. The SEC suggests that it could retain rulemaking authority over advisers while granting the SRO (or SROs) examination authority only. Reserving rulemaking authority for itself may help mitigate the possibility of what the SEC refers to as “regulatory arbitrage” that may occur with having multiple SROs. “Regulatory arbitrage” is the practice of a registrant seeking the most favorable regulator or SRO and/or structuring its business to fall under the regulation of the most favorable regulator and/or SRO.
Despite the perceived negatives of a SRO, it seems that one or more SROs, with FINRA being the top contender, will be seriously considered given the budget and resource-constrained environment in which the SEC finds itself. In fact, we believe FINRA will be an adviser SRO in the near future given that we know that FINRA has recently hired ex-SEC staff with only adviser experience.
In Summary
What the SEC has told us with respect to pushing back registration deadlines for private advisers is limited. This leaves many investment advisers hanging, and preparing to register by the July 21st date nonetheless. This may not be a bad approach given that advisers may soon be subject to a vetting process in order to register with the SEC.[2] In many states mid-sized advisers have no idea who to register with by July 21st. The industry is seeking clarification and given the fast-approaching deadline, they are seeking that clarity now. In a similar, but less urgent, vein, the SRO decisions are of concern to many advisers, including those that will be required to register soon. Advisers want to know who their regulators (plural) may be and what their responsibilities will be under the regulatory landscape. The SRO matter is more complex in some respects than the possible delay in registration in that it involves numerous players and moving parts.
[1] http://www.sec.gov/news/studies/2011/914studyfinal.pdf
[2] In a February 10th speech, SEC Commissioner Elisse B. Walter offered her support that new investment advisers seeking registration with the SEC should be subject to a substantive review prior to being “approved” for registration with the SEC. While it would likely not prevent most advisers from ultimately being registered, the “vetting process”, similar to what new broker-dealers currently are subjected to, would add additional costs to the registration process as well increase the time frame to register.
