Time is Ticking for SEC-to-State Transition

Zach Gronich, President and CEO of RIA in a Box, says that advisers who will need to register at the state level should be aware of the paperwork awaiting them.  

For approximately 3,300 registered investment advisers (RIAs) nationwide, the days of minimal paperwork and low probability of an audit will soon be a thing of the past. In an effort to lessen the workload of the Securities and Exchange Commission (SEC), the Dodd-Frank Act has mandated that RIAs with assets under management (AUM) above $25M and below $100M will need to register with their state and will no longer fall under the jurisdiction of the SEC. This will have major ramifications for those advisers, says Gronich.

However, not all RIAs in that AUM range will have to make the switch. Wyoming, Minnesota and New York do not regulate midsize advisers, so RIAs in those states will remain registered through the SEC. With a few other exceptions, all other advisers will need to register at the state level. They have until March 30, 2012 to declare their AUM and must obtain their state registration by June 28, 2012. RIAs will be allowed to declare their AUM starting January 1, 2012.

To register with the SEC, an RIA just had to submit forms ADV and ADV2. “The SEC doesn’t ask for much up front or ongoing,” says Gronich, which will be very different at the state level. He gave some examples: New Jersey is asking for RIAs to submit a balance sheet and Kansas wants a policy and procedure manual – things RIAs have never had to submit for approval. Each state will ask for different things; some will have exam requirements, for instance.

This begs the question – will the states reject any RIA applications, potentially from RIAs that are already up and running? Gronich says it will be interesting to see how it all unfolds; some states have even called his consulting firm asking for ideas about what they should be looking for. “[The states] are afraid if they start asking for all these documents that neither side is familiar with, it will kind of be a mess,” he said.

Gronich gave Illinois as another example of a state that has a reputation of being very thorough in its registration procedures. He believes most firms are not prepared to handle the level of detail the state will be asking for.  Whereas the SEC may hardly look at the ADV, Illinois will scrutinize it, he says. “What are the fees for, top of range and bottom of range, how do you define ‘hourly fees,’ or ‘financial planning,’ etc.,” he said – it will not be simple.   

The other ramification of going under state jurisdiction, in addition to the added paperwork, will be the increased likelihood of an audit. “The SEC is only auditing about 10% of RIAS under their jurisdiction. The states are auditing 5 to 8 times that many that are already under their jurisdiction. In Ohio and Texas – you will be audited.  If the SEC is going to continue to audit 10% as it has been doing, then the number of audits should sky rocket for the firms transitioning to the states.  Most states audit 100% of their firms,” says Gronich.

Don’t Wait 

Every state will have different requirements ranging in complexity. The key, says Gronich, is to not wait much longer to figure out what needs to be done. RIAs need to first find out if they will be required to register at the state level or if they qualify to stay under SEC jurisdiction. If they have to register with their state, the RIA needs to find out what to submit.This may require the help of a consultant or law firm.

Gronich suggests taking care of these first steps come November or December of this year. Then, you’ll be ready to declare your AUM in early January. If you wait to declare your AUM until late March (with a deadline of March 30), the states may become overwhelmed with paperwork and not get to your registration in time for the June 28 deadline. And you would have a hard time fighting them for approval, says Gronich.