Understanding and Preparing for the Switch for Mid-Sized Advisors

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Sara Griffith
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1 Understanding and Preparing for the Switch for Mid-Sized Advisors

2 Copy of Slides To access a copy of the slides from today s presentation please go to:

3 Presentation Disclosures Although the sponsor of this presentation, RIA Compliance Consultants, Inc. ( Sponsor ), is an affiliate of a law firm and Sponsor may have an individual on its staff that is also licensed as an attorney providing legal services in a completely separate capacity, Sponsor is not a law firm and does not provide legal services or legal advice. A consulting relationship with Sponsor does not provide the same protections as an attorney-client relationship. This presentation is offered for educational purposes only and should not be considered an engagement with Presenter or Sponsor. This presentation should not be considered a comprehensive review or analysis of the topics discussed today. These materials are not a substitute for consulting with an attorney or compliance consultant in a one-on-one context whereby all the facts of your situation can be considered in their entirety. Despite efforts to be accurate and current, this presentation may contain out-of-date information. Additionally, Presenter and Sponsor will not be under an obligation to advise you of any subsequent changes. Information provided during this presentation is provided "as is" without warranty of any kind, either express or implied, including, without limitation, warranties and merchantability, fitness for a particular purpose, or non-infringement. Presenter and Sponsor assume no liability or responsibility for any errors or omissions in the content of the presentation. There is no guarantee or promise that concepts, opinions and/or recommendations discussed will be favorably received by any particular court, arbitration panel or securities regulator or result in a certain outcome. To the extent that you provide RCC with your address, it will be added to RCC s electronic newsletter mailing list regarding compliance issues for investment advisors. You may opt out at any time by calling RCC at or clicking at any time the unsubscribe link on the electronic newsletter. Communication with today s webinar presenter is not protected by attorney-client privilege. Please keep questions during this seminar in a hypothetical form. This seminar session and/or the presentation materials may be recorded, copied and/or shared with third parties and/or posted to our public website.

4 Background Agenda Eligibility for SEC Registration State Transition Requirements and Timeline Amendments Form ADV

5 Background On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ) was signed into law. Under one section of the Dodd-Frank Act, certain provisions of the Investment Advisers Act of 1940 ( Advisers Act ) were amended. These amendments included provisions that reallocate primary responsibility for oversight of investment advisors by delegating generally to the states responsibility over certain mid-sized advisors. These provisions have an effective date of July 21, 2011.

6 Mid-Sized Advisor A Mid-Sized Advisor is an investment advisor that has between $25 million and $100 million of assets under management (AUM).

7 Eligibility for Registration with the SEC Section 203A of the Advisers Act generally prohibits an investment advisor 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 AUM. This provision makes states the primary regulators of smaller advisors and the SEC the primary regulator of larger advisors.

8 Eligibility for Registration with the SEC Section 410 of the Dodd-Frank Act creates a new category of mid-sized advisors and shifts the primary responsibility for their regulatory oversight to the states by prohibiting from SEC registration an investment advisor that is required to be registered as an investment advisor in the state in which it maintains its principal office and place of business and that has AUM between $25 million and $100 million.

9 Eligibility for Registration with the SEC A mid-sized advisor must register with the SEC if: The advisor is not required to be registered as an investment advisor with the state securities commissioner of the state in which it maintains it principal office and place of business; or

10 Eligibility for Registration with the SEC If the advisor would not be subject to an audit by the state securities commissioner of the state in which it maintains its principal office and place of business (NY). Estimated 3,200 SEC registered investment advisors will be required to withdraw their registrations and register with one or more state securities authorities.

11 Eligibility for Registration with the SEC Section 203A(c) of the Advisers Act, permits the SEC to exempt small and midsized advisors from the prohibition on SEC registration and 6 exemptions have been adopted for small advisors.

12 SEC Exemptions Amendments were adopted to three of the exemptions in Rule 203A-2 from the prohibition on SEC registration in Section 203A of the Advisers Act. The exemption in Rule 203A-2(a) from the prohibition on SEC registration for nationally recognized statistical rating organizations ( NRSROs ) was eliminated.

13 SEC Exemptions Rule 203A-2(b), the exemption available to pension consultants, is being revised to increase the minimum value of plan assets required to rely on the exemption from $50 million to $200 million. Rule 203A-2(d), the multi-state advisor exemption, is being revised to allow investment advisors who are required to register as an investment advisor with 15 or more states to register with the SEC. (This was previously 30 states.)

14 Transition to State Registration The SEC adopted a new rule, Rule 203A- 5, to provide for an orderly transition to state registration for mid-sized advisors that will no longer be eligible to register with the SEC.

15 Transition to State Registration Existing Registrants- Under the new Rule, each investment advisor that is SEC registered on January 1, 2012 must file an amendment to its Form ADV no later than March 30, This includes ALL SEC registered investment advisors-regardless of size.

16 Transition to State Registration Will coincide with annual update amendment filing for many investment advisors. Will have to respond to new items in Form ADV Part 1 and identify mid-sized advisors no longer eligible to remain SEC registered. Advisors can choose the date by which it must calculate its AUM reported on Form ADV so long as the calculation is within 90 days of the transition filing.

17 Transition to State Registration Mid-sized advisors that are no longer eligible for SEC registration must withdraw their registrations by filing a Form ADV-W no later than June 28, 2012.

18 Transition to State Registration New Applicants- Until July 21, 2011 advisors applying for registration with the SEC that qualify as mid-sized advisors may register with either the SEC or appropriate state securities authority(ies).

19 Transition to State Registration After July 21, 2011, all mid-sized advisors are prohibited from registering with the SEC and must register with the state securities authorities. Mid-sized advisors registered with the SEC on July 21, 2011 will be required to remain registered with the SEC until they switch to state registration after January 1, 2012.

20 Transition to State Registration After June 28, 2012, the SEC will cancel registrations of advisors no longer eligible to register with the SEC that fail to file the amendment or withdraw their registrations in accordance with the Rule.

21 Transition to State Registration The new Rule requirements will require updates to the IARD system. FINRA has indicated that the updates to reflect the revisions to the Form ADV that were adopted on June 22, 2011 will not be ready until November 2011.

22 Amendments to Form ADV There will be several amendments to Form ADV Part 1A, Item 2.A. to reflect the new threshold for registration and the revisions made to related rules in response to the enactment of the Dodd-Frank Act.

23 Amendments to Form ADV Section 203A(a)(2) of the Advisers Act defines assets under management as the securities portfolios with respect to which an advisor provides continuous and regular supervisory or management services. Instructions are provided in Form ADV to provide advisors guidance in applying this provision and until now have permitted advisors to exclude certain types of assets that otherwise would have to be included.

24 Amendments to Form ADV Instructions being revised to implement a uniform method for advisors to calculate AUM that will be used under the Advisers Act for regulatory purposes in addition to assessing whether an adviser is eligible to register with the SEC. Will now be referred to as regulatory assets under management to acknowledge the regulatory purposes of this reporting requirement and to distinguish for AUM disclosure in ADV Part 2.

25 Amendments to Form ADV Under revised instructions, advisors must include in their regulatory AUM securities portfolios for which they provide continuous and regular supervisory or management services, assets managed without receiving compensation or assets of foreign clients, regardless of whether these assets are family or proprietary assets.

26 Amendments to Form ADV The revised instructions also clarify that an advisor must calculate its regulatory AUM on a gross basis without deduction of any outstanding indebtedness or other accrued but unpaid liabilities.

27 Amendments to Form ADV Form ADV is being amended to require mid-sized advisors registering with the SEC to affirm, upon application and annually thereafter, that it is either: i. Not required to be registered as an investment advisor with the state securities authority in the state where it maintains its principal office and place of business; or ii. Is not subject to examination as an advisor by that state.

28 Amendments to Form ADV Form ADV instructions will be updated to reflect that the required to be registered standard that Congress included in the new section of 203A(a)(2) of the Advisers Act for mid-sized advisors is different from the regulated or required to be regulated standard set forth in section 203A(a)(1) for small advisors. The instruction explains that a mid-sized advisor that is not required to be registered with the state securities authority and must register with the SEC (unless an exemption from registration with the SEC otherwise is available) if the advisor is exempt from registration under the law of the state in which it has its principal office and place of business, or is excluded from the definition of investment advisor in that state.

29 Amendments to Form ADV Example: An adviser with $75 million in AUM that is exempt from registration in the state in which its principal office and place of business is located will have to register with the SEC (unless an exemption from SEC registration is available).

30 Amendments to Form ADV The SEC staff contacted the state securities authority for each state and, based on the information they provided, identified those states that do not subject advisors registered with them to examination. This list has been posted on the SEC website and will also be available to advisors using the IARD to register or amend their registrations. Based on the responses, advisors with their principal office and place of business in NY and WY with AUM between $25 million and $100 million must register with the SEC.

31 Switching Between State and SEC Registration Rule 203A-1 is designed to prevent an advisor from having to switch frequently between state and SEC registration as a result of changes in the value of its AUM or the departure of one or more clients. Rule 203A-1 is being amended to provide a buffer for mid-sized advisors with AUM close to $100 million to determine whether and when to switch between state and SEC registration.

32 Switching Between State and SEC Registration Advisors will now be required to register with the SEC once the advisor has $110 million or more in AUM. Once an advisor is registered with the SEC, it will not be required to withdraw registration until it has less than $90 million of AUM

33 Additional ADV Amendments Part 1, Item 5- Basic information regarding types of services, number of employees, amount of AUM, and number and types of clients. Item 5.B.- Requires advisor to indicate how many employees are registered as investment advisor representatives or are insurance licensed. Now will require a single numerical approximation (instead of range) in response to these questions as well as to the existing questions that ask about employees that perform investment advisory functions or are registered representatives of a broker-dealer, and firms that solicit advisory clients.

34 Additional ADV Amendments Item 5.C. and 5.D.-Requires advisors to report the number and types of clients the advisor services. Amendments will require advisor to: (i) provide an approximate number of clients if it has over 100; (ii) report the approximate percentage of its clients that are not United States persons;

35 Additional ADV Amendments (iii)specify the types of clients that it advises (adding categories for business development companies, other investment advisors, and insurance companies) and the percentage that each client type comprises of its total number of clients (adding a box to check if 100% of an advisor s clients are a particular type); and (iv) report in a new item the approximate percentage (in broad ranges) of assets under management attributable to each client type.

36 Additional ADV Amendments Item 5.G.- Amended to include 2 new types of services: (i) portfolio management for pooled investment vehicles, other than registered investment companies; and (ii) educational seminars or workshops. (Educational seminars or workshops would not include episodic meetings at which the advisors educate existing clients about issues related to the ongoing management of their accounts.)

37 Additional ADV Amendments Section 5.G.(3) of Schedule D- If the advisor selects portfolio management for an investment company in Item 5.G. of ADV Part 1, the advisor must provide the SEC file number for the registered investment company, as well as business development companies that have made an election pursuant to section 54 of the Investment Company Act of 1940, in Section 5.G.(3) of Schedule D.

38 Additional ADV Amendments Item 5.J.- This is a new item being added to require advisors to indicate whether they report, in response to Part 2A, Item 4.B., that they provide investment advice only with respect to limited types of securities.

39 Additional ADV Amendments ADV Part 1, Items 6 & 7- Requires advisors, including exempt reporting advisors, to report financial services the advisor or a related person is actively engaged in providing, from lists of financial services set forth in the items.

40 Additional ADV Amendments Expanding lists of types of financial service businesses in both Items 6.A. and 7.A. Advisors must now report whether it or a related person is a trust company, registered municipal advisor, registered security-based swap dealer, or major security-based swap participant. Also, an advisor must report if it is an accountant (or accounting firm) or lawyer (or law firm). Last, amendments will require advisors to report if it or a related person is a sponsor, general partner or managing member of a pooled investment vehicle, and add an instruction to clarify that advisors responses must include related persons that are foreign affiliates, regardless of whether they are registered or required to be registered in the United States.

41 Additional ADV Amendments The information required on Schedule D relating to Items 6 and 7 will also be expanded.

42 Additional ADV Amendments Item 8- Requires an advisor to report information about its transactions, if any, with clients, including whether the advisor or a related person engages in transactions with clients as a principal, otherwise sells securities to clients, or has discretionary authority over client assets. Three amendments are being adopted to this Item:

43 Additional ADV Amendments 1. If an advisor indicates that it has discretionary authority to determine the brokers or dealers for client transactions or that it recommends broker or dealers to clients, it must additionally report whether any of such brokers or dealers are related persons of the advisor. 2. If an advisor indicates that it receives soft dollar benefits, it must also report whether all of those benefits qualify for the safe harbor under Section 28(e) of the Exchange Act for eligible research or brokerage.

44 Additional ADV Amendments 3. An advisor must report whether it or its related person(s) receives direct or indirect compensation for client referrals.

45 Additional ADV Amendments Item 9- Requires information regarding whether the advisor has custody of clients assets. Amending to require each advisor to indicate the total number of persons that act as a qualified custodian for the advisor s clients in connection with advisory services the advisor provides. Amending various aspects of this Item to provide further clarification of the information already being requested.

46 Additional ADV Amendments Item This is a new item being added to require each advisor to indicate whether it had $1 billion or more in total assets shown on the advisor s balance sheet as of the last day of the most recent fiscal year.

47 Additional ADV Amendments Item 1.J.- Updated to require an advisor to provide contact information for its CCO to give us direct access to the person designated to be in charge of its compliance program. Item 1.K.- Updated to provide an additional regulatory contact for the Form ADV. Item 1- Updated to require an advisor to indicate whether it or any of its control persons is a public reporting company under the Exchange Act.

48 Additional ADV Amendments Item 1.P.- This is new item that requires an advisor to provide a legal entity identifier if it has one. Adopting 3 technical changes with respect to the reporting of disciplinary events: Adding a box to Item 11 for advisors to check if any disciplinary information reported in that item and the corresponding disclosure reporting pages is being reported about the advisor or any of its supervised persons.

49 Additional ADV Amendments A third reason is being added to each disclosure reporting page ( DRP ) that permits an advisor to remove the DRP from its filing by adding a box the advisor can check if it was filed in error. Item 3.D. of Part 2B is being amended to correct a drafting error regarding when the brochure supplement would need to include disclosure regarding the revocation or suspension of a profession attainment, designation, or license.

50 Timeline Summary Rule has been adopted as of June 22, All SEC registered investment advisors will be required to file an amendment to Form ADV between January 1, 2012 and March 30, All mid-sized advisors registered with the SEC as of January 1, 2012 that no longer qualify for SEC registration will have until June 28, 2012 to register with the appropriate state securities regulator(s) and withdraw their registration with the SEC.

51 Timeline Summary If you know you are affected by these changes, do not wait until the last minute to begin preparing for this changes. State registration typically takes longer than SEC registration and with approximately 3200 advisors switching from SEC to state registration, states will be extremely busy, likely resulting in an even longer time frame to process each registration.

52 Timeline Summary Advisors that will need to register in multiple states will need more time to prepare and the registration process will likely take longer. Keep in mind that you will not only need to update your Form ADV, but you will also likely need to update your written supervisory procedures and possibly your client agreements.

53 Timeline Summary You can begin working on all of this prior to January 1, 2012 so that you are ready to file the documents early in the process. If you plan on engaging a consultant with this process, do so as soon as possible in order to avoid getting shut-out like many advisors were with the Form ADV Part 2.

54 About Us Serve Over 450 Investment Advisor Firms Principals Are Industry Experienced Working in Compliance or Law Departments & Hold Professional Credentials Consult with Retail & Institutional Firms Offer Full Array of IA Compliance Services Reasonably Priced at Midwest Rates RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services.

55 Copy of Slides To access a copy of the slides from today s presentation please go to:

56 Schedule Introductory Call via Online Appointment System

57 Thank You Tammy Emsick Senior Compliance Consultant RIA Compliance Consultants, Inc x 102 temsick@ria-compliance-consultants.com

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