Transition from SEC to State Investment Adviser Registration

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1 Transition from SEC to State Investment Adviser Registration March 17, 2011 Presented by: Linda Paullin-Hebden Shane B. Hansen (248) (616)

2 Today s topics... Who must transition; When and how to transition; Michigan registration OFIR s orders Life as a multi-state RIA; and NASAA s coordination and rulemaking. 2

3 Who must transition from SEC Registration? Generally, all advisers with assets under management of under $100 million must register with state regulators. Exceptions to this rule are: Advisers with assets of less than $25 million which do business in 30 or more states; and Advisers with assets between $25 million and $100 million which do business in 15 or more states. 3

4 How Do I Make the Switch? All advisers registered with the SEC on July 21, 2011 must amend their Form ADV by August 20, 2011 reporting AUM within prior 30 days. Federally registered advisers no longer eligible must withdraw and transition to State registration by October 19,

5 Amendments to Form ADV Part 1 Amendments generally seek additional information about: Private funds adviser s advice; The adviser's advisory business and conflicts of interest; The adviser s non-advisory activities and financial industry affiliations; and Additional amendments designed to improve the SEC s ability to assess compliance risks and to identify and address certain incentivebased compensation arrangements. 5

6 Item 1: Reporting $1 Billion in Assets of Adviser Section 956 of the Dodd-Frank Act requires the SEC to adopt rules or guidelines addressing certain excessive incentive-based compensation arrangements, including those of investment advisers with $1 billion or more in assets. Item 1 would require each adviser to indicate whether it had $1 billion or more in assets as of the last day of the adviser's most recent fiscal year. 6

7 Item 1: (Continued) Item 1 also would be amended to require an adviser to provide contact information for its chief compliance officer and to disclose whether it or any of its control persons is a public reporting company under the Securities Exchange Act. Item 1 would be amended to give advisers the option of picking "limited partnership" as a form of organization. 7

8 Item 2: Registration Eligibility Item 2 would require each adviser or applicant to identify SEC registration eligibility: Is a large adviser (having $100 million or more of regulatory assets under management); Is a mid-sized adviser that does not meet the criteria for state registration and examination; Has its principal office and place of business in Wyoming (which does not regulate advisers) or outside the United States; 8

9 Item 2: (Continued) Meets the requirements for one or more of the exceptive rules under section 203A of the Act (as amended); Is an adviser (or subadviser) to a registered investment company; Is an adviser to a business development company and has at least $25 million of regulatory assets under management; or Has some other basis for registering with the Commission. 9

10 Item 5: Advisory Business Information Item 5 will require SEC registered advisers to: Disclose the number of employees that are registered as investment adviser representatives or insurance agents; Provide an approximate number in response to the questions about employees instead of checking a box corresponding to a range of numbers; Disclose whether the adviser's clients include business development companies, insurance companies and other investment advisers; 10

11 Item 5: (Continued) Distinguish pension and profit-sharing plans subject to ERISA from those that are not; Indicate the approximate amount of its regulatory assets under management attributable to each client type; Disclose the approximate percentage of the adviser's clients that are not United States persons; Disclose in response to Item 5.G. whether the adviser provides portfolio management for pooled investment vehicles, other than registered investment companies, and whether it provides educational seminars or workshops; 11

12 Item 5: (Continued) Require an adviser to provide the SEC file number for a registered investment company if it provides portfolio management for an investment company; and Require advisers to select from a list the types of investments about which it provided advice during the fiscal year for which it is reporting. 12

13 Items 6 and 7: Other Business Activities Items 6 and 7 of Part 1A will be amended to require the following: Expand the lists in both Items 6 and 7 to include business as a trust company, registered municipal adviser, registered security-based swap dealer and major security-based swap participant; Add accountants (or accounting firms) and lawyers (or law firms) to the list in Item 6; Clarify in the instructions to Item 7 that advisers are to include related persons that are foreign affiliates; 13

14 Items 6 and 7: (Continued) Add new Section 6.A. to Schedule D that would require advisers to list the names of any other business in which the adviser engages and the nature of the business; Modify Item 6.B. to require advisers primarily engaged in another business under a different name to also provide that name in Section 6.B. of Schedule D; Amend Section 7.A. of Schedule D to require that advisers provide identifying information for any type of related persons (not just those that are investment advisers or broker-dealers as currently required); 14

15 Items 6 and 7: (Continued) Expand the information collected on related persons to include more details about the relationship between the adviser and the related person; and Require the adviser to report if a related person is either (i) an investment adviser (whether or not exempt from registration), or (ii) a bank or futures commission merchant that is a related person is a qualified custodian for client assets under the adviser custody rule. 15

16 Item 7.B.: Private Fund Reporting Completion of Section 7.B. only for a private fund that the adviser (and not a related person) advises. Use of new term private fund definition so as to require advisers to report pooled investment vehicles regardless of whether they are organized as limited partnerships. Not required to report funds that are advised by affiliates. Sub-Adviser is permitted to exclude private funds for which an adviser is reporting on another Schedule D. 16

17 Item 7.B.: Private Funds Adviser sponsoring a master-feeder arrangement is permitted to submit a single Schedule D for the master fund and all of the feeder funds that would otherwise be submitting substantially identical data. Adviser with a principal office and place of business outside the United States is not required to submit a Schedule D for a private fund that is not organized in the United States and that is not offered to, or owned by, United States persons. 17

18 Item 7.B.: (Continued) Expand the indentifying information required in Section 7.B. of Schedule D to require that the adviser disclose the following which will be publicly available on the SEC's website: The name of the private fund; The state or country where the private fund is organized; The name of the general partner, directors, trustees or persons occupying similar positions; 18

19 Item 7.B.: (Continued) Information about the organization of the fund, including whether it is a master-feeder fund; Information about the regulatory status of the fund and its adviser, including regulatory exemptions relied upon by the fund and adviser; Whether the adviser is a sub-adviser to the fund and identification by name and SEC registration number of any other advisers to the fund; The size of the fund, including both gross and net assets; 19

20 Item 7.B.: (Continued) The investment strategy employed by the fund; A breakdown of assets and liabilities held by the fund by class and categorization in the fair value hierarchy established under GAAP; The number and type of investors in the fund and the minimum investment requirements; Characteristics of the fund that may present the fund manager with conflicts of interest with fund investors of the sort that may implicate the adviser's fiduciary obligations to the fund and, in some cases, create risks for the fund investors; and The service providers to the fund, including among other things, identity, location and relationship to the adviser. 20

21 Item 8: Participation in Client Transactions The SEC proposes the following changes to Item 8: If an adviser has discretionary authority to determine the brokers or dealers for client transactions and if it recommends brokers or dealers to clients, it must disclose whether those brokers or dealers are related persons of the adviser; An adviser that indicates that it receives "soft dollars would be required to report whether those benefits qualify for the safe harbor under Section 28(e) of the Securities Exchange Act; and An adviser would be required to indicate whether it or its related person receives compensation for client referrals. 21

22 Amendments to Part 1 for Custody The SEC has amended Part 1 as a result of changes to the new custody rule requiring disclosure of the following: Amount of assets for which the adviser has custody; Amount of assets for which a related person has custody; Additional disclosures relating to account statements; and Name and address of the independent public accountant engaged for audit or surprise examination. 22

23 What do I do to switch? Part 1 and Part 2A of Form ADV must be submitted through the IARD system. If you sponsor a wrap fee program, your wrap fee brochure must be submitted through IARD. State registered advisers must also submit ALL Part 2Bs (the supervised persons brochure) through IARD. 23

24 OFIR - Form ADV Part 2A and 2B OFIR 10/7/10 letter - Tracks with SEC requirements Part 2A - Item 19 state-required info Principal executive officers Other businesses and time committed Performance-based compensation Arbitration awards and civil litigation Does NOT cover settlements Relationships with securities issuers Part 2B - Item 7 state-required info 24

25 Other filing requirements... An investment advisory contract which includes the following: The services to be provided, the term of the contract, the investment advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of termination or non-performance of the contract, and any grant of discretionary power to the investment adviser or investment adviser representative; The investment adviser will not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client; That no assignment of the investment advisory contract may be made without the consent of the other party to the contract; and If the investment adviser is a partnership, it will notify the other party to the investment advisory contract of any change in the membership of the partnership within fifteen (15) days after the change. 25

26 Other filing requirements... An accrual basis balance sheet in conformity to Generally Accepted Accounting Principles (GAAP) no older than 45 days signed as to its accuracy by an officer, partner, member, or sole proprietor. 26

27 Michigan s securities law... Michigan Uniform Securities Act Effective October 1, 2009 Based on 2002 model act 17 states Directs OFIR to promote uniformity Gives OFIR rulemaking discretion Currently, no OFIR rules adopted 27

28 OFIR s transition orders... First Transition Order Addresses registration, renewals, and amendments Prescribes the content of investment advisory services contracts Requires IAR registration broader definition than federal IAR 28

29 OFIR s transition orders... Second Transition Order N/A Third Transition Order Prescribes the books and records by reference to the SEC s rules; Form ADV delivery same as SEC Modifies the IAR examination waivers 29

30 OFIR s transition orders... Fourth Transition Order Modifies the IAR examination waiver IAR registration deadline 11/1/10 (passed) Fifth Transition Order Use of senior-specific certifications and professional designations 30

31 OFIR s transition orders... Sixth Transition Order Adopts the SEC custody rule Adopts the SEC performance fee rule Expands institutional investor to include private funds with accredited investors or qualified clients 31

32 OFIR s anticipated rules OFIR likely to adopt NASAA models Michigan rulemaking process Special drafting and review process Legislative committee review Public comment period 32

33 Life as a multi-state RIA... State securities jurisdiction - Place of business locations More than 5 clients Registration in up to 14 states Registration requirements vary Exams primarily by home state 33

34 Life as a multi-state RIA... Multi-state compliance program Multi-state compliance manual Monitoring registration requirements Firm, IARs, and solicitors Initial registration and renewals Monitoring state law developments 34

35 NASAA s role among the states NASAA s coordinating efforts 50-state agreement to share info NASAA Electronic Examination Modules (NEMO) database Biennial examination sweeps NASAA examiner training project NASAA s model rulemaking 35

36 Questions? 36

37 Upcoming Webinars April 14 - Final model privacy form under the Gramm-Leach-Bliley Act May 12 - Impact of fee disclosures under ERISA 408(b)(2) 37 Grand Rapids. Holland. Lansing. Muskegon. Southfield. Sterling Heights

Understanding and Preparing for the Switch for Mid-Sized Advisors

Understanding and Preparing for the Switch for Mid-Sized Advisors Copy of Slides To access a copy of the slides from today s presentation please go to: http://www.ria-complianceconsultants.com/switchsectostate.html