Earlier this week, the U.S. Securities and Exchange Commission (“SEC”) approved a new rule “switching” regulatory responsibility from the SEC to state securities regulators for mid-size investment advisers (between $25 million and $100 million of what will now be known as “regulatory” assets under management).
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Here is a summary of certain key aspects of the SEC’s new switch rule for mid-size investment advisers.
· A mid-size investment adviser registered with the SEC as of July 21, 2011 will be required to remain an SEC registered investment until January 1, 2012.
· As of July 21, 2011, any state or new investment adviser with assets under management between $25 million and $100 million will not be permitted to register with the SEC and must register with the applicable state securities regulator(s).
· Each existing investment adviser, registered with the SEC on January 1, 2012, must file by March 30, 2012 an amendment to its Form ADV identifying whether the SEC registered investment adviser is a mid-size adviser and is no longer eligible to remain registered with the SEC.
· “Regulatory” assets under management will include proprietary and family accounts managed by the investment adviser even if no investment advisory fees are charged.
· The SEC is permitting an existing SEC registered investment adviser to select the date (within 90 days before this Form ADV filing described above) for purposes of calculating “regulatory” assets under management.
· After making this Form ADV filing in first quarter of 2012, an ineligible mid-size investment adviser must withdraw its SEC registration by filing the Form ADV-W within 90 days (no later than June 28, 2012).
· In order to avoid frequent switches, there will be an assets under management buffer. A state registered investment adviser will be required to register with the SEC when it reaches $110 million of “regulatory” assets under management. Once an investment adviser is registered with the SEC, the investment adviser will not be required to file the Form ADV-W and de-register with the SEC until the investment adviser has less than $90 million of “regulatory” assets under management.
· The threshold for the pension consultant exemption available for an investment adviser to register with the SEC has been increased from $50 million to $200 million of pension plan assets under advisement.
· The number of states requiring registration under the multi-state exemption available for an investment adviser to register with the SEC has been lowered from 30 states to 15 states.
Although mid-sized investment advisors will not be able to complete the new SEC filings until after January 1, 2012, investment advisors affected by the rule changes should begin to review and prepare the revised investment advisory documents during the last quarter of 2011. It is estimated approximately 3200 investment advisors will be required to switch to state registration. The state registration process typically includes an in-depth review of, at a minimum, the investment advisor’s entire Form ADV and a sample of any client contracts. Investment advisors should submit their revised documents and applications for registration with the state securities regulators as early as possible during the first quarter of 2012 to allow plenty of time for the states to approve their registrations. An investment advisor waiting until the last minute to begin preparing its documents to apply for state registration may result in the investment advisor not meeting the appropriate regulatory deadlines.