Advisor Solutions - Volume 2 Issue 2 Supplement - S1

2010 compliAnce insights

A Look Ahead at the Regulatory Landscape
By Eric Garland

compliance and regulatory experts give their views on the outlook for advisory exams and industry regulatory reform

fter the tumult in the financial markets, it’s no surprise that regulators and legislators are keen to step up their efforts to protect investors. Spectacular frauds such as Bernie Madoff’s Ponzi scheme, as well as the losses suffered by millions of investors, have led to calls for sweeping reforms of the securities and investment industry. The actual steps taken will depend on how several bills move through Congress, including the proposed creation of a Consumer Financial Protection Agency. In addition, there are calls from President Obama and Congress to harmonize the varied rules that regulate registered representatives and registered investment advisors, with a single fiduciary standard to be applied. So what should an independent Registered Investment Advisor (RIA) be prepared for in the months ahead?
A more stringent exAm process

Let’s start with conditions on the ground for independent advisors, most of whom are SEC-registered. In fact, the requirements for SEC registration may themselves be changed. Currently, an RIA must manage more than $25 million in assets, in most cases, to be under the SEC umbrella. The SEC is considering a higher threshold, perhaps $100 million, so that more advisors could be pushed to the state level. One reason for this is that all U.S.-based hedge funds may be required to register, which would swell the ranks of firms the SEC needs to examine. Without significantly more staff

or funding, the SEC’s exam cycle might stretch to 10 years or more under that scenario, according to attorney David Blass, the former head of the SEC’s investment advisory office, who is now with Willkie Farr & Gallagher. “The SEC is very aware that some states don’t have the resources to deal with an influx of advisors,” said Blass. But “if thousands of hedge funds come into the SEC pool,” he said, the SEC could easily raise the bar on its own, since legislation would not be required.¹ So advisors who manage under $100 million should be on notice that they might end up under state registration. If you’re in that category, consider consulting with a securities attorney to find out what compliance and filing requirements you would face. Regardless of size, all RIAs who undergo an SEC exam in the year ahead will find themselves under much greater scrutiny. The fallout from the Madoff fraud, which went undetected by the SEC despite repeated tips and its own exams, “will define their exam process for many years to come,” said Steven Stone, a partner and leader of Morgan Lewis’s Investment Management Practice Group. At the TD AMERITRADE Institutional 2009 Fall Regional Conference, Stone and Anne Flannery, a partner in Morgan Lewis’s Litigation Practice, highlighted several changes in the SEC’s approach to exams, including: • Greater expertise. The SEC is hiring more lawyers to beef up its exam teams. More than a third of its examiners are now getting qualified as certified fraud examiners.

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Advisor Solutions - Volume 2 Issue 2 Supplement

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