| November 21 2011
In July, regulation of more than 4,000 registered investment advisors (RIAs) shifted from the Securities and Exchange Commission (SEC) to the individual state authorities. This change was required by the Dodd-Frank Wall Street Reform Act, which was signed into law in the summer of 2010.
This change in regulatory requirements is one of number of reforms included in the Dodd-Frank Act, including requirements for RIAs to provide "plain English" disclosures in their Form ADV. Investment advisors will be most affected by these changes, but consumers may also benefit, since a more effective regulatory structure could help protect their assets. In addition, providing clear information about advisors could help them make more informed investment choices.
The Dodd-Frank Act attempts to fix some of the problems with financial industry regulation that were introduced by the National Securities Market Improvement Act (NSMIA) of 1996. Under that law, RIAs with less than $25 million in assets under management (AUM) were regulated by state securities departments. Firms with more than $25 million AUM were regulated by the SEC. This change was intended to allow the SEC to concentrate on examining larger firms.
However, the 1996 law introduced significant confusion. States now were responsible for approving investment advisor representatives, regardless of the size of their RIAs. As a result, states could examine IA reps, but not RIAs, while the SEC could examine IA reps, but rarely did so. After the NSMIA reforms, the SEC focused primarily on the largest firms, a situation that has negatively affected investors, since many RIAs were never examined by the SEC.
Under the Dodd-Frank Act, states are now charged with regulating RIAs with AUM of less than $100 million, a significantly greater threshold than that established by NSMIA. About 4,200 RIAs will now be under state regulation, a significant burden at a time when most states are facing revenue shortfalls and budget cuts. In addition, the SEC is now responsible for regulating 10,000 hedge funds and thousands of private equity firms as well as for conducting additional studies of how markets are regulated.
Both the SEC and individual states face significant challenges in this new regulatory environment. Yet, in the long run, the shift should benefit investors. For our part, we will continue to strive to provide high-quality services that put your financial interests first.
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