Normally, it is small firms that need more time to update their technology systems so that they can comply with new regulatory requirements.

A recent communiqué from the Securities and Exchange Commission to David Massey, president of the North American Securities Administrators Association (NASAA), however, has the regulator looking like the small company. The one that is outgunned, overwhelmed and needs more time and manpower to do its job.

Advisory firms with between $25 million and $100 million of assets under management have been anticipating a switch to state regulation ever since Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act last year. Apparently, the Security and Exchange Commission (SEC) needs additional time to reprogram the Investment Adviser Registration Depository (IARD) system, so that it can accept advisors’ transition filings.

How much more time?

About four months should do it, according to the letter. Originally, mid-and small-size firms had until July 21, 2011 to declare whether they would remain with the SEC and make the switch. In last Friday’s letter, the regulator seemed to favor extending the deadline for smaller firms to declare whether they are going stateside or staying with the SEC, giving them until the first quarter of 2012.

There is nothing wrong with giving mid-and small-sized advisory firms an extension to come into compliance. Certainly, the SEC also needs to upgrade its equipment to ensure that it can monitor independent financial advisors. The regulator needs to run those upgrades at some point, and it makes sense that one project or another would be delayed as it made those improvements.

But it is hard to dispel the image of SEC inspectors, toiling away behind mounds of documents, laboring to keep tabs on all of the financial advisors that qualify for its oversight. All the while, they are almost certainly overwhelmed and underfunded.  

“It raises an interesting question: ‘Have we put such a burden on securities administrators that they will not be able to carry out their functions?’” said M. Holland West, a partner at Dechert, a New York-based law firm. “The SEC is totally swamped, because Dodd-Frank imposed so many obligations on the SEC to conduct studies and propose and change rules.”

As Holland rightly noted, Dodd-Frank require many studies to be carried out, and the design and implementation of a whole raft of new rules.

Just think: The SEC’s letter addressed one other issue—that of registration for private and venture capital fund advisors—aside from the deadline extension. How many more areas is the agency dealing with, each with its own set of requirements, rules and technology?

“These rules, we need to get them right,” Holland said. “The SEC and it staff are scrambling at this point. There are just so many hours in the day to get this done right, without adversely affecting the market.” Similarly, says Holland, the state securities regulators have fallen behind and are not ready to handle the influx of new responsibilities coming to them. About 4,000 financial advisory practices fall into the category “mid-sized advisers,” and could be switched over to state supervision once the new rules take effect.

Massey, who is also deputy securities administrator for the North Carolina Securities Division, differs with Holland’s assessment of state readiness. In North Carolina, securities regulators have been educating advisors for about six months on what to expect as they make the switch. In some states, regulators have taken their message on the road, making presentations to advisors potentially affected by the switch. NASAA has posted informational and how-to materials on its Web site to walk advisors through the conversion process, Massey said.

“State regulators are ready and have been ready,” Massey said in a telephone call. The technology behind the IARD is one of the deal killers, the wild card, Massey said. Until that system is adequately upgraded to handle all of the conversions, it will be impossible for the SEC to implement the switch.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access