AUM Standards for SEC Advisers May Rise

With state and federal regulators evaluating their ongoing responsibility for the supervision of nearly 20,000 retail registered investment advisers (“RIA’s”), the SEC is currently considering the possibility of doubling the minimum assets under management which are required for registered investment advisers to come under SEC supervision (to $50 million).

Under this scenario, it is estimated that over one third of approximately 9000 SEC registered RIA’s would instantly become subject to state registration requirements which can vary widely by jurisdiction.  This development could prove to be particularly troubling since these advisers would be required to individually register in each state jurisdiction in which they are currently conducting business.  This could become a very time consuming and expensive process that could take months and thousands of dollars to complete. 

In addition to being required to register with any applicable state jurisdictions, the adviser would become subject to specific advisory regulations of their home state (and potentially those of other jurisdictions), which may differ from those enforced by the SEC under the Adviser’s Act.  Most states tend to follow the Adviser’s Act when regulating advisers but do not always follow it exactly and often impose different standards where they feel the need is justified to protect the public interest.

Advisers may also be impacted at an operational level since some major institutional platforms require RIA’s to be SEC registered in order to participate in the program or platform offered.  This is a particular concern for current SEC registered firms (with under $50 million in AUM) who may be forced to deregister under the new proposed AUM guidelines.

Lastly, there is the issue of the States’ ability to handle the potential influx of new registrations and increased supervisory load due to the potential regulation.   It seems almost certain that both registration approval time frames and audit cycles would increase significantly in the short run.  Right now a state registered adviser can expect to be examined once every three years on average.  SEC registered advisers are audited on a risk based regime which will typically subject them to an examination every 1-4 years depending on the nature of their practice and the risk it presents.

At this point in time, the current rules pertaining to the AUM required for SEC registration still apply.  In addition, any state registered adviser who will be crossing $30 million in AUM as of the filing of their next annual amendment will need to immediately initiate a transition to SEC registration and have such transition complete within 90 days of the filing of their annual amendment. 

Regulatory Compliance stands ready to answer your questions on this topic and assist your firm with transitioning to SEC registration if necessary.

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