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New Investment Adviser Requirements of the Dodd-Frank Act

What CPAs should know.

January 2011
by Wesley Nissen and Milton Buckingham/Journal of Accountancy

The Dodd-Frank Wall Street Reform and Consumer Protection Act, PL 111-203 (Reform Act), which was signed into law by President Barack Obama in July 2010, will require sweeping changes to virtually all areas of the financial services industry in the United States and will affect a wide variety of businesses and professions, including CPAs, investment advisers and financial planners. One area of particular importance to CPAs is new requirements regarding the registration of investment advisers under the Investment Advisers Act of 1940 (Advisers Act) and related matters.

This article provides an overview of the top provisions of the Reform Act relating to investment advisers and financial planners of which all CPAs should be aware (Title IV of the Reform Act), as well as other relevant provisions of the Reform Act, both for themselves and their clients. Many aspects of the Reform Act will not take effect until July 2011, and its full implications will not be known until the U.S. Securities and Exchange Commission (SEC) and other regulatory agencies complete the many rulemakings, studies and reports the Reform Act requires. (View a timetable of planned guidance releases and other mandated governmental actions here.) However, CPAs would be well-served to familiarize themselves with the following aspects of the Reform Act now, so that they may position themselves and their clients for the brave new regulatory world that is fast approaching, if not already here.

Federal vs. State Investment Adviser Registration

The eligibility threshold for SEC registration has been raised, requiring many registrants to switch to state registration. One of the most significant changes for CPA financial advisers wrought by the Reform Act is its new eligibility requirements for registering as an investment adviser with the SEC under the Advisers Act (federal registration) as opposed to registration with one or more state securities regulatory authorities under state law. Under the investment adviser regulatory scheme in the United States, an investment adviser registers either with the SEC or the states but not both. The Reform Act shifts to the states the regulatory responsibility for monitoring many smaller advisers so that the SEC may concentrate its examination resources on larger advisers.

Under current law, an investment adviser generally is prohibited from registering with the SEC under the Advisers Act if it has less than $25 million of assets under management (and instead must register with a state, if required by applicable state law). If, however, an investment adviser has at least $25 million but less than $30 million of assets under management, the adviser may choose to register with the SEC instead of a state. If the adviser has $30 million or more of assets under management, the adviser must register with the SEC, unless an exemption is available.

Section 410 of the Reform Act effectively raises these eligibility thresholds by prohibiting SEC registration unless the investment adviser has more than $100 million of assets under management, in which case the adviser is required to register with the SEC, unless an exemption is available. If, however, the adviser has between $25 million and $100 million of assets under management and is not subject to registration and examination by its home state, then it is required to register with the SEC, notwithstanding that it does not meet the $100 million threshold. In addition, if an adviser with between $25 million and $100 million of assets under management is otherwise required to register with 15 or more states, the adviser may elect, but is not required, to register with the SEC. The Reform Act gives the SEC the ability to raise the $100 million threshold by rule. The foregoing new eligibility requirements take effect July 21, 2011.

Therefore, SEC-registered investment advisers with more than $100 million of assets under management should not be affected by the Reform Act’s reallocation of federal and state authority. The Reform Act will, however, require many SEC-registered investment advisers with assets of less than $100 million to withdraw their registrations and instead register with their home states and possibly other states in which their clients reside, by July 21, 2011. Given that state registration and compliance requirements may differ from the SEC’s requirements and that each state’s requirements may be different from other states’ requirements, registration with one or more states may prove more costly and administratively burdensome than SEC registration.

CPAs with investment advisory clients should consider familiarizing themselves with these new eligibility requirements and, if necessary, reviewing with their clients the federal or applicable state investment advisory registration and compliance requirements, before the compliance date. To help investment advisers prepare to switch from federal to state registration, the North American Securities Administrators Association (NASAA), a voluntary association of state securities regulatory agencies, has launched an online resource, the NASAA IA Switch Resource Center, which is available on the NASAA’s website. The site includes background information, answers to frequently asked questions, and a directory of state contacts. In addition, for more information regarding federal versus state registration eligibility requirements under current law as well as under the Reform Act, see Exhibit 1.

This article has been excerpted from the Journal of Accountancy. View the full article here.