High anxiety
While federal agencies conduct scores of studies and write hundreds of regulations implementing the sweeping Dodd-Frank financial-reform law, investment advisers wait with trepidation
While federal agencies conduct scores of studies and write hundreds of regulations implementing the sweeping Dodd-Frank financial-reform law, investment advisers wait with trepidation.
“They look at this change with the worst-case scenario in mind,” said Craig Gordon, director of correspondent and advisory services at RBC Advisor Services. “It’s not what they know [that’s bothering them], it’s what they don’t know right now.”
The 2,300-page legislative package touches on nearly every facet of the financial industry — in some cases with a tap, in others with more of a punch. For the most part, provisions affecting advisers are tucked away in a section of the bill that drew little controversy.
“Relatively speaking, investment advisers get off scot-free,” said Brian Hamburger, managing director of MarketCounsel, a regulatory compliance consulting firm.
What is in the bill — changes ranging from which government entity oversees advisers to the potential for a uniform standard of care for anyone dispensing investment advice to retail investors — combined with other recent regulatory changes, including modifications to adviser disclosure forms and increased custody audits, has created mounting anxiety for the advisory business.
“We’ve had a dearth of regulatory and legislative activity over the last several years,” Mr. Hamburger said. “Compared to the prior period, [Dodd-Frank] is significant.”
The recent wave of regulation might be the reason that advisers responding to InvestmentNews‘ annual Industry Attitudes survey ranked “regulatory overload” as the second-biggest issue currently facing the industry, right after “economic problems.”
The survey also shows that advisers are wary of the Dodd-Frank reforms, with 67.9% indicating that the measure is either “not a good law” or “a disaster.”
SUSPICIONS ABOUT DETAILS
The fact that Congress has left so much to the fine tuning to the Washington regulatory process is adding to the atmosphere of fear — and, perhaps, even loathing.
“They know something real is going on,” Mr. Gordon said. The law “gets a lot of publicity, but it’s not specific. It’s not ready for digesting yet. It’s still in that cloud of uncertainty.”
Perhaps the most concrete change to the advisory business has to do with the transfer of oversight of advisers with assets under management of between $25 million and $100 million from the Securities and Exchange Commission to state regulators.
The move, which will affect about 4,200 advisers, was made to give the SEC more capacity to oversee private funds. As part of the effort to monitor systemic risk in the financial markets more accurately, Dodd-Frank mandates that advisers to hedge funds and private-equity funds with assets of more than $150 million register with the SEC.
By next July, advisers that will come under state regulation will have to sign up in their individual states, introducing them to a host of changes, according to Zachary Gronich, chief executive of Gronich Wealth Management Inc. and the compliance firm RIA in a Box.
For instance, SEC registration does not have any balance sheet requirements. But advisers in Arkansas must maintain $12,000 in cash or cash equivalents. Oregon and Alabama require $10,000 bonds.
There’s also the matter of examinations. In some states, advisers who have been working in the field for years may suddenly have to take tests to get state approval to practice.
“A lot of states are discussing doing a waiver, but that’s not a done deal,” Mr. Gronich said. “It’s going to be a mess.”
State securities administrators, however, asserted that the “switch,” as they call it, will go smoothly. At the annual meeting of the North American Securities Administrators Association Inc. last month, the organization’s officials rolled out their program to facilitate the transition.
John Walsh, associate director and chief counsel in the SEC Office of Compliance Inspections and Examinations, said at the meeting that his agency and NASAA are cooperating “seamlessly” and that the SEC will promulgate rules about the switch before the end of the year.
Maryland Securities Commissioner Melanie Senter Lubin said that with the change in the Form ADV-2 already looming, it might be a good idea for advisers to wait for the SEC rule before making the switch to the states.
“It’s a little early to say exactly what you do,” she said. “I don’t think anything is etched in stone.”
For the most part, changes that affect advisers — such as the state registration requirement — stirred little push-back during congressional debate on financial reform.
It’s not yet clear whether some higher-profile and controversial provisions might have an effect on the advisory business.
The creation of the Consumer Financial Protection Bureau generated fierce opposition from Republicans. The GOP is likely to try to rescind that provision if it takes control of the House — and maybe even the Senate — in next month’s midterm elections. The new agency is charged with oversight of mortgages, credit cards, student loans and other kinds of lending.
Those areas don’t apply directly to financial advisers. In fact, the agency was not given any jurisdiction that overlaps with the SEC or state securities offices. But like so much that happens in Washington, regulatory reach depends on who winds up leading the agency.
“To have this bureau out there is a giant question,” Mr. Hamburger said. “It comes down to how they execute.”
Even if the regulator stays in its lane, the rules it promulgates may have an indirect effect on advisers.
NO ‘FREE PASS’
“This is a competitive industry,” said Chris Walters, executive vice president of the CitizensTrust division of Citizens Business Bank. “We don’t get a free pass. Whatever affects the larger banks, you’re going to have to deal with as a smaller business.”
Figuring out exactly what changes Dodd-Frank will usher in and how to respond already is cutting into advisers’ time. Richard Jackson, a principal at Schlindwein Associates LLC, is anticipating “more reporting and regulatory scrutiny,” and an increase in the number of SEC audits.
He and his colleagues are spending several hours a week in law firm seminars or on conference calls with industry groups to determine the impact of Dodd-Frank.
“It’s definitely a work in progress,” Mr. Jackson said. “It’s going to evolve over time.”
E-mail Mark Schoeff Jr. at [email protected].
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