These next few months will mark the beginning of change for most RIAs — transitioning from SEC registration to state registration. The focus right now revolves around the various registration forms and what firms need to have in order before the shift takes effect.
A New Regulatory Reality
The majority of RIAs have never had the experience of going through a regulatory inspection. In fact, the SEC was reported to have audited only 8–9% of the approximately 11,500 RIAs under its jurisdiction in 2010. However, some states have been increasingly active in regulating investment advisers and registered representatives for years. States like Virginia and Florida have always maintained an active role in the financial industry — whether through inquiries or on-site inspections.
Though we are still waiting to see whether the SEC will pass some of its regulatory authority to FINRA or maintain primary responsibility by outsourcing to other firms, expect the role of the majority of states to increase substantially in the near future. The National Association of State Securities Administrators (NASAA) has reported that 3,000 investment advisers — which have never been examined by the SEC — will go to the top of the state examination priority list.
The Open Question: Capacity
We know that most states will be ramping up regulatory examinations. The real question is whether they have the manpower, and whether additional funding will be allocated to address this new requirement. Time will only tell.
"Be prepared for an increasing number of states to actively regulate their IA firms."
For any RIA firm that has operated for years without ever receiving an examination, now is the time to take stock. Review your compliance program, update your policies and procedures, and make sure your books and records are organized and accessible. The absence of prior scrutiny is not a shield — it simply means the examination, when it comes, may be your first.