Dodd-Frank Regulatory Update:

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Dodd-Frank Regulatory Update  Meet the Missouri
and Kansas Securities Regulators

• Patrick T. Morgan, chief counsel, Securities
  Division
• Rick Fleming, general counsel, Office of the
  Securities Commissioner

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Outline of Todays Content

• I. Introduction to Your State Regulators
• II. Update on SECs Final Rules on Midsized
  Advisers
• III. State IA Regulation What Your Clients Can
  Expect
• IV. State Registration of Investment Advisers
• V. Preregistration Exams
• VI. Audits

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I. Introduction to Your State Regulators Kansas

• Aaron Jack, Kansas Securities Commissioner
• Office of the Securities Commissioner
• 109 SW 9th Street, Suite 600
• Topeka, KS 66612
• T [phone]
• F [phone]
• www.ksc.ks.gov

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I. Introduction to Your State Regulators
Kansas Contact Info

• Questions about IA Switch should be directed to
• Katherine Price
• BD/IA Registration Manager
• Office of the Securities Commissioner
• 109 SW 9th St., Ste. 600
• Topeka, KS  66612
• [phone]
• katherine.price_at_ksc.ks.gov

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I. Introduction to Your State Regulators Missouri

• Matthew D. Kitzi, Commissioner of Securities
• Securities Division
• Office of Missouri Secretary of State
• 600 W. Main St.
• P.O. Box 1276
• Jefferson City, MO 65102-1276
• T [phone]
• F [phone]
• www.sos.mo.gov/securities

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I. Introduction to Your State Regulators
Missouri Contact Info

• Questions about IA Switch should be directed to
• Drew Veatch
• Chief Registration Counsel
• Securities Division
• Office of Missouri Secretary of State
• 600 W. Main St.
• P.O. Box 1276
• Jefferson City, MO 65102-1276
• [phone]
• drew.veatch_at_sos.mo.gov
• Make clear that you are calling with a
  question regarding the IA Switch or registration.

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Exceptions to Midsized IAs Prohibition from SEC
Registration

• A midsized investment adviser can register with
  the SEC after January 1, 2011 if it is a
• multistate advisers, i.e., those IAs that would
  have to register in 15 or more states
• pension consultants
• nationally recognized statistical rating
  organizations

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II. Update on SECs Final Rules on Midsized
Advisers

• What is a midsized investment adviser?
• A midsized investment adviser is an investment
  adviser that has between 25M and 100M in AUM.
• Under Dodd-Franks provisions, a midsized IA will
  generally be prohibited from SEC registration if
  the IA
• is required to be registered with the state
  securities regulator in which it maintains its
  principal office and
• would be subject to examination if it were
  registered with the state securities regulator.
• But there are exceptions to these prohibitions. .
  . .

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Four Important Dates for Midsized IAs that
Transition to State Registration

• July 21, 2011
• Dodd-Frank Act provisions go into effect
• Midsized advisers must be either
• federally registered,
• dually registered,
• solely state registered,
• or exempt.
• January 1, 2012
• 90-day countdown begins for all SEC-registered
  IAs to file amended Form ADV, stating among other
  things, their eligibility to remain federally
  registered
• 180-day countdown begins for ineligible,
  SEC-registered midsized advisers to file Form
  ADV-W
• March 30, 2012 Deadline for filing the amended
  Form ADV
• June 28, 2012 Deadline for filing the Form ADV-W

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Timeline for Midsized Advisers Not Currently
Registered with SEC

• June 24, 2011 July 21, 2011
  January 1, 2012 March 30, 2012 June
  28, 2012
• Federal
• Registration
• Solely State
• Registered
• Exemption

• 90 days to file amended Form ADV
• 180 days to file Form ADV-W and either
• register with state or
• find exemption

Must remain federally registered
until January 1, 2012
PROHIBITED FROM FEDERALLY REGISTERING
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Timeline for Midsized Advisers Currently
Registered with SEC

• June 24, 2011 July 21, 2011
  January 1, 2012 March 30, 2012 June
  28, 2012
• Federal
• Registration
• State
• Registration
• Exemption

• 90 days to file amended Form ADV
• 180 days to file Form ADV-W and either
• register with state or
• find exemption

Must remain federally registered
until January 1, 2012
Required to be federally registered under NSMIA
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New Rule Buffer for Some Midsized Investment
Advisers

• Midsized investment advisers with 100M to 110M
  in AUM may choose federal registration or state
  registration
• Once AUM falls beneath 90M, then the midsized
  adviser must federally deregister and either
• Register with the state regulatory authority, or
• Find an exemption.

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III. State IA Regulation What Your Clients Can
Expect

• Regulatory philosophy States emphasize investor
  protection.
• State-registered IAs can expect to be examined
  more often and more thoroughly than under Federal
  registration.
• The Switch Processing switching IAs is not new
  for state regulators.
• States have been preparing to handle the Switch.
• NASAA www.nasaa.org/industry___regulatory_resour
  ces/investment_advisers/13183.cfm
• Missouri www.sos.mo.gov/securities/iaswitch/

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IV. State Registration of IAs Kansas

• www.ksc.ks.gov/register/iareq.html

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IV. State Registration of IAs Missouri

• www.sos.mo.gov/forms/securities/IA-Checklist.pdf

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V. Preregistration Exams

• An initial examination that auditors do at the
  time the IA submits the required registration
  documents.
• Preregistration examinations typically take 3-5
  days, depending on various factors.
• Auditors examine
• the Form ADV item disclosures, making sure they
  correspond to each other
• disciplinary items and accompanying disclosures
• whether the IA is involved in placing pooled
  investment vehicles
• the client agreement
• custody arrangements and
• financial statements.

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V. Preregistration Exams (contd)

• Most common problem uncovered in preregistration
  exams? Inconsistencies between the
  representations in Form ADV part 1 and those in
  part 2, or even in the client agreement.
• Examples
• The IAs Form ADV part 1 may state that it only
  serves institutional clients, but part 2 says the
  IA serves individual investors as well.
• The IAs Form ADV part 1 says that the IA sends
  monthly invoices to the client, but the client
  agreements state that invoices will be received
  quarterly.
• Tip To streamline the preregistration exam,
  ensure that
• all your clients required documents are timely
  submitted, and
• all representations are consistent.

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VI. Audits

• Purpose
• Types

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VI. Audits Purpose

1. Protecting investors
2. Ensuring that IAs are compliant with the statutes
   and regulations

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VI. Audits Two Types

• 1. Routine
• Usually on-site, sometimes a remote desk audit
• Announced in writing and scheduled in advance
• List of items to be reviewed is provided in
  advance, but subject to change during the exam
• 2. For Cause
• targeted audits
• unannounced
• sometimes part of a focused audit

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VI. Audits Routine

• Areas typically examined include
• Books and records (K.A.R. 81-14-1 Mo. 15 CSR
  30-51.140)
• Financials (K.A.R. 81-14-9(c) Mo. 15 CSR
  30-51.040, -140(F))
• RegistrationForm ADV parts 1 2
• Investment activities
• Complaints
• Advertising and marketing (K.A.R. 81-14-5(d)(11)
  Mo. 15 C.S.R. 30-51.172(1)(S))
• Conflicts of interest (K.A.R. 81-14-5(a)(9) Mo.
  15 CSR 30-51.172(1)(L))
• Custody arrangements (K.A.R. 81-14-9 Mo. 15 CSR
  30-51.100)
• Supervisory/compliance procedures (K.A.R.
  81-14-10 Mo. 15 CSR 30-51.173)
• Business practices
• Advisory fee/compensation structures (K.A.R.
  81-14-5(f) Mo. 15 CSR 30-51.145)
• Kansas www.ksc.ks.gov/register/IAGUIDELINES_521
  2010.pdf

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VI. Audits Routine (contd)

• First Stage On-Site Audit
• Always conducted with at least two auditors.
• May last from one day to one week, depending on
  factors such as, the size of the firm, number of
  representatives, IAs type of business, etc.
• Process
• Introduction of auditors IA staff
• tour the office
• find a place for auditors to work and a copier
  for them to use (Tip your clients should
  prepare those things in advance)
• Gathering of Documents
• Interview
• Primary focus understand the IAs business and
  learn about its operations
• Tip your clients should have the key personnel
  in the office and available for interview
• Auditors can answer questions about the process,
  but cannot answer questions about findings or
  concerns. That comes later.

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VI. Audits Routine (contd)

• Second Stage Office Review
• Once the auditors have left your office, the exam
  is not over.
• Auditors examine documents, interviews back at
  their office. Frequently, additional documents
  or information is required.
• Office review will identify areas of concern,
  issues, and deficiencies.
• Depending on findings, the office review may
  stretch from a few weeks to a few months.

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VI. Audits Routine (contd)

• Most common audit deficiencies
• Failing to maintain applicable books and records
• Inaccurate information on IA website
• Failing to maintain all supporting documents
  related to performance reports prepared by firm
• Not sending invoice of fees if autodeducting fees
• Noncompliance with advertising rules
• Inconsistencies between representations about
  charging clients and how clients are actually
  charged
• Lack of documentation supporting suitability
• No proof of disclosing Form ADV pt. 2 (brochure)

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VI. Audits Routine (contd)

• Third Stage Post-Exam
• Office review results in a deficiency letter with
  a 30-day response time to make the necessary
  changes.
• Tip If more time is needed, communicate ASAP
  with the assigned auditor.
• Once all issues are resolved, the exam is
  officially closed.
• Alternatively, with unresolved issues, your
  clients file may be referred to enforcement for
  follow-up.

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VI. Audits Remote Desk Audits

• Used for out-of-state firms.
• Auditors will send the IA a list of specific
  questions to be answered and documents to be
  provided.
• IA must respond with documents and answers within
  30 days.
• Once received, remote desk audit proceeds
  normally office review, post-exam.

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VI. Audits For Cause

• Initiated due to complaints or specific concerns
  regarding the IA.
• Besides being unannounced, for-cause audits
  proceed according to the same audit steps
• On-site audit
• Office review
• Post-exam