Patrick T. Morgan, chief counsel, Securities Division&

Rick Fleming, general counsel, Office of the Securities Commissioner

I. Introduction to Your State Regulators II. Update on SEC’s 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

Aaron Jack, Kansas Securities CommissionerOffice of the Securities Commissioner109 SW 9th Street, Suite 600Topeka, KS 66612

T: (785) 296-3307F: (785) 296-6872

www.ksc.ks.gov

Questions about IA Switch should be directed to:

Katherine PriceBD/IA Registration ManagerOffice of the Securities Commissioner109 SW 9th St., Ste. 600Topeka, KS  66612

(785) 296-3307

katherine.price@ksc.ks.gov

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: (573) 751-4136 F: (573) 526-3124

www.sos.mo.gov/securities

Questions about IA Switch should be directed to:*

Drew VeatchChief Registration CounselSecurities Division Office of Missouri Secretary of State 600 W. Main St. P.O. Box 1276 Jefferson City, MO 65102-1276

(573) 751-4136

drew.veatch@sos.mo.gov

* Make clear that you are calling with a question regarding the IA Switch or registration.

A midsized investment adviser can register with the SEC after January 1, 2011 if it is a:1. “multistate advisers,” i.e., those IAs that

would have to register in 15 or more states

2. pension consultants

3. nationally recognized statistical rating

organizations

What is a “midsized investment adviser”? ◦ A midsized investment adviser is an investment adviser

that has between $25M and $100M in AUM.

Under Dodd-Frank’s provisions, a midsized IA will generally be prohibited from SEC registration if the IA:1.is required to be registered with the state securities

regulator in which it maintains its principal office; and2.would be subject to examination if it were registered

with the state securities regulator.

But there are exceptions to these prohibitions. . . .

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

June 24, 2011 July 21, 2011 January 1, 2012 March 30, 2012 June 28, 2012

Federal

Registration

Solely State

Registered

Exemption

Must remain federally registered untilJanuary 1, 2012

PROHIBITED FROM FEDERALLY REGISTERING

June 24, 2011 July 21, 2011 January 1, 2012 March 30, 2012 June 28, 2012

Federal

Registration

State

Registration

Exemption

Must remain federally registered untilJanuary 1, 2012

Required to be

federally registered under NSMIA

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:

1. Register with the state regulatory authority, or2. Find an exemption.

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_resources/investment_advisers/13183.cfm

Missouri: www.sos.mo.gov/securities/iaswitch/

www.ksc.ks.gov/register/iareq.html

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

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.

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 IA’s Form ADV part 1 may state that it only serves

institutional clients, but part 2 says the IA serves individual investors as well.

◦ The IA’s 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 client’s required documents are timely submitted,

and all representations are consistent.

Purpose Types

1. Protecting investors2. Ensuring that IAs are compliant with the

statutes and regulations

1. Routinea. Usually on-site, sometimes a “remote desk audit”b. Announced in writing and scheduled in advancec. List of items to be reviewed is provided in

advance, but subject to change during the exam

2. “For Cause”a. targeted audits b. unannouncedc. sometimes part of a focused audit

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))

◦ Registration—Form 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_5212010.pdf

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, IA’s 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 IA’s 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.

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.

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)

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 client’s file may be referred to enforcement for follow-up.

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.

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