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News January 29, 2007 Issue

Voluntary Form ADV Part II IARD Filing Coming This Year

Advisers soon will have the opportunity to file their existing Form ADV Part IIs on IARD, for all the world to see.

According to Maryland Securities Commissioner Melanie Senter Lubin, who chairs the North American Securities Administrators Association’s CRD/IARD steering committee, state securities regulators are planning a new pilot program in which hundreds of state-registered advisers will be asked to voluntarily file their Form ADV Part IIs on IARD (yes, that's old Part "II," not the yet-to-be-finalized Part "2" that we've all been waiting for). The filings will be made publicly available on the IAPD, the public version of IARD. SEC-registered advisers would be welcome to voluntarily file their Part IIs, as well. However, they will not officially be part of the states’ pilot program.

"What the states are doing is opening up the system for the filing of the existing Part II," said Lubin, speaking at last week’s ALI-ABA investment adviser conference. "That functionality will be available starting later on this year." If all goes well, she said, the pilot will begin "probably early fall."

Lubin said that "several hundred" state-registered advisers will be asked to beta test the new filing feature. Beta testing, she explained, is necessary to allow the states to develop guidelines for advisers that are registered in more than one jurisdiction: "How do you manage the system when you get comments from multiple states?" she asked. To that end, state securities regulators are working on "business rules and suggestions on the best way to handle the system," she said. For example, one approach may be for the adviser to wait for all of the relevant states to submit comments on a newly-filed Part II, and then incorporate all of the comments into a second filing.

Lubin emphasized that the Part II filing would be strictly voluntary. "I don’t anticipate anyone [mandating] putting Part II onto the system until we have a new Part 2," she said. The SEC is expected to re-propose Part 2 later this year.

SEC-registered advisers. According to Lubin, SEC-registered advisers will be able to voluntarily file their Part IIs on IARD once the pilot program is launched. "Clearly the push is going to be on the state side, since federal advisers are not required to file the Part II with the SEC," she said (under the SEC’s "filing cabinet rule," a Part II is deemed to be filed with the SEC if it is stored in the firm’s records). However, Lubin went on to suggest that SEC-registered advisers may want to consider filing their Part IIs on IARD, even if not required. "I’ll leave it up to you to consider whether — just from a competitive and marketing standpoint — if the state advisers’ information is up there, whether the federal advisers might want to voluntarily put their Part IIs on the system also," she said.

In other IARD news, Lubin noted that individual investment adviser representative (IAR) filings will be available on IAPD "in the next 18 months or two years."

Lubin provided some interesting statistics based on recent IARD data:

At the human level, most advisers are brokers. Lubin noted that there were almost 225,000 investment advisers representatives on IARD. Of those, slightly more than 200,000 also are registered as broker-dealer agents. "That is a really interesting number," Lubin noted. Think about it this way: Nearly 90 percent of all individuals licensed to provide retail advisory services in the U.S. are affiliated with brokerage firms.

That doesn’t hold true at the firm level, however: Of the 24,481 advisory firms on IARD, only 1,019 are also registered as broker-dealers.

Many SEC-registered advisers may have neglected to make state notice filings. Lubin reported that of the 24,481 advisers currently on IARD, 2,376 pop up as "SEC-only," meaning that they have registered with the SEC but have not made any notice filings. "I have to go home and think about what are these ‘SEC-only’ advisers," said Lubin. "Hopefully they’ve thought about that before they decided to be an SEC-only adviser." The implication: Some of those 2,376 SEC-only firms may have failed to make required state notice filings.

In contrast, Lubin noted that 8,601 SEC-registered firms have made at least one notice filing with the states. And 13,312 advisers are state-registered only.

Some advisers opt for state and SEC registration. Interestingly, 192 advisers are registered with both the SEC and the states. This is something that "firms do at their own option," Lubin explained. "There are provisions in different state laws for dealing with big pensions and other institutional money that [require that] the firms be registered with the states." For those reasons, as well as marketing purposes, she said, some SEC-registered firms have chosen to remain registered with the states.