By the thousands, midsized investment advisers are migrating to states like California, Texas, Florida and New York.  Are state regulators up to the task?  Will they ever be? 

According to the WSJournal, regulation of 4,100 IA's with $25 to $100 million of assets under management ("AUM"), will transfer in July from the SEC to state regulators.  The switch is designed to improve scrutiny of the midsized firms.  The switch probably couldn't have come a a more inopportune time.  The states are facing huge cutbacks in response to large fiscal deficits and decreasing tax revenues. 

    Which begets the question:  How effective can states be in regulating advisers and, in turn, protecting consumers?   Which begets this question:  Before the changeover in July, should investment advisers be put under the control of an industry-funded national regulator or left to the states and the SEC.  An SEC report on this option is due out later this month.

    The Epi-Centers of the Migration.  Data drawn from the latest "home state" registrations of the advisers show that a handful of states will bear the brunt of the new regulatory workload - California, Florida, New York and Texas will account for 35% of all firms switching over. Yet, multibillion-dollar budget deficits in each cast a funding shadow over preparations for the impending increase in their regulatory workload.

1.  California expects it will regulate 3,800 IA's, up from the current 3,070.  The state uses just 8 full-time staffers for registering and examining investment advisers. 

2.  Florida's 75 full-time staffers expect to cover 1,800 IA's, from its current 1,100.

3.  New York has no regular exam program for the more than 1,500 advisers it oversees, relying instead on its extensive statutory powers under the Martin Act to punish misconduct if problems emerge.  The New York attorney general's office declined to comment on its plans to oversee the new firms coming under its purview.

4.  Texas expects the IA numbers to double to about 2,400 from 1,200, has had a request for an extra 10 staff approved. The money to fund the extra staff hasn't been released.  The State Securities Board is adamant that financial pressures won't mean the new firms escape scrutiny:  it will "handle the shift regardless of whether we get the extra funding we've requested." 

Note:  This story continues in the next blog posting - what investment advisers might expect under the new state regulatory regime.

    For further details, click onto:   [WSJournal, 1/3].