[Note:  This is a continuation of preceding story - re: the "exodus" of IA's to state oversight.]

Investment advisers will face much greater scrutiny under state oversight, unlike the regulatory treatment they received while registered with the SEC.  That's what the states are saying.

Cases in Point:  Only 9% of 11,888 SEC-registered advisers were examined by through September 2010.  Some 3,000 SEC-advisers have never been examined. 

It'll be helpful for these midsized advisers to know which camp they fall into - because they will be going to the top of the state examination priority list," said NASAA Director Robert Webster.  NASAA also expressed its confidence in state securities regulators and their ability to "marshall the resources needed for their new role."

    What a Consultant Thinks.  Some think increased state scrutiny could produce a burst of enforcement activity.  "These midsized firms are moving from being little fish in the world of federal scrutiny to very big fish in the arena of state enforcement," said John Gebauer, MD of consultants NRS.  Others say more needs to be done to improve regulation in this area.

    What FINRA Thinks.   FINRA has urged the SEC to recommend a similar industry-funded regulator for investment advisers, and suggested ways it would approach the task if designated with the responsibility. The FSI, or Financial Services Institute, endorsed FINRA, asserting in a letter to the SEC that "the states are not adequately prepared to take on the inspection, examination and enforcement role assigned to them under the Dodd-Frank Act."

    Other Industry Bodies.   Which would include state regulators, are staunchly opposed to FINRA expanding its empire. The IAA - or Investment Adviser Association, which reps SEC-registered advisers - opposes FINRA's "lack of transparency and accountability and its poor track record on enforcement, as well as its bias favoring the broker-dealer model."

FINRA CEO Rick Ketchum rejects such criticism, saying it already acts on "red flags" it spots among IA's at the BD's it regulates.  The brunt of the criticism comes from its handling of the Bernie Madoff broker-dealer exams, and its failure (along with the SEC) to uncover Bernie's Ponzi scheme.  "Some organizations that attacked us for not finding Madoff somehow are appalled by the fact that when we see red flags we will follow them."    For the complete story, click onto:   [WSJournal, 1/3].