State ups oversight of financial advisers

  • Article by: JENNIFER BJORHUS
  • Star Tribune
  • August 2, 2012 - 9:37 PM

A dusty corner of the state Department of Commerce is being reshaped as the agency ramps up its oversight of investment advisers, saying it must do more to ensure that investors are protected.

The move is a response to the federal Dodd-Frank financial regulatory law, which greatly expanded the state's authority over this group of financial planners. But it also is the result of a personal push by Commerce Commissioner Mike Rothman, who said in an interview that the state's neglected securities unit "was not up to the standards I wanted" given the increasing complexity of financial instruments.

"When I started, I immediately identified this area as one that needed to be strengthened," said Rothman.

Rothman took charge of the powerful state agency, which oversees 20 industries, in early 2011. The agency's securities unit had just 3.2 employees to handle the sale and registration of securities such as stock, franchises, time-shares and the general delivery of financial advice, including investment advisers -- about 125,000 business entities altogether, most of them individual agents who work for broker-dealers. There was no appropriate examination process in place for investment advisers, Rothman said.

The agency defines investment advisers as people or firms that receive compensation for giving advice regarding securities to clients. It only registers business entities, not individuals. Commerce officials said they don't know how many unregistered people work as investment advisers in the state.

The Dodd-Frank financial overhaul act increased the responsibility of state regulators from all investment advisers with $25 million or less in assets under management to all those with $100 million or less in assets under management. That pushed the number of advisers in the state's bailiwick from 275 to 385, a 40 percent increase. The Securities and Exchange Commission registers and examines advisers above that threshold. The switch from federal to state regulation, which affects about 2,400 firms nationally, went into effect in June.

Under the change, the state will now be overseeing parts of local investment banks Dougherty & Co. in Minneapolis and Oak Ridge Financial Services Group Inc. in Golden Valley, for instance. Dougherty, which has $56 million in fee-based advisory accounts under management, declined to comment.

Last December, Rothman hired veteran securities lawyer Bob Moilanen, a former partner at Anthony Ostlund Baer & Louwagie in Minneapolis, and charged him with building up the securities unit. So far the unit has added two examiners and is adding a third as it creates a new examination program, which Rothman said he expects to be hammered out by this fall.

Top areas for scrutiny: how advisers handle taking custody of money for clients and whether they provide full disclosures about fees they charge and conflicts of interest they have, for instance, with broker-dealers who compensate advisers for recommending them or making particular trades.

Rothman said he expects the new state examination to be hammered out by fall. The state is testing a pilot examination program with several firms to figure out how much time the audits will take, how much they'll cost and whether to charge advisers a flat or hourly fee. Exams will probably be conducted at least every three years.

Reaction from local investment advisers has been mixed. Some call the regulatory ramp-up a nonissue --"an audit's an audit" one said. Others said they're in wait-and-see mode.

"We just want to make sure that the application of the rule and regulation that we've been subject to for so long at the federal level is the same at the state level," said Roger Kruse, a principal of Coon Rapids-based Foundation Financial Planning, also known as FFP Wealth Management.

Kruse, whose firm has $68 million under management, said the SEC audits could last weeks and are disruptive. He said he doesn't expect that to change with the switch from federal to state regulation. It's just an accepted part of doing business, Kruse said.

"The issue is the state of Minnesota really hasn't had the manpower," he said.

The SEC apparently hasn't either. Bill Strand, principal of Paradigm, Strategies in Wealth Management in Maple Grove, which has $78 million under management, said the SEC in theory examined firms every few years. In reality, he said "it was more like once every 8 to 10 years."

Strand is unfazed by the prospect of more rigorous regulation. "The impact has really been very minimal," he said.

Jennifer Bjorhus • 612-673-4683

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