A new law clarifies

SEC, States Divide Adviser Registration

On July 8, the Investment Advisers Supervision Coordination Act took effect, clarifying who has to be registered with the Securities and Exchange Commission and who has to be registered with one or more states. Previously, many advisers had to register with both states and the SEC. The new law applies to all CPAs providing investment advice who do not fall under the so-called accountants exemption.

On the surface, the provisions are simple: The SEC supervises advisers managing $25 million or more in client assets and the states supervise those managing less. However, there are exemptions and subtleties. For example, to say you have $25 million under management and are thus eligible for SEC supervision, you have to show you have discretionary authority, Stephanie Monaco, a partner in the Washington, D.C., law firm of Morgan, Lewis & Bockius, told the Journal . But nondiscretionary advisers may still be able to include nondiscretionary assets that they manage as part of the $25 million floor—making the advisory entities exempt from state registration—if they can show they have ongoing responsibility to select or make recommendations based on client needs.

Thorny issues
CPAs with one office who do not meet the $25 million exemption probably will have to work with one state. But such advisers with only offices in several states will have to work with each states regulations. "Most larger CPA advisers will be better off if they can register with the SEC. Its a lot easier to file with the one agency than with 20 states." This appeared to be a nearly insurmountable problem for some Big Six firms, which provide nondiscretionary advice in most of the 50 states but are not eligible for SEC registration. "KPMG Peat Marwick, Arthur Andersen and Ernst & Young each faced having to comply with regulations in about 30 states where they had principal offices," said Monaco. "They told the SEC this would be unduly burdensome and the commission granted them exemptions allowing them to be SEC registered. They are thus under SEC—and not state—regulations."

A firm practicing across state lines can be exempt from a particular states regulations if it does not have an office in that state and has fewer than six clients there. But Monaco said there are circumstances when the firm establishes enough of a presence to warrant registration. And even a small firm can cross the dollar threshold and find itself needing SEC registration after all. "Resolving these issues is harder than solving a Rubiks Cube," she said. In fact, Steve Stone, another partner at her firm, prepared two flowcharts to help clients determine when state or SEC registration and regulation applies and when circumstances warrant the registration of investment adviser representatives at the state level.

Phyllis Bernstein, American Institute of CPAs director of personal financial planning, discussed some of the key issues in the PFP Pointer newsletter in April. The PFP division is updating its Guide to Registering as an Investment Adviser to reflect the new law.

OMB Issues Final Audit Requirements for Federal Awards

The Office of Management and Budget released final audit requirements for not-for-profits and state and local governments that administer federal financial assistance. The revisions to Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations , implement new rules under the Single Audit Act Amendments of 1996, which was passed last summer (see President Signs Single Audit Act of 1996, JofA, Sept.96).

The 1996 act eased the auditing burdens on smaller entities that administer federal grants by increasing the threshold that triggers an audit requirement, and it improved the oversight of federal grants by focusing on programs that present the greatest risk to the government. The act also permitted the consolidation of OMB Circular A-128, Audits of State and Local Governments , with circular A-133, the final revisions to which encompass both sets of entities that administer federal awards.

Auditor musts
One of the most significant changes for the auditor in the revised A-133 is the new requirement to prepare and sign a data collection form. The form will be used by the federal government to develop a database on federal awards and by the federal clearinghouse in lieu of sending the full single audit report. "The entity being audited is required to certify the entire form is complete and accurate," said Sheila O. Conley, OMB policy analyst. "For the first time the auditor must prepare certain sections of the form and must sign the form at the end of every audit conducted in accordance with A-133."

Another significant change in A-133 includes an explanation of the types of procedures that qualify as limited-scope audits for purposes of monitoring subrecipients that spend less than $300,000 annually. Limited scope audits are defined to include only agreed-upon procedures paid for and arranged by a pass-through entity. The procedures only can relate to activities allowed or unallowed; allowable costs/cost principles; eligibility; matching, level of effort earmarking; and reporting.

The OMB removed a provision from the A-133 proposal that explained the auditors responsibility for testing and reporting on the allowability of costs charged to cost pools used in formulating indirect cost rate proposals and cost allocation plans. According to Conley, many people thought the OMB had elevated the indirect cost area to the status of a major program. "That was not our intention," said Conley. "Therefore, we removed that language from A-133 and dealt with the auditors responsibility for auditing indirect costs in the circular A-133 compliance supplement."

The OMB chose not to amend A-133 language that requires auditors to test internal control over major programs. Conley said the OMB did not change the language because federal agencies are concerned there is not enough internal control testing in a single audit. "The circular should remain very explicit about the auditors responsibility for testing internal control over major programs," said Conley.

Successful implementation
The OMB also issued a provisional compliance supplement for use in the first audits conducted in accordance with the revised circular. The supplement identifies the compliance requirements that should be considered by the auditor during an A-133 audit. The OMB is requesting comment on the compliance supplement by November 30. Both the revised circular A-133 and the compliance supplement can be obtained on the OMB Web site at
http://www.whitehouse.gov/WH/EOP/omb , under the captions "OMB Documents" and "Grants Management," or by calling the OMB Office of Administration at 202-395-7332.

The American Institute of CPAs is expected to issue a statement of position in the fall on the revised circular A-133. The SOP will supersede SOP 92-9, Audits of Not-for-Profit Organizations Receiving Federal Awards , and certain chapters in the AICPA state and local audit guide. For more information on the AICPA guidance, contact Mary Foelster, technical manager, at 202-434-9259.

New Rules for Fed Contractors

The Cost Accounting Standards Board (CASB) issued two rules for companies that perform contracting services with the federal government. Applicability of Cost Accounting Standards Coverage is effective as of June 6, 1997, and Allocation of Contractor Restructuring Costs is effective as of August 15, 1994.

The applicability rule implements the Federal Acquisitions Reform Act of 1996 by exempting certain contracts for the acquisition of commercial items from cost accounting standards (CAS) requirements. The exemption from CAS includes firm fixed-price contracts and subcontracts, as well as fixed-price contracts and subcontracts with economic price adjustments, provided the price adjustments are not based on actual incurred costs.

The restructuring costs rule provides interpretive guidance on the methods used when measuring, assigning and allocating certain restructuring costs. In essence, it clarifies whether restructuring costs should be treated as a current period expense or as a deferred charge to be amortized over future periods. "Under normal circumstances, the restructuring costs should be deferred over the period when the savings would accrue," said Richard C. Loeb, CASB executive secretary. According to Loeb, a common example is when a contractor wants the government to pay $500 million in restructuring costs and it can prove it will save the government $1 billion over five years. "We want the restructuring payments to be deferred over the five years," said Loeb.

For more information on the two new rules, contact Richard Loeb, CASB executive secretary, at 202-395-3254.


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