(MONEY Magazine) – Starting in July, lawmakers hope to protect small investors better by splitting oversight of financial planners and other investment advisers between the Securities and Exchange Commission and the states. The changes, approved by Congress last year ("What Investors Will Get from the New Securities Law," December 1996), make state regulators the principal watchdogs for the roughly 18,000 advisers with less than $25 million in assets under management; the SEC will oversee the 7,000 largest advisers.

Both the states and the SEC have been criticized in the past for allowing most advisers to operate virtually unsupervised; this law should help them better focus their efforts. In April, for instance, state regulators announced plans to develop a competency exam that will for the first time allow them to measure an adviser's knowledge of investment risk and other key planning concepts. It will be up to individual states to decide whether they want to give the test.

In addition, about half a dozen states have already started to beef up their oversight efforts. In April, Kansas began requiring new advisers to pass an exam that measures knowledge of stocks, bonds and other investment products. The state also intends to inspect financial planning firms every other year instead of once every five years as it does now. Illinois will now require that nearly every employee in its securities division spend some time on inspections, a move that should allow it to at least double the number of advisers it reviews annually. Officials in the four states that don't currently regulate advisers--Colorado, Iowa, Ohio and Wyoming--all plan to ask their legislatures for the power and staff to do so.

But the new law could also leave investors vulnerable in some areas. For instance, states have lost the authority to license and regulate small advisers who don't maintain a regular place of business in their state. So a planner could avoid Connecticut's stiff licensing requirements by doing business out of New York, which doesn't license individuals.

All of which means you still must check out your planner. Start by asking him or her for a copy of Form ADV, the two-part registration form that must be filed with state or federal authorities. Your adviser is required to give you only part two, which describes his training and experience and states whether he is paid commissions or fees. If he's had any regulatory problems, that's on part one, so be sure to ask for that too. If he won't release it, find another adviser.

--Ruth Simon