Topic 10
Financial Services Regulations and
Requirements
Topic 10: Financial Services
Regulations and Requirements
• Learning Objectives
– Identify the regulatory authorities that impact elements
of the financial planning process. (Examples include
regulation of accountancy, legal practice, real estate law,
insurance regulation, etc.)
– Differentiate between investment knowledge that is
proper to use in the evaluation of securities and insider
information.
– Demonstrate a comprehensive understanding of
investment advisor regulation and financial planning
aspects of the ERISA.
– Explain the relevant licensing, reporting and compliance
issues that may affect the business model used by a
financial planning firm.
Topic 10: Financial Services
Regulatory Authorities
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Planning Area
Investment advice
Sale of securities
Sale of insurance
Income tax preparation
Legal advice
Accounting services
Real estate law
Banking
Municipal securities
Regulatory Authority
SEC/State securities administrator
SEC/FINRA/State securities administrator
State insurance commission
IRS
State/ABA
State/AICPA
State real estate commission
OCC, FED, OTS
MSRB
Topic 10: Financial Services
Regulations and Requirements
• Topics:
– Registration and licensing
– Reporting
– Compliance
– State securities and insurance laws
Topic 10: Investment Advisers Act of
1940
• Requires registration with SEC if
– A - Advice
– B - in the Business
– C - Compensation
• All of these elements must be present
• Anyone who is: (1) in the business (2) of
providing advice about securities (3) for
compensation.
Topic 10: Investment Advisers Act of
1940
• The following entities and persons are not required to register
– Any bank or holding company that is not an investment company
– Any lawyer, accountant, engineer or teacher when the advisory
services are “solely incidental” to the practice of these professions
– Any broker or dealer whose performance of advisory services is
solely incidental and who receives no special compensation for
these services
– The publisher of any bona fide newspaper, news magazine, or
business or financial publication of general and regular circulation
– Any person whose advice, analyses or reports relate only to
securities which are direct obligations of, or guaranteed by, the
United States
– Other persons not within the intent of the law as determined by
the SEC
Topic 10: Investment Advisers Act of
1940
• Trick
• “Big Plate”
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B = Bank
I = Incidental services
G = Government securities
P = Publisher
L = Lawyer
A = Accountant
T = Teacher
E = Engineer
Topic 10: Investment Advisers Act of
1940
• The following advisers are not required to register with the
SEC
– An intrastate adviser provided all clients reside in the same state
where the adviser has his or her principal office and the adviser
does not give advice on any listed securities or on any securities
admitted to unlisted trading privileges on any national security
exchange
– An adviser with only insurance companies as clients
– An adviser with fewer than fifteen clients per year and who does
not hold himself or herself out to the public as an investment
adviser
– An adviser whose only clients are venture capital funds
– A foreign adviser without a US office or other place of business
that manages less than $25 million of client assets or has fewer
than 15 clients
• Last two added by Dodd-Frank Act
Topic 10: Compliance
• Under the Investment Advisers Act of 1940,
investment advisers must
– Disclose conflicts of interest
– Maintain fiduciary status
– Not use performance fees unless managing ≥ $1.0
million of client’s assets or if client’s net worth is ≥ $
2.0 million
– Not assign advisory contract without client’s consent
– Assure no insider trading by self or employees
– Follow brochure rule
– Keep records
– Not use initials RIA, but may use Registered
Investment Adviser
Topic 10: Reporting
• An investment adviser required to register with the
SEC must file Form ADV
– Part 1
• General and background information concerning the applicant
and clients
– Part 2A
• Includes 18 disclosure items that must be included in the
advisor’s brochure
– Part 2B
• Supplemental information about supervised persons who may
provide advisory services to the client
– Adviser must refile Part 1 along with a current balance
sheet on an annual basis
– Individual advisers or the adviser’s organization may
register
Topic 10: Brochure Rule
• An investment adviser must deliver a disclosure
statement to each client within 48 hours before entering
into an investment advisory contract
– If the adviser delivers the statement at the time the contract
is signed, the client has five days to cancel the agreement
• The disclosure statement must be
– A narrative written in plain English describing the adviser's
business, conflicts of interest, disciplinary history, and other
important information that would help clients make an
informed decision about whether to hire or retain the adviser
(including the 18 disclosure items in Part 2A or Form ADV)
– The information contained in Part 2B of Form ADV must be
included as a supplement to the brochure for each
supervised person of the advisor who provides investment
advice or interacts with the client
Topic 10: The “Coordination Act” of
1996
• Exempts from SEC registration an adviser who
– Has total assets under management of less than $110
million (increased from $30 million by Dodd-Frank Act); and
– Does not advise a registered investment company; and
– Is registered as such by a state
• Must register with state if manage less than $100 million (increased
from $25 million by Dodd-Frank Act)
• Choice to register with SEC or state if managing between $100
million and $110 million
• If state does not have an applicable state registration law, then the
adviser must register with the SEC
• No state in which an adviser is registered may impose
more burdensome record keeping requirements than
those of the adviser's home state of registration
Topic 10: Financial Industry
Regulatory Authority (FINRA
• FINRA (previously called NASD) is not associated
with the SEC
– FINRA was started by the securities industry as a way
of regulating itself
• Anyone selling stocks, bonds, tax shelters, options
or mutual funds must register with the FINRA
– An individual may not register separately as all
individuals must be associated with a broker-dealer
– The individual must file Form U-4, Uniform Application
for Securities Industry Registration, and pass certain
exams depending on the products the individual sells
Topic 10: Most Common FINRA Exams
• Series 6
– Allows individuals to sell mutual funds and variable
life insurance
• Series 7
– Allows individuals to sell everything except for
commodities and certain options
• Series 63
– Allows individuals to sell securities in several states
• Series 65
– Allows individuals to become registered in certain
states as an investment adviser
Topic 10: State Securities Laws
• “Blue sky” laws are state laws dealing with the
regulations of the securities business which
require
– Set standards that must be met by a new security
before it may be sold
– The filing of financial information regarding new
securities with state regulatory bodies
– The registration of financial planners and other
individuals who sell securities and the licensing of
brokers and security firms
Topic 10: State Insurance Laws
• State laws require insurance agents to obtain
licenses to sell life insurance and annuity
products
– A person selling variable life insurance and
variable annuity contracts must obtain a state
insurance license in addition to a FINRA license
Topic 10: Insider Trading
• The Insider Trading and Securities Fraud
Enforcement Act of 1988 requires the creation
and strict enforcement of written policies and
rules to prevent the misuse of material,
nonpublic information by an RIA or any
associated person
– Violations will occur if the inside information is
used by the planner for personal gain (or loss
avoidance) as well as client gain (or loss
avoidance) in client accounts
Topic 10: Dodd-Frank Wall Street
Reform and Consumer Protection Act
• Created the Consumer Financial Protection Bureau (CFPB) as
an independent bureau of the Federal Reserve System
– Mission is “to make markets for consumer financial products and
services work for Americans — whether they are applying for a
mortgage, choosing among credit cards, or using any number of
other consumer financial products”
• Has had, and will continue to have, a significant impact on
financial planning
• Gave the SEC authority to adopt a uniform fiduciary standard
for both broker-dealers and investment advisors who provide
personalized investment advice to retail customers.
– The SEC is in the process of analyzing the effect and cost of such a
standard, and has sought input from those affected, although a
final rule has not yet been determined
Topic 10: Business Models
• Financial planners may work under a number of
different business and/or compensation models
– CFP Board is model-neutral (does not favor one model
over another)
• If the business model limits the practitioner to
only certain products or proprietary products, it
must be disclosed to clients
• CFP Board requires strict adherence to the use of
the term fee-only in the planner’s brochure
and/or Forms ADV
– Acceptable descriptions of compensation include “fee
only”, “commission only”, or “fee plus commission”
End of Topic 10