CFP Board Financial Planning Competency Handbook. Board CFP

management. Given her new business model and compensation approach, she must register as an investment advisor. Because her asset base is less than $100 million, she will register at the state level, unless her state does not require investment advisors to register. Rebecca must also hold either a nationally recognized certification, such as the CFP^® mark, or a Series 7 and 65 license, in order to start her new practice.27 When the total value of assets managed by Rebecca exceeds $100 million, she will fall under the jurisdiction of the SEC; in the meantime, she must complete and file Form ADV as outlined in the Investment Advisers Act of 1940.

Janie

      Is Janie a fiduciary? This is a question that has marked the twenty-first century as being unique in the history of financial planning as a profession. For many years, financial planners considered themselves primarily to be engaged to transact business for clients. Many planners still consider themselves in this role. Janie, however, views her position as a financial planner differently. She advertises her services to be fair and balanced. She believes in disclosing all real and perceived conflicts of interest. Rather than acting as an intermediary in the purchase and/or sale of a product or service, Janie considers herself to be a fiduciary – someone “who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.”28 Although national and international guidelines regarding fiduciary standards for financial planners are not uniform or necessarily similar, the Uniform Prudent Investor Act of 1994 helped promote discussion within the profession about the functioning of planner-client relationships. Some, such as Janie, would argue that all financial planners are, in fact, acting as fiduciaries. The debate regarding who is and who is not a fiduciary within the profession is certain to continue.

      NOTES

      Visit www.wiley.com/go/wileycfpboard2e to access nearly 400 practice questions. Your access code is at the back of this book. CFP^® professionals in the United States can also choose to obtain the full 28 credit hours by taking and passing the test.

      CHAPTER 3

      Financial Services Regulations and Requirements

John E. Grable, PhD, CFP^®University of GeorgiaSonya L. Britt, PhD, CFP^®Kansas State University

      CONNECTIONS DIAGRAM

      The regulation of financial services markets and professionals is integrated into nearly every aspect of the financial planning process. At its core, however, is the requirement that financial planners understand and determine how they interact with clients. Some planners provide advice for a fee. Others transact trades for clients. Some financial planners provide a number of related but technically different services. In general, those who provide services for a fee are considered investment advisors. Those who transact trades and other business for a commission are known as brokers, agents, or registered representatives. The form of regulation differs based on each financial planner’s responsibilities. The nature, type, and extent of regulation are briefly described in this chapter.

      INTRODUCTION

      The regulation and licensing of securities professionals has a long and vivid history. King Edward of England, in the thirteenth century, was the first to decree that brokers in London should be licensed.29 The United States was somewhat late in implementing regulations. The state of Massachusetts drafted the first securities regulation in 1852, but it was not until the early twentieth century that the regulation of securities and financial advisors became widespread. In 1911, the state of Kansas took the first step in enacting wide-ranging securities regulations, which became known as blue-sky laws. The name blue-sky referred to the practice of salespeople touting worthless investments (e.g., gold mines) that had no value other than the “blue skies of Kansas.”

      Blue-sky laws eventually paved the way for what is known as merit review authority, or a state regulator’s right to refuse licensing to a person or firm whose business practices are deemed unfair, unjust, inequitable, or oppressive. By 1913, another 23 states had implemented some type of merit review authority regulation. The year 1929, the beginning of the Great Depression, ushered in sweeping financial regulation reform. Congress enacted the Securities Act of 1933 (“truth in securities” law) in reaction to the stock market crash of 1929. Congress passed four additional acts that further implemented securities regulation. The Securities Exchange Act of 1934 prohibited insider trading and instituted regulation of securities trading, creating the Securities and Exchange Commission (SEC). The Public Utility Holding Act of 1935 was designed to curb corporate accounting fraud. The Trust Indenture Act of 1939 extended equity regulation to the bond market. An important piece of legislation was the Investment Company Act of 1940, which established rules for the development of mutual funds and other similar pooled investment companies. Of primary importance for financial planners and advisors is the Investment Advisors Act of 1940. This law codified regulations regarding the licensing of investment advisors who render investment advice for a fee, or provide analyses or securities reports. These Great Depression–era regulations remain as foundational aspects of all modern securities markets regulations.

      It was not until 1956 that additional broad legislative action was reviewed again. States attempted to bring uniformity to securities and insurance laws by establishing the National Conference of Commissioners on Uniform State Laws (NCCUSL). This group approved the Uniform Securities Act, which has been adopted, in some form or another, by 40 states. While there is a tendency to focus on federal regulations, it is important to note that individual states have retained considerable regulatory authority in the financial services marketplace. This is particularly true in relation to insurance products and services.

      The period between the mid-1950s and the 1990s saw numerous policy updates and modifications to existing laws. The Employee Retirement Income Security Act of 1974 (ERISA) was a notable event during this period. ERISA impacts the practice of financial planning in many ways. The law describes fiduciary responsibilities and, through amendments, Consolidated Omnibus Budget Reconciliation Act (COBRA) and Health Insurance Portability and Accountability Act of 1996 (HIPAA) provides provisions for health insurance plans. In 1996, Congress enacted the National Securities Markets Improvement Act. This law updated and amended numerous provisions of:

      ■ The Securities Act of 1933.

      ■ The Securities Exchange Act of 1934.

      ■ The Trust Indenture Act of 1939.

      ■ The Investment Company Act of 1940.

      ■ The Investment Advisers Act of 1940.

      Following these changes, NCCUSL revised the Uniform Securities Act in 2002.

      The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act is the most important regulatory reform since the Great Depression.30 Although many provisions of the law were focused on corporate reform and regulation, key aspects impact securities transactions and the practice of financial planning. The Act established a new federal agency, the Consumer Financial Protection Bureau (CFPB), as an independent bureau of the Federal Reserve System. The CFPB has rule-making, supervisory, enforcement, and other authorities related to consumer financial products and services.31 The Consumer Financial Protection Bureau has the authority to issue regulations concerning more than a dozen federal consumer financial laws to ensure that all consumers have access to consumer financial markets, products, and services. The Bureau is also charged with regulating consumer markets to guarantee fairness, transparency, and competitiveness.

      In addition to state and federal securities laws and regulations, nearly every financial planner also interacts with either self-regulatory organizations (SROs) or a credentialing body. An SRO is an organization that has been granted statutory functions by the federal government to monitor, regulate, and sometimes license its own members to ensure

27

K. C. Garrett and J. E. Grable, “State Investment Adviser Representative Examination and Waiver Requirements,” Journal of Personal Finance 6, no. 1 (2007): 38–43.

28

CFP Board, Rules of Conduct, 2015. Retrieved from Certified Financial Planner Board of Standards, Inc.: http://www.cfp.net/for-cfp-professionals/professional-standards-enforcement/standards-of-professional-conduct/rules-of-conduct.

30

A brief review of the Act can be found at: www.banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_ summary_Final.pdf.

31

For more regulatory information about the Bureau, see: www.consumer finance.gov/strategic-plan/.