1. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company1 Investment Company Act of 1940 Most, but not all, financial planners are considered to be Investment Advisors. More than $25 million under management or practice in states that do not regulate investment advisors requires SEC registration. Less than $25 million under management and subject to state regulation generally prohibited from registering with the SEC. Whether state or SEC registered, there are disclosures and procedures that an Investment Advisor must follow.

2. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company2 Organization of the Chapter Part I describes the regulatory process for Investment Advisors under the 1940 Act. Part II provides information on how to register as an Investment Advisor. Part III concerns other regulations of the financial services industry.

3. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company3 Who is an Investment Advisor? An investment advisor is a person who: –Provides advice or issues reports or analyses concerning securities –Is in the business of providing such services –Provides those services for compensation ALL THREE prongs of this test must be met for the definition to apply. Note: Compensation is defined to be the receipt of any economic benefit, which includes commissions from the sale of products.

4. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company4 Exclusions from the Definition of Investment Advisor Banks & Bank holding companies Lawyers, accountants, engineers, or teachers if the advisory services are solely incidental to their professions Brokers or dealers if the performance of advisory services is solely incidental to the performance of their business as brokers or dealers, and they do not receive any special compensation for their advisory services Publishers of bona fide newspapers, newsmagazines, or business or financial publications of general and regular circulation Those persons whose advice is related only to securities that are direct obligation of or guaranteed by the United States

5. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company5 “Incidental” “Incidental practice” does not include individuals who hold themselves out to the public as providing financial planning, pension consulting, or other financial advisory services. The SEC contends that persons promoting or advertising themselves as providing those services are unlikely to be providing them as just an incidental portion of their business.

6. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company6 “De minimus” The 1940 Act provides that investment advisors who during the course of the preceding 12 months had fewer than 15 clients and who did not hold themselves out to the public as investment advisors are exempt from registration as Investment Advisors. HOWEVER, the de minimus exclusion is VERY narrow. A listing in the telephone directory or on a letterhead as an investment advisor disqualifies the person from exemption, as does expressing a willingness to take on new clients.

7. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company7 Is a Financial Planner an Investment Advisor? Almost always, since the financial planner is in the business of providing financial advice for compensation which will usually include advice on portfolios or securities. A special case is the registered representative (stockbroker) who gives financial planning advice on non-investment related matters, but provides investment advice in his or her role as a registered representative. This person can argue that he or she is exempt under the broker-dealer exclusion.

8. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company8 Pension Consultants and Sports and Entertainment Representatives Pension consultants who advise the plan or its beneficiaries on securities on an ongoing basis are investment advisors. Sports or entertainment representatives may be compensated primarily for negotiating contracts, but if they also give specific advice concerning securities, they are investment advisors.

9. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company9 The Broker-Dealer Exemption This exemption has been challenged by the Financial Planning Association as not being equal application of the law. –On March 30, 2007, the U.S. Ct. Appeals for the D.C. Circuit ruled 2-1 against the broker-dealer exemption. –https://www.fpanet.org/member/govt_relation/lawsuit- against-sec-broker-dealer-rule.cfm FPA Regulatory Oversight Comparison chart: –http://www.fpanet.org/member/press/releases/loader.cfm?url=/co mmonspot/security/getfile.cfm&PageID=36285

10. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company10 “Compensation” Compensation is ANY economic benefit. This can be fees, an hourly rate, or commission. Even if a fee or commission covers a number of services, if investment advice is part of the service, it is compensation.

11. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company11 Accountants Is the investment advice incidental to the practice of accounting? SEC “No-action letter.” The individual is still subject to the 1940 Act’s anti-fraud requirements.

12. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company12 Brochure Rule The SEC focuses on disclosure, so RIA’s are generally required to deliver a written disclosure statement when entering into a contract with a client. Information required is that on the Form ADV, Part II. (Form ADV is the form required to register as an Investment Advisor) The RIA can deliver either Part II or a brochure that contains at least that information.

13. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company13 Books and Records The 1940 Act requires that RIA’s maintain and preserve specified books and records. The SEC may make surprise inspections of the RIA’s books and records. Microfilm and computer records are allowed under certain circumstances (the data should not be alterable without a record of the alteration under ordinary circumstances.)

14. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company14 Prohibited Fee and Contractual Provisions Contract may not be assigned without client’s consent. Partnership RIA’s must notify the client of changes in its membership. With the exception of clients that are mutual funds or that have more than $1 million in managed assets*, fees may not be contingent upon capital gains or appreciation in the client’s account. Performance fee contracts are allowed if the client has $750,000 under management with the advisor or a net worth in excess of $1.5 million.* * Under certain specified conditions.

15. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company15 “Investment Counsel” An RIA cannot use the term “Investment Counsel” unless its principal business is acting as an investment advisor and a substantial portion of its business is providing “investment supervisory services.” “Investment supervisory services” are the giving on continuous advice of the investment of funds on the basis of the individual needs of each client.

16. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company16 Anti-Fraud Provisions and Disclosure Requirements Fraud is prohibited whether the advisor is registered or not. Restrictions exist on advertising, custody or possession of client funds or securities, and when advisors can pay cash referral fees. As a fiduciary, an investment advisor owes his or her clients undivided loyalty and may not engage in any activity in conflict with the client’s interest. Advisors have an affirmative obligation of utmost good faith and full and fair disclosure of material facts. They may not mislead.

17. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company17 RIA Advertising Cannot contain any untrue statement of material fact or be misleading in anyway Cannot use testimonials Cannot cite past recommendations Cannot use charts, graphs and similar devices Note: The CFA Institute, the professional regulatory body to which most institutional money managers belong, only allows performance BEFORE the deduction of fees to be advertised.

18. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company18 Custody of Client Funds and Securities Advisors can only have custody under specified conditions, and must provide certain information to clients. Advisors with custody must have annual unannounced examinations by an independent certified public account and file the report with the SEC. Most advisors have a broker-dealer or bank custody client funds and securities.

19. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company19 Fiduciary Duty The SEC has stated that an investment advisor has a fiduciary obligation to: –Render disinterested and impartial advice. –Make suitable recommendations in light of client needs, financial circumstances and investment objectives. –Exercise a high degree of care that adequate and accurate representations and other information about securities are presented to clients. –Have an adequate basis in fact for its recommendations, representations, and projections.

20. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company20 Responsibility for Compliance The investment advisor is responsible for knowledge of and compliance with the law. The 1940 Act and its regulations are found in Title 17, Part 275 of the Code of Federal Regulations. Online access through the government archives website: –http://ecfr.gpoaccess.gov/cgi/t/text/text- idx?c=ecfr&sid=1c639e0cd3e40b92815769e5883cd748&tpl=/ecfrbr owse/Title17/17cfr275_main_02.tpl

21. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company21 Part II – Registration An RIA subject to the SEC must: –File Form ADV –Must keep the ADV current by filing periodic amendments –File a brief report annually –Comply with the brochure rule For complete and up-to-date copies of the rules and regulations concerning Investment Advisors under the 1940 Act, go to http://www.access.gpo.gov/nara/cfr/waisidx_00/17cfr275_00.html This includes Rule 204-3 concerning the brochure rule, and Rule 204-2 concerning books and records.

22. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company22 Filing Registration All forms, whether state or federal filings, must be submitted electronically. Approval will be granted within 45 days. All forms are available at: http://www.sec.gov/divisions/investment/iard/iastuff.shtml Note: If the form is not properly filled out, it will be rejected and the 45-day waiting period for approval will start again when it is re-submitted.

23. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company23 Amending Form ADV Rule 204-1 States when ADV forms must be amended. Amendment is done electronically. The web site gives the instructions.

24. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company24 Public Access by Investors Free web site for information on all registered investment advisors registered on IAPD. Investors have access to all advisors’ Form ADV. Site does not warn investors that the ADVs are prepared by the advisors. The only grounds for denial of registration once the ADV is properly filed is if the advisor has committed prohibited acts and public interest demands denial.* *This is one reason that it is improper to use “RIA” on letterheads and business cards as if it were a certification.

25. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company25 Part III – Other Regulation of the Industry CFP® Professionals NASD - Securities Broker-Dealers & Associated Persons State Regulation Insurance Regulation

26. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company26 Compliance Requirements of CFP® Professionals Must comply with all federal and local regulations Must submit himself or herself to the jurisdiction of the CFP Board of Standards Must adhere to the CFP Board Code of Ethics and Professional Responsibility and the Financial Planning Practice Standards Failure to comply may result in loss of the certification Read the Code of Ethics at http://www.cfp.net/learn/ethics.asp Read the Practice Standards at http://www.cfp.net/learn/standards.asp

27. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company27 Certification Requirements to Become a CFP® Professional Four “E’s”: –Education Completion of a CFP Board Registered Degree or Program Starting in 2007, a bachelor’s degree –Experience Three years in a position involving client contact Five years if does not hold an appropriate college degree –Examination Passing a two-day, 10 hour examination in all sections –Ethics Declaration and Agreement to abide by the Code of Ethics and Standards of Practice For more information go to : http://www.cfp.net/become/

28. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company28 State Requirements Most states have their own laws concerning investment advisors. Most state laws are modeled on the federal laws. Most states now use the online ADV forms from the federal government.

29. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company29 Insurance Regulation Financial planners often advise on insurance needs. Insurance is primarily regulated by the state insurance commissioners. Even if the financial planner does not sell the insurance, acceptance of a referral fee may require licensing as a broker or agent. Some states make licensing easier for people holding the CFP® certification.

30. Financial Services Industry Regulations Chapter 6 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company30 Insurance Licensing States typically require passage of an exam PLUS an appropriate educational course. Some states require three years experience as a life insurance agent before becoming a life insurance advisor, a problem for fee-only planners. Some states prohibit financial planners from receiving both a financial planning fee and a commission as an insurance agent unless the client signs an agreement.