after abuses are noted and laws are enacted to counter such abuses.
It is important for financial planners to have a working knowledge of not only how financial institution regulation is created and applied, but also which regulator deals with what type of entity. For example, the Securities and Exchange Commission (SEC), which was created with passage of the Securities Exchange Act of 1934, regulates both secondary market institutions as well as certain primary market firms. The SEC also plays a role in regulating how financial planners interact with consumers.
Regulation of the secondary markets occurs through a number of mechanisms. Financial planners may fall under the enforcement power of state and federal regulators. It is equally likely, however, that a financial planner will have more contact on a regular basis with self-regulatory organizations. Brokers, dealers, and registered representatives typically fall under the rules and regulations of the Financial Industry Regulatory Authority (FINRA). Financial service professionals who deal most often at the primary and secondary market level will interact with numerous self-regulatory organizations, including the Chicago Board Options Exchange (CBOE), Municipal Securities Rulemaking Board (MSRB), National Futures Association (NFA), New York Stock Exchange (NYSE), and the Options Clearing Corporation (OCC). Planners who deal primarily with insurance products will find it useful to be well informed of the National Association of Insurance Commissioners’ (NAIC) rule making.
Related Content Areas Associated with the Learning Objective
■ This learning objective is conceptually related to all aspects of the financial planning process.
■ Financial regulations serve to provide a working framework for financial planners when interacting with clients.
■ The function and purpose of financial institution regulations is closely aligned with business law, financial services requirements, and consumer protection regulations.
IN CLASS
*Appropriate for on-campus course.
**Appropriate for both on-campus and distance courses.
PROFESSIONAL PRACTICE CAPABILITIES
Entry-Level: An entry-level planner working in a financial planning office environment should be able to differentiate among commercial banks, credit unions, trust companies, insurance companies, and brokerage firms as sources of consumer loans and investment assets. Additionally, entry-level planners should be well versed in basic financial institution and securities regulations and laws. The planner should be able to explain the fundamental aspects of the seven most important financial institution laws as outlined by the SEC, as well as explain the role and limitations associated with Federal Deposit Insurance Corporation (FDIC) deposit insurance.
Competent: A competent personal financial planner will have either completed Form ADV – application for registration of investment advisor – or, if not required to register, will have completed disclosure forms similar to what a registered investment advisor would provide clientele.
Expert: An expert personal financial planner should fully understand the history of financial institution regulation, SEC rules, rule-making procedures, and sources for researching rules and procedures. Additionally, someone who is an expert will monitor, on a regular basis, regulatory actions as published in the Federal Register, as well as regulatory actions, proposed rules, and rules releases as published by the SEC. This knowledge, when combined with experience and professional judgment, allows a financial planner to predict real and perceived violations of financial institution laws and ethical guidelines. An expert will be able to anticipate which, and when, personal and business actions will lead to violations of known laws.
IN PRACTICE
Rebecca has been working in the financial services marketplace for 10 years. She began her career as a stockbroker at a regional firm. She easily passed the Series 7 licensing requirements necessary to sell securities to the general public. About three years ago, she started the process of converting her practice away from compensation strictly by commission to one primarily based on assets under management fees. She recently resigned her position as a broker and opened her own firm. She has $73 million in assets under 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.
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
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
K. C. Garrett and J. E. Grable, “State Investment Adviser Representative Examination and Waiver Requirements,”
CFP Board,
