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 that business practices are conducted fairly, efficiently, and in an ethical manner. The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. FINRA oversees over 4,450 brokerage firms, 161,065 branch offices, and nearly 630,000 registered securities representatives.32 Other SROs include national commodities and securities exchanges. The role of the organization is to protect consumers and the general public by upholding standards of practice and ethical standards.
While nearly all financial planners work, in some way or another, within these regulatory frameworks, it also is important to note that the majority of financial planners conduct business in ways that require knowledge of banking, real estate, and tax laws. For example, the Federal Reserve Board, the Federal Deposit Insurance Corporation, state banking regulators, and the U.S. Treasury all issue and enforce regulations that can impact recommendations made to clients. Additionally, financial planners should have a working knowledge of real estate regulations, such as the Fair Housing Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Home Mortgage Disclosure Act, Community Reinvestment Act, Fair Credit Reporting Act, Homeowners Protection Act, Fair Debt Collection Practices Act, and Gramm-Leach-Bliley Act. It almost goes without saying, but it is worth emphasizing, that keeping abreast of Internal Revenue Service (IRS) and state tax authority mandates and tax code changes is essential to the prudent practice of financial planning.
LEARNING OBJECTIVES
The student will be able to:
a. 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.).
b. Differentiate between investment knowledge that is proper to use in the evaluation of securities and insider information.
c. Demonstrate a comprehensive understanding of investment advisor regulation and financial planning aspects of ERISA.
d. Explain the relevant licensing, reporting, and compliance issues that may affect the business model used by a financial planning firm.
The purpose of a financial planner having the ability to understand, follow, and adapt to financial services regulations and requirements is to ensure that planning services are provided in a highly ethical manner. Financial planners work in an extremely regulated environment. Consumers, regulators, and planning colleagues expect financial planners to know existing rules and guidelines. While financial planners are assumed to be familiar with the SEC, FINRA, and state securities and insurance regulators, there are a host of other regulatory organizations that impact the work of some financial planners. Examples include the Municipal Securities Rulemaking Board, the National Futures Association, and the major stock exchanges, including the New York Stock Exchange (NYSE) and American Stock Exchange. Additionally, designation and certification organizations, such as Certified
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.
For more regulatory information about the Bureau, see: www.consumer finance.gov/strategic-plan/.
Source: www.finra.org.
