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entitled 'Consumer Finance: Regulatory Coverage Generally Exists for
Financial Planners, but Consumer Protection Issues Remain' which was
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United States Government Accountability Office:
GAO:
Report to Congressional Addressees:
January 2011:
Consumer Finance:
Regulatory Coverage Generally Exists for Financial Planners, but
Consumer Protection Issues Remain:
GAO-11-235:
GAO Highlights:
Highlights of GAO-11-235, a report to congressional addressees.
Why GAO Did This Study:
Consumers are increasingly turning for help to financial planners�
individuals who help clients meet their financial goals by providing
assistance with such things as selecting investments and insurance
products, and managing tax and estate planning. The Dodd-Frank Wall
Street Reform and Consumer Protection Act mandated that GAO study the
oversight of financial planners. This report examines (1) how
financial planners are regulated and overseen at the federal and state
levels, (2) what is known about the effectiveness of this regulation,
and (3) the advantages and disadvantages of alternative regulatory
approaches. To address these objectives, GAO reviewed federal and
state statutes and regulations, analyzed complaint and enforcement
activity, and interviewed federal and state government entities and
organizations representing financial planners, various other arms of
the financial services industry, and consumers.
What GAO Found:
There is no specific, direct regulation of �financial planners� per se
at the federal or state level, but various laws and regulations apply
to most of the services they provide. Financial planners are primarily
regulated as investment advisers by the Securities and Exchange
Commission (SEC) and the states, and are subject to laws and
regulation governing broker-dealers and insurance agents when they act
in those capacities. Federal and state agencies have regulations on
marketing and the use of titles and designations that also can apply
to financial planners.
The regulatory structure applicable to financial planners covers the
great majority of their services, but the attention paid to enforcing
existing regulation can vary and certain consumer protection issues
remain. First, consumers may be unclear about when a financial planner
is required to serve the client�s best interest, particularly when the
same financial planner provides multiple services associated with
different standards of care. SEC is studying these issues with regard
to securities transactions, but no complementary review is under way
by the National Association of Insurance Commissioners (NAIC) related
to the sale of high-risk insurance products. Second, financial
planners can adopt numerous titles and designations, which vary
greatly in the expertise or training that they signify, but consumers
may not understand or be able to distinguish among them. SEC has a
mandated review under way on financial literacy among investors and
incorporating this issue into that review could assist in assessing
further changes that may be needed. Finally, the extent of problems
related to financial planners is not fully known because SEC generally
does not track data on complaints, examination results, and
enforcement activities associated with financial planners
specifically, and distinct from investment advisers as a whole. A
regulatory system should have data to identify risks and problem
areas, and given that financial planning is a growing industry that
has raised certain consumer protection issues, regulators could
benefit from better information on the extent of problems specifically
involving financial planning services.
A number of stakeholders have proposed different approaches to the
regulation of financial planners, including (1) creation of a
federally chartered board overseeing financial planners as a distinct
profession; (2) augmenting oversight of investment advisers with a
self-regulatory organization; (3) extending the fiduciary standard of
care to more financial services professionals; and (4) specifying
standards for financial planners and the designations that they use.
While the views of stakeholder interests vary, a majority of the
regulatory agencies and financial services industry representatives
GAO spoke with did not favor significant structural change to the
overall regulation of financial planners because they said existing
regulation provides adequate coverage of most financial planning
activities. Given available information, an additional layer of
regulation specific to financial planners does not appear to be
warranted at this time.
What GAO Recommends:
GAO recommends that (1) NAIC assess consumers� understanding of the
standards of care associated with the sale of insurance products, (2)
SEC assess investors� understanding of financial planners� titles and
designations, and (3) SEC collaborate with the states to identify
methods to better understand problems associated specifically with the
financial planning activities of investment advisers. NAIC said it
would consider GAO�s recommendation and SEC provided no comments.
View [hyperlink, http://www.gao.gov/products/GAO-11-235] or key
components. For more information, contact Alicia Puente Cackley at
(202) 512-8678 or .
[End of section]
Contents:
Letter:
Background:
Various Federal and State Laws and Regulations Apply to Financial
Planners and Their Activities:
Regulatory Structure for Financial Planners Covers Most Activities,
but Some Consumer Protection Issues Exist, and Data Tracking
Complaints and Regulatory Actions against Planners Are Limited:
Some Changes in the Oversight of Financial Planners Could Be
Beneficial, but Most Stakeholders Believe Substantial Overhaul Is Not
Needed:
Conclusions:
Recommendations:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Comments from the National Association of Insurance
Commissioners:
Appendix III: Comments from the North American Securities
Administrators Association:
Appendix IV: GAO Contact and Staff Acknowledgments:
Figures:
Figure 1: Change in Regulatory Oversight of Investment Adviser Firms
Providing Financial Planning Services as a Result of the Dodd-Frank
Act:
Figure 2: Summary of Key Statutes and Regulations That Can Apply to
Financial Planners:
Figure 3: Differences in the Standards of Care Required of Financial
Planners:
Abbreviations:
Advisers Act: Investment Advisers Act of 1940:
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection
Act:
FINRA: Financial Industry Regulatory Authority:
Form ADV: Uniform Application for Investment Adviser Registration:
FTC: Federal Trade Commission:
NAIC: National Association of Insurance Commissioners:
NASAA: North American Securities Administrators Association:
SEC: Securities and Exchange Commission:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
January 18, 2011:
Congressional Addressees:
Consumers are increasingly turning for help to professionals who
describe themselves as financial planners for assistance with a broad
range of services, such as selecting the right balance of stocks and
bonds for an investment portfolio, choosing among insurance products,
and tax and estate planning. Although there is no statutory or single
definition of financial planning, it can be broadly defined as a
systematic process that individuals use to achieve their financial
goals. Between 2000 and 2008, the number of financial planners more
than doubled and may continue to climb as more individuals are asked
to take responsibility for their retirement savings and must choose
among a growing array of investment options.
Some financial planning organizations have raised concerns that no
single law governs providers of financial planning services, broadly
describing this situation as a regulatory gap. Concerns also exist
that financial planners may have an inherent conflict of interest in
recommending products they may stand to benefit from selling. In
addition, some consumer advocates believe consumers may be confused by
the numerous titles and designations that financial planners can use.
This report responds to a mandate included in Section 919C of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
that directed GAO to conduct a study on the oversight and regulation
of financial planners. Our objectives are to address (1) how financial
planners are regulated and overseen at the federal and state levels,
(2) what is known about the effectiveness of regulation of financial
planners and what regulatory gaps or overlap may exist, and (3)
alternative approaches for the regulation of financial planners and
the advantages and disadvantages of these approaches.
To address these objectives, we reviewed federal and selected state
statutes and regulations applicable to financial planners. We also
reviewed regulations issued by the Securities and Exchange Commission
(SEC) and the Financial Industry Regulatory Authority (FINRA), and
model laws developed by the National Association of Insurance
Commissioners (NAIC) and by the North American Securities
Administrators Association (NASAA). In addition, we reviewed
applicable securities and insurance laws and regulations of five
states--California, Illinois, North Carolina, Pennsylvania, and Texas.
We also interviewed representatives of, and gathered documentation
from, SEC, FINRA, the Federal Trade Commission (FTC), NAIC, and
organizations representing the interests of consumers, financial
planners, and various arms of the financial services industry. In
addition, we gathered information on complaints and enforcement
activity, as available, from SEC, FINRA, FTC, and selected state
regulators and organizations. A more extensive discussion of our scope
and methodology appears in appendix I.
We conducted this performance audit from June 2010 to January 2011 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
Financial planning typically involves a variety of services, including
preparing financial plans for clients based on their financial
circumstances and objectives and making recommendations for specific
actions clients may take. In many cases, financial planners also help
implement these recommendations by, for example, providing insurance
products, securities, or other investments. Individuals who provide
financial planning services may call themselves a variety of different
titles, such as financial planner, financial consultant, financial
adviser, trust advisor, or wealth manager. In addition, many financial
planners have privately conferred professional designations or
certifications, such as Certified Financial Planner�, Chartered
Financial Consultant�, or Personal Financial Specialist.
The number of financial planners in the United States rose from
approximately 94,000 in 2000 to 208,400 in 2008, according to the
Bureau of Labor Statistics. The bureau projects the number will rise
to 271,200 by 2018 because of the need for advisers to assist the
millions of workers expected to retire in the next 10 years.[Footnote
1] According to the bureau, 29 percent of financial planners are self-
employed and the remaining 71 percent are employees of firms, some of
them large entities with offices nationwide that provide a variety of
financial services. The median annual wage for financial planners was
$68,200 in May 2009.
According to an analysis of the 2007 Survey of Consumer Finances, the
most recent year for which survey results are available, in 2007 about
22 percent of U.S. households used a financial planner for investment
and saving decisions and about 12 percent of U.S. households used a
financial planner for making credit and borrowing decisions. Those
households most likely to use a financial planner were those with
higher incomes. For example, 37 percent of households in the top
income quartile used a financial planner to make investment and saving
decisions compared to 10 percent of households in the bottom quartile.
[Footnote 2]
Various Federal and State Laws and Regulations Apply to Financial
Planners and Their Activities:
Financial planners are primarily regulated by federal and state
investment adviser laws, because planners typically provide advice
about securities as part of their business. In addition, financial
planners that sell securities or insurance products are subject to
applicable laws governing broker-dealers and insurance agents. Certain
laws and regulations can also apply to the use of the titles,
designations, and marketing materials that financial planners use.
Financial Planners Are Primarily Regulated by Federal and State
Investment Adviser Laws:
There is no specific, direct regulation of "financial planners" per se
at the federal or state level. However, the activities of financial
planners are primarily regulated under federal and state laws and
regulations governing investment advisers--that is, individuals or
firms that provide investment advice about securities for
compensation. According to SEC staff, financial planning normally
includes making general or specific recommendations about securities,
insurance, savings, and anticipated retirement.[Footnote 3] SEC has
issued guidance that broadly interprets the Investment Advisers Act of
1940 (Advisers Act) to apply to most financial planners, because the
advisory services they offer clients typically include providing
advice about securities for compensation.[Footnote 4] Similarly, NASAA
representatives told us that states take a similar approach on the
application of investment adviser laws to financial planners and, as a
result, generally register and oversee financial planners as
investment advisers. As investment advisers, financial planners are
subject to a fiduciary standard of care when they provide advisory
services, so that the planner "[is] held to the highest standards of
conduct and must act in the best interest of [the adviser's] clients."
[Footnote 5]
SEC and state securities departments share responsibility for the
oversight of investment advisers in accordance with the Advisers Act.
[Footnote 6] Under that act, SEC generally oversees investment adviser
firms that manage $25 million or more in client assets, and the states
that require registration oversee those firms that manage less.
[Footnote 7] However, as a result of section 410 of the Dodd-Frank
Act, as of July 2011 the states generally will have registration and
oversight responsibilities for investment adviser firms that manage
less than $100 million in client assets, instead of firms that manage
less than $25 million in assets as under current law.[Footnote 8] This
will result in the states gaining responsibility for firms with assets
under management between $25 million and $100 million. As shown in
figure 1, as of October 2010, of the approximately 16,000 investment
adviser firms providing financial planning services, the states were
overseeing about 11,100 firms and SEC was overseeing about 4,900 such
firms.[Footnote 9] However, in July 2011 about 2,400 of investment
adviser firms that provided financial planning services (15 percent of
the 16,000 firms) may shift from SEC to state oversight.[Footnote 10]
Figure 1: Change in Regulatory Oversight of Investment Adviser Firms
Providing Financial Planning Services as a Result of the Dodd-Frank
Act:
[Refer to PDF for image: stacked horizontal bar graph]
As of October 2010:
Number of state-registered firms: 11,135;
Number of SEC-registered firms: 4,896.
Starting July 2011:
Number of state-registered firms: 13,598;
Number of SEC-registered firms: 2,433.
Source: GAO.
[End of figure]
SEC's supervision of investment adviser firms includes evaluating
their compliance with federal securities laws by conducting
examinations of firms--including reviewing disclosures made to
customers--and investigating and imposing sanctions for violations of
securities laws. According to SEC staff, in its examinations, the
agency takes specific steps to review the financial planning services
of investment advisers. For example, SEC may review a sample of
financial plans that the firm prepared for its customers to check
whether the firm's advice and investment recommendations are
consistent with customers' goals, the contract with the firm, and the
firm's disclosures.
However, the frequency with which SEC conducts these examinations
varies, largely because of resource constraints faced by the agency.
[Footnote 11] SEC staff told us that the agency examined only about 10
percent of the investment advisers it supervises in 2009. In addition,
they noted that generally an investment adviser is examined, on
average, every 12 to 15 years, although firms considered to be of
higher risk are examined more frequently. In 2007, we noted that
harmful practices could go undetected because investment adviser firms
rated lower-risk are unlikely to undergo routine examinations within a
reasonable period of time, if at all.[Footnote 12]
According to NASAA, state oversight of investment adviser firms
generally includes activities similar to those undertaken by SEC,
including taking specific steps to review a firm's financial planning
services. According to NASAA, states generally register not just
investment adviser firms but also investment adviser representatives--
that is, individuals who provide investment advice and work for a
state-or federally registered investment adviser firm.[Footnote 13]
Financial Planners Are Subject to Broker-Dealer and Insurance Laws
When Acting in Those Capacities:
In addition to providing advisory services, such as developing a
financial plan, financial planners generally help clients implement
the plan by making specific recommendations and by selling securities,
insurance products, and other investments. SEC data show that, as of
October 2010, 19 percent of investment adviser firms that provided
financial planning services also provided brokerage services, and 27
percent provided insurance.[Footnote 14]
Financial planners that provide brokerage services, such as buying or
selling stocks, bonds, or mutual fund shares, are subject to broker-
dealer regulation at the federal and state levels. At the federal
level, SEC oversees U.S. broker-dealers, and SEC's oversight is
supplemented by self-regulatory organizations (SRO).[Footnote 15] The
primary SRO for broker-dealers is FINRA. State securities offices work
in conjunction with SEC and FINRA to regulate securities firms.
Salespersons working for broker-dealers are subject to state
registration requirements, including examinations. About half of
broker-dealers were examined in 2009 by SEC and SROs. Under broker-
dealer regulation, financial planners are held to a suitability
standard of care when making a recommendation to a client to buy or
sell a security, meaning that they must recommend those securities
that they reasonably believe are suitable for the customer.[Footnote
16]
Financial planners that sell insurance products, such as life
insurance or annuities, must be licensed by the states to sell these
products and are subject to state insurance regulation. In contrast to
securities entities (other than national banks) that are subject to
dual federal and state oversight, the states are generally responsible
for regulating the business of insurance. When acting as insurance
agents, financial planners are subject to state standard of care
requirements, which can vary by product and by state. As of October
2010, 32 states had adopted a previous version of the NAIC Suitability
in Annuities Transactions Model Regulation, according to NAIC.
[Footnote 17] In general, this regulation requires insurance agents to
appropriately address consumers' insurance needs and financial
objectives at the time of an annuity transaction.[Footnote 18] Thirty-
four states had also adopted the Life Insurance Disclosure Model
Regulation in a uniform and substantially similar manner as of July
2010, according to NAIC. This regulation does not include a
suitability requirement, although it does require insurers to provide
customers with information that will improve their ability to select
the most appropriate life insurance plan for their needs and improve
their understanding of the policy's basic features.
Financial planners that sell variable insurance products, such as
variable life insurance or variable annuities, are subject to both
state insurance regulation and broker-dealer regulation, because these
products are regulated as both securities and insurance products. When
selling variable insurance, financial planners are subject to FINRA
sales practice standards requiring that such sales be subject to
suitability standards.[Footnote 19] In addition, other FINRA rules and
guidance, such as those governing standards for communication with the
public, apply to the sale of variable insurance products.[Footnote 20]
In addition, as previously discussed, 32 states also generally require
insurance agents and companies to appropriately address a consumer's
insurance needs and financial objectives at the time of an annuity
transaction. However, in the past, we have reported that the
effectiveness of market conduct regulation--that is, examination of
the sales practices and behavior of insurers--may be limited by a lack
of reciprocity and uniformity, which may lead to uneven consumer
protection across states.[Footnote 21]
Federal and State Laws and Regulations Can Apply to the Use of
Marketing Materials and Financial Planning Titles and Designations:
At the federal level, SEC and FINRA have regulations on advertising
and standards of communication that apply to the strategies investment
adviser firms and broker-dealers use to market their financial
planning services. For example, SEC-registered investment advisers
must follow SEC regulations on advertising and other communications,
which prohibit false or misleading advertisements, and these
regulations apply to investment advisers' marketing of financial
planning services.[Footnote 22] FINRA regulations on standards for
communication with the public similarly prohibit false, exaggerated,
unwarranted, or misleading statements or claims by broker-dealers, and
broker-dealer advertisements are subject to additional approval,
filing, and recordkeeping requirements and review procedures.[Footnote
23] According to many company officials we spoke with, their companies
responded to these requirements by putting procedures in place to
determine which designations and titles their registered
representatives may use in their marketing materials, such as business
cards.
SEC and state securities regulators also regulate information that
investment advisers are required to disclose to their clients. In the
Uniform Application for Investment Adviser Registration (Form ADV),
regulators have typically required investment adviser firms to provide
new and prospective clients with background information, such as the
basis of the advisory fees, types of services provided (such as
financial planning services), and strategies for addressing conflicts
of interest that may arise from their business activities.[Footnote
24] Recent changes to Form ADV are designed to improve the disclosures
that firms provide to clients. For example, firms must now provide
clients with information about the advisory personnel on whom they
rely for investment advice, including the requirements and
applicability of any professional designations or certifications
advisers may choose to include in their background information.
Most states regulate the use of the title "financial planner," and
state securities and insurance laws can apply to the misuse of this
title and other titles. For example, according to NASAA, at least 29
states specifically include financial planners in their definition of
investment adviser.[Footnote 25] According to NAIC, in many states,
regulators can use unfair trade practice laws to prohibit insurance
agents from holding themselves out as financial planners when in fact
they are only engaged in the sale of life or annuity insurance
products. However, as noted earlier, the effectiveness of the
regulation of insurers' market conduct varies across states. In
particular, in 2010 we noted inconsistencies in the state regulation
of life settlements, a potentially high-risk transaction in which
financial planners may participate.[Footnote 26]
In addition, we were told some states had adopted regulations limiting
the use of "senior-specific designations"--that is, designations that
imply expertise or special training in advising senior citizen or
elderly investors. According to NAIC, as of December 2010, 25 states
had adopted in a uniform and substantially similar manner the NAIC
Model Regulation on the Use of Senior-Specific Certifications and
Professional Designations in the Sale of Life Insurance and Annuities,
which limits the use of senior-specific designations by insurance
agents. According to NASAA, as of December 2010, 31 states had
adopted--and at least 9 other states were planning to adopt--the NASAA
Model Rule on the Use of Senior-Specific Certifications and
Professional Designations, which prohibits the misleading use of
senior-specific designations by investment adviser representatives and
other financial professionals.
Regulatory Structure for Financial Planners Covers Most Activities,
but Some Consumer Protection Issues Exist, and Data Tracking
Complaints and Regulatory Actions against Planners Are Limited:
The regulatory system for financial planners covers most activities in
which they engage. However, enforcement of regulation may be
inconsistent and some questions exist about consumers' understanding
of the roles, standards of care, and titles and designations that a
financial planner may have. The ability of regulators to identify
potential problems is limited because they do not specifically track
complaints, inspections, and enforcement actions specific to financial
planning services.
Existing Regulation Covers Most Financial Planning Services:
Although there is no single stand-alone regulatory body with oversight
of financial planners, the regulatory structure for financial planners
covers most activities in which they engage. As discussed earlier, and
summarized in figure 2, the primary activities a financial planner
performs are subject to existing regulation at the federal or state
level, primarily through regulation pertaining to investment advisers,
broker-dealers, and insurance agents. As such, SEC, FINRA, and NASAA
staff, a majority of state securities regulators, financial industry
representatives, consumer groups, and academic and subject matter
experts with whom we spoke said that, in general, they believe the
regulatory structure for financial planners is comprehensive,
although, as discussed below, the attention paid to enforcing existing
regulation has varied.
Figure 2: Summary of Key Statutes and Regulations That Can Apply to
Financial Planners:
[Refer to PDF for image: illustration]
Financial planner:
Capacity: Investment adviser;
Applicable federal and state laws:
Federal: Investment Advisers Act of 1940 and rules from SEC;
State: State securities laws;
Financial planning service covered by regulation: Advice about
securities, including advice given in conjunction with product
recommendations and advice about non-securities;
Federal and state regulators enforcing laws:
Federal: SEC;
State: State securities agencies.
Capacity: Broker-dealer;
Applicable federal and state laws:
Federal:
Securities and Exchange Act of 1934 and rules of SEC and FINRA;
State: State securities laws;
Financial planning service covered by regulation:
* Recommendations for specific securities products;
* Purchase or sale of securities products;
* Sale of variable insurance (variable annuities, variable life
insurance);
Federal and state regulators enforcing laws:
Federal: SEC and FINRA;
State: State securities agencies.
Capacity: Insurance agent;
Applicable federal and state laws:
State:
State insurance laws.
Financial planning service covered by regulation:
* Recommendations for insurance products;
* Sale of insurance products;
* Sale of variable insurance (variable annuities, variable life
insurance);
Federal and state regulators enforcing laws:
* State insurance agencies.
All work in concert with the customer.
Source: GAO.
Note: This figure highlights three major areas of regulatory oversight
but is not comprehensive and does not include other regulatory regimes
or practice standards that may be applicable to financial planners. In
addition, not all investment advisers, broker-dealers, or insurance
agents are financial planners.
[End of figure]
As noted earlier, the activities a financial planner normally engages
in generally include advice related to securities--and such activities
make financial planners subject to regulation under the Advisers Act.
One industry association and an academic expert noted that it would be
very difficult to provide financial planning services without offering
investment advice or considering securities. SEC staff told us that
financial planners holding even broad discussions of securities--for
example, what proportion of a portfolio should be invested in stocks--
would be required to register as investment advisers or investment
adviser representatives. In theory, a financial planner could offer
only services that do not fall under existing regulatory regimes--for
example, advice on household budgeting--but such an example is likely
hypothetical and such a business model may be hard to sustain. SEC and
NASAA staff, a majority of the state securities regulators we spoke
with, and many representatives of the financial services industry told
us that they were not aware of any individuals serving as financial
planners who were not regulated as investment advisers or regulated
under another regulatory regime. Some regulators and industry
representatives also said that, to the extent that financial planners
offered services that did not fall under such regulation, the new
Bureau of Consumer Financial Protection potentially could have
jurisdiction over such services.[Footnote 27]
However, not everyone agreed that regulation of financial planners was
comprehensive. One group, the Financial Planning Coalition, has argued
that a regulatory gap exists because no single law governs the
delivery of the broad array of financial advice to the public.
[Footnote 28] According to the coalition, the provision of integrated
financial advice--which would cover topics such as selecting and
managing investments, income taxes, saving for college, home
ownership, retirement, insurance, and estate planning--is unregulated.
Instead, the coalition says that there is patchwork regulation of
financial planning advice, and it views having two sets of laws--one
regulating the provision of investment advice and another regulating
the sale of products--as problematic.
In addition, although the regulatory structure itself for financial
planners may generally be comprehensive, attention paid to enforcing
existing statute and regulation has varied. For example, as noted
earlier, due to resource constraints, the examination of SEC-
supervised investment advisers is infrequent. Further, as also noted
earlier, market conduct regulation of insurers--which would include
the examination of the sales practices and behavior of financial
planners selling insurance products--has been inconsistent. Some
representatives of industry associations told us that they believed
that a better alternative to additional regulation of financial
planners would be increased enforcement of existing law and
regulation, particularly related to fraud and unfair trade practices.
Certain professionals--including attorneys, certified public
accountants, broker-dealers, and teachers--who provide financial
planning advice are exempt from regulation under the Advisers Act if
such advice is "solely incidental" to their other business activities.
[Footnote 29] According to an SEC staff interpretation, this exemption
would not apply to individuals who held themselves out to the public
as providing financial planning services, and would apply only to
individuals who provided specific investment advice on anything other
than "rare, isolated and non-periodic instances."[Footnote 30] Banks
and bank employees are also excluded from the Advisers Act and are
subject to separate banking regulation.[Footnote 31] The American
Bankers Association told us that the financial planning activities of
bank employees such as trust advisors or wealth managers were
typically utilized by clients with more than $5 million in investable
assets. The association noted that these activities were subject to a
fiduciary standard and the applicable supervision of federal and state
banking regulators.
Most regulators and academic experts and many financial services
industry representatives we spoke with told us that there is some
overlap in the regulation of individuals who serve as financial
planners because such individuals might be subject to oversight by
different regulatory bodies for the different services they provide.
For example, a financial planner who recommends and sells variable
annuities as part of a financial plan is regulated as a registered
representative of a broker-dealer as well as an insurance agent under
applicable federal and state laws. However, some state regulators we
spoke with told us that such overlap may be appropriate since the
regulatory regimes cover different functional areas.
Consumers May Not Understand That Financial Planners Have Potential
Conflicts of Interest When Selling Products:
As seen in figure 3, financial planners are subject to different
standards of care in their capacities as investment advisers, broker-
dealers, and insurance agents.
* Fiduciary Standard of Care: As noted earlier, investment advisers
are subject to a fiduciary standard of care--that is, they must act in
their client's best interest, ensure that recommended investments are
suitable for the client, and disclose to the client any material
conflicts of interest[Footnote 32]. According to SEC and NASAA
representatives, the fiduciary standard applies even when investment
advisers provide advice or recommendations about products other than
securities, such as insurance, in conjunction with advice about
securities.
* Suitability Standard of Care When Recommending Security Products:
FINRA regulation requires broker-dealers to adhere to a suitability
standard when rendering investment recommendations--that is, they must
recommend only those securities that they reasonably believe are
suitable for the customer.[Footnote 33] Unlike the fiduciary standard,
suitability rules do not necessarily require that the client's best
interest be served. According to FINRA staff, up-front general
disclosure of a broker-dealer's business activities and relationships
that may cause conflicts of interest is not required.[Footnote 34]
However, according to SEC, broker-dealers are subject to many FINRA
rules that require disclosure of conflicts in certain situations,
although SEC staff also note that those rules may not cover every
possible conflict of interest, and disclosure may occur after
conflicted advice has already been given.[Footnote 35]
* Suitability Standard of Care When Recommending Insurance Products:
Standards of care for the recommendation and sale of insurance
products vary by product and by state. For example, as seen earlier,
NAIC's model regulations on the suitability standard for annuity
transactions, adopted by some states but not others, require
consideration of the insurance needs and financial objectives of the
customer, while NAIC's model regulation for life insurance does not
include a suitability requirement per se.
Figure 3: Differences in the Standards of Care Required of Financial
Planners:
[Refer to PDF for image: illustration]
Financial planner:
Capacity: Investment advisor;
Standard of care: Fiduciary;
* Person has an affirmative duty to render services solely in the best
interests of clients;
* Requires advisers to disclose material conflicts of interest to
clients;
Financial planning service covered by standard of care:
* Advice about securities, including advice given in conjunction with
product recommendations and advice about non-securities.
Capacity: Broker-dealer;
Standard of care: Suitability;
* Rules require standard of care that includes, among other things,
rendering investment recommendations that are suitable for customers;
Financial planning service covered by standard of care:
* Recommendations for the purchase or sale of specific securities
products;
* Recommendations for the purchase of variable insurance (variable
annuities, variable life insurance).
Capacity: Insurance agent;
Standard of care: Varies by product and by state insurance law;
* Requires insurance agents to follow suitability standards, when
state has adopted such standards for products;
Financial planning service covered by standard of care:
* Recommendations for the purchase of insurance product;
* Recommendations for the purchase of variable insurance (variable
annuities, variable life insurance).
All work in concert with the customer.
Source: GAO.
Note: This figure is illustrative and is not comprehensive: financial
planners may serve in capacities other than those shown here, and not
all investment advisers, broker-dealers, and insurance agents serve as
financial planners.
[End of figure]
Conflicts of interest can exist when, for example, a financial
services professional earns a commission on a product sold to a
client. Under the fiduciary standard applicable to investment
advisers, financial planners must mitigate any potential conflicts of
interest and disclose any that remain. But under a suitability
standard applicable to broker-dealers, conflicts of interest may exist
and generally may not need to be disclosed up-front.[Footnote 36] For
example, as confirmed by FINRA, financial planners functioning as
broker-dealers may recommend a product that provides them with a
higher commission than a similar product with a lower commission, as
long as the product is suitable and the broker-dealer complies with
other requirements. Because the same individual or firm can offer a
variety of services to a client--a practice sometimes referred to as
"hat switching"--these services could be subject to different
standards of care. As such, representatives of consumer groups and
others have expressed concern that consumers may not fully understand
which standard of care, if any, applies to a financial professional.
As shown above, the standards of care--and the extent to which
conflicts of interest must be disclosed--can vary depending on the
capacity in which the individual serves.[Footnote 37] A 2007 report by
the Financial Planning Association stated that "it would be difficult,
if not impossible, for an individual investor to discern when the
adviser was acting in a fiduciary capacity or in a non-fiduciary
capacity."[Footnote 38] A 2008 SEC study conducted by the RAND
Corporation, consisting of a national household survey and six focus
group discussions with investors, found that consumers generally did
not understand not only the distinction between a suitability and
fiduciary standard of care but also the differences between broker-
dealers and investment advisers.[Footnote 39] Similarly, a 2010
national study of investors found that most were confused about which
financial professionals are required to operate under a fiduciary
standard that requires professionals to put their client's interest
ahead of their own.[Footnote 40]
Representatives of financial services firms that provide financial
planning told us they believe that clients are sufficiently informed
about the differing roles and accompanying standards of care that a
firm representative may have. They noted that when they provide both
advisory and transactional services to the same customer, each service-
-such as planning, brokerage, or insurance sales--is accompanied by a
separate contract or agreement with the customer. These agreements
disclose that the firm's representatives have different obligations to
the customer depending on their role. In addition, once a financial
plan has been provided, some companies told us that they have
customers sign an additional agreement stating that the financial
planning relationship with the firm has ended.
Recent revisions by SEC to Form ADV disclosure requirements were
designed to address, among other things, consumer understanding of
potential conflicts of interest by investment advisers and their
representatives. Effective October 12, 2010, SEC revised Form ADV,
Part 2, which financial service firms must provide to new and
prospective clients.[Footnote 41] The new form, which must be written
in plain English, is intended to help consumers better understand the
activities and affiliations of their investment adviser. It requires
additional disclosures about a firm's conflicts of interest,
compensation, business activities, and disciplinary information that
is material to an evaluation of the adviser's integrity. Similarly, in
October 2010 FINRA issued a regulatory notice requesting comments on a
concept proposal regarding possible new disclosure requirements that
would, among other things, detail for consumers in plain English the
conflicts of interest that broker-dealers may have associated with
their services.[Footnote 42]
Section 913 of the Dodd-Frank Act requires SEC to study the
substantive differences between the applicable standards of care for
broker-dealers and investment advisers; the effectiveness of the
existing legal or regulatory standards of care for brokers, dealers,
and investment advisers; and consumers' ability to understand the
different standards of care. SEC will also consider the potential
impact on retail customers of imposing the same fiduciary standard
that now applies to investment advisers on broker-dealers when they
provide personalized investment advice. Under the act, SEC may
promulgate rules to address these issues and is specifically
authorized to establish a uniform fiduciary duty for broker-dealers
and investment advisers that provide personalized investment advice
about securities to customers. As a result, further clarification of
these standards may be forthcoming. FINRA officials told us that they
support a fiduciary standard of care for broker-dealers when they
provide personalized investment advice to retail customers.
Consumer confusion on standards of care may also be a source of
concern with regard to the sale of some insurance products. A 2010
national survey of investors found that 60 percent mistakenly believed
that insurance agents had a fiduciary duty to their clients.[Footnote
43] Some insurance products, such as annuities, are complex and can be
difficult to understand, and annuity sales practices have drawn
complaints from consumers and various regulatory actions from state
regulators as well as SEC and FINRA for many years.[Footnote 44]
According to NAIC, many states have requirements that insurance
salespersons sell annuities only if the product is suitable for the
customer. However, NAIC notes that some states do not have a
suitability requirement for annuities. Consumer groups and others have
stated that high sales commissions on certain insurance products,
including annuities, may provide salespersons with a substantial
financial incentive to sell these products, which may or may not be in
the consumer's best interest. As a result of section 989J of the Dodd-
Frank Act, one type of annuity--the indexed annuity--is to be
regulated by states as an insurance product, rather than regulated by
SEC as a security, under certain conditions.[Footnote 45]
SEC's pending study related to the applicable standards of care for
broker-dealers and investment advisers will not look at issues of
insurance that fall outside of SEC's jurisdiction. NAIC has not
undertaken a similar study regarding consumer understanding of the
standard of care for insurance agents. As we reported in the past,
financial markets function best when consumers understand how
financial service providers and products work and know how to choose
among them.[Footnote 46] Given the evidence of consumer confusion
about differing standards of care and given the increased risks that
certain insurance products can pose, there could be benefits to an
NAIC review of consumers' understanding of standards of care for high-
risk insurance products.
Consumers May Be Confused about the Ways Financial Professionals
Present Themselves to the Public:
Individuals who provide financial planning services may use a variety
of titles when presenting themselves to the public, including
financial planner, financial consultant, and financial adviser, among
many others. However, evidence suggests that the different titles
financial professionals use can be confusing to consumers. The 2008
RAND study found that even experienced investors were confused about
the titles used by broker-dealers and investment advisers, including
financial planner and financial adviser. Similarly, in consumer focus
groups of investors conducted by SEC in 2005 as part of a rulemaking
process, participants were generally unclear about the distinctions
among titles, including broker, investment adviser, and financial
planner.[Footnote 47] In addition, a representative of one consumer
advocacy group has expressed concern that some financial professionals
may use as a marketing tool titles suggesting that they provide
financial planning services, when in fact they are only selling
products. One industry group, the Financial Planning Coalition, also
has noted that some individuals may hold themselves out as financial
planners without meeting minimum training or ethical requirements.
Federal and state regulators told us they generally focused their
oversight and enforcement actions on financial planners' activities
rather than the titles they use. Moreover, NASAA has said that no
matter what title financial planners use, most are required to
register as investment adviser representatives and must satisfy
certain competency requirements, including passing an examination or
obtaining a recognized professional designation.[Footnote 48]
Financial planners' professional designations are typically conferred
by a professional or trade organization. These designations may
indicate that a planner has passed an examination, met certain
educational requirements, or had related professional experience. Some
of these designations require extensive classroom training and
examination requirements and include codes of ethics with the ability
to remove the designation in the event of violations. State securities
regulators view five specific designations as meeting or exceeding the
registration requirements for investment adviser representatives,
according to NASAA, and allow these professional designations to
satisfy necessary competency requirements for prospective investment
adviser representatives.[Footnote 49] For example, one of these five
designations requires a bachelor's degree from an accredited college
or university, 3 years of full-time personal financial planning
experience, a certification examination, and 30 hours of continuing
education every 2 years.
The criteria used by organizations that grant professional
designations for financial professionals vary greatly. FINRA has
stated that while some designations require formal certification
procedures, including examinations and continuing professional
education credits, others may merely signify that membership dues have
been paid. The Financial Planning Coalition and The American College,
a nonprofit educational institution that confers several financial
designations, similarly told us that privately conferred designations
range from those with rigorous competency, practice, and ethical
standards and enforcement to those that can be obtained with minimal
effort and no ongoing evaluation.
As noted earlier, designations that imply expertise or special
training in advising senior citizen or elderly investors have received
particular attention from regulators. A joint report of SEC, FINRA,
and NASAA described cases in which financial professionals targeted
seniors by using senior-specific designations that implied that they
had a particular expertise for senior investors, when in fact they did
not; as noted earlier, NASAA and NAIC have developed a model rule to
address the issue.[Footnote 50] The report also noted these
professionals targeted seniors through the use of so-called free-lunch
seminars, where free meals are offered in exchange for attendance of a
financial education seminar. However, the focus of the seminars was
actually on the sale of products rather than the provision of
financial advice.
Given the large number of designations financial planners may use,
concerns exist that consumers may have difficulty distinguishing among
them. To alleviate customer confusion, FINRA has developed a Web site
for consumers that provides the required qualifications and other
information about the designations used by securities professionals.
The site lists more than 100 professional designations, 5 of which
include the term "financial planner," and 24 of which contain
comparable terms such as financial consultant or counselor.[Footnote
51] The American College told us that it had identified 270 financial
services designations. Officials from NASAA, NAIC, and a consumer
advocacy organization told us that consumers might have difficulty
distinguishing among the various designations. Officials from The
American College told us that the number of designations itself was
not necessarily a cause for concern, but rather consumers' broadly
held misperception that all designations or credentials are equal.
To help address these concerns, FINRA plans to expand its Web site on
professional designations to include several dozen additional
designations related to insurance. However, FINRA officials noted that
consumers' use of this tool has been limited. For example, in 2009,
the site received only 55,765 visits. A recent national study of the
financial capability of American adults sponsored by FINRA found that
only 15 percent of adults who had used a financial professional in the
last 5 years claimed to have checked the background, registration, or
license of a financial professional.[Footnote 52] In addition, SEC
staff acknowledged that there have been concerns about confusing
designations, and SEC's October 2010 changes to investment adviser
disclosure requirements mandate that investment adviser
representatives who list professional designations and certifications
in their background information also provide the qualifications needed
for these designations, so that the consumer can understand the value
of the designation for the services being provided.
Section 917 of the Dodd-Frank Act includes a requirement that SEC
conduct a study identifying the existing level of financial literacy
among retail investors, including the most useful and understandable
relevant information that they need to make informed financial
decisions before engaging a financial intermediary. While the section
does not specifically mention the issue of financial planners' titles
and designations, the confusion we found to exist could potentially be
addressed or mitigated if SEC incorporated this issue into its overall
review of financial literacy among investors. SEC staff told us that
at this time its review would not likely address this issue, although
it would address such things as the need for conducting background
checks on financial professionals. Financial markets function best
when consumers have information sufficient to understand and assess
financial service providers and products.[Footnote 53] Including
financial planners' use of titles and designations in SEC's financial
literacy review could provide useful information on the implications
of consumers' confusion on this issue.
Consumer Complaints and Enforcements Actions Appear to Be Relatively
Limited, but Regulators Generally Do Not Track Data Specific to
Financial Planners:
Available data do not show a large number of consumer complaints and
enforcement actions involving financial planners, but the exact extent
to which financial planners may be a source of problems is unknown. We
were able to find limited information on consumer complaints from
various agencies. For example, representatives of FTC and the Better
Business Bureau said that they had received relatively few complaints
related to financial planners. FTC staff told us that a search in its
Consumer Sentinel Network database for the phrase "financial planner"
found 141 complaints in the 5-year period from 2005 through 2010 but
that only a handful of these appeared to actually involve activity
connected to the financial planning profession.[Footnote 54] The staff
added that additional searches on other titles possibly used by
financial planners, such as financial consultant and personal
financial adviser, did not yield significant additional complaints. In
addition, a representative of the Better Business Bureau told us that
it had received relatively few complaints related to financial
planners, although the representative noted that additional complaints
might exist in broader categories, such as "financial services."
Consumer complaint data may not be an accurate gauge of the extent of
problems. Complaints may represent only a small portion of potential
problems and complaints related to "financial planners" may not always
be recorded as such. As we have previously reported, consumers also
may not always know where they can report complaints.[Footnote 55] At
the same time, some complaints that are made may not always be valid.
SEC has limited information on the extent to which the activities of
financial planners may be causing consumers harm. The agency does
record and track whether federally and state-registered investment
adviser firms provide financial planning services, but its data
tracking systems for complaints, examination results, and enforcement
actions are not programmed to readily determine and track whether the
complaint, result, or action was specifically related to a financial
planner or financial planning service. For example, SEC staff told us
the number of complaints about financial planners would be
undercounted in their data system that receives and tracks public
inquiries, known as the Investor Response Information System, because
this code would likely be used only if it could not be identified
whether the person (or firm) was an investment adviser or broker-
dealer. In addition, the data system that SEC uses to record
examination results, known as the Super Tracking and Reporting System,
does not allow the agency to identify and extract examination results
specific to the financial planning services of investment advisers.
However, SEC staff told us that a review of its Investor Response
Information System identified 51 complaints or inquiries that had been
recorded using their code for issues related to "financial planners"
between November 2009 and October 2010. SEC staff told us that the
complaints most often involved allegations of unsuitable investments
or fraud, such as misappropriation of funds.[Footnote 56] A review of
a separate SEC database called Tips, Complaints, and Referrals--an
interim system that was implemented in March 2010--found 124
allegations of problems possibly related to financial planners from
March 2010 to October 2010.[Footnote 57]
SEC staff told us that they did not have comprehensive data on the
extent of enforcement activities related to financial planners per se.
In addition, NASAA said that states generally do not track enforcement
data specific to financial planners. At our request, SEC and NASAA
provided us with examples of enforcement actions related to
individuals who held themselves out as financial planners. Using a
keyword search, SEC identified 10 such formal enforcement actions
between August 2009 and August 2010. According to SEC documents, these
cases involved allegations of such activities as defrauding clients
through marketing schemes, receiving kickbacks without making proper
disclosures, and misappropriation of client funds. Although NASAA also
did not have comprehensive data on enforcement activities involving
financial planners, representatives provided us with examples of 36
actions brought by 30 states from 1986 to 2010. These cases involved
allegations of such things as the sale of unsuitable products,
fraudulent misrepresentation of qualifications, failure to register as
an investment adviser, and misuse of client funds for personal
expenses.
Because of limitations in how data are gathered and tracked, SEC and
state securities regulators are not currently able to readily
determine the extent to which financial planning services may be
causing consumers harm. NASAA officials told us that, as with SEC,
state securities regulators did not typically or routinely track
potential problems specific to financial planners. SEC and NASAA
representatives told us that they had been meeting periodically in
recent months to prepare for the transition from federal to state
oversight of certain additional investment adviser firms, as mandated
under the Dodd-Frank Act, but they said that oversight of financial
planners in particular had not been part of these discussions. SEC
staff have noted that additional tracking could consume staff time and
other resources. They also said that because there are no laws that
directly require registration, recordkeeping, and other
responsibilities of "financial planners" per se, tracking such
findings relating to those entities would require expenditure of
resources on something that SEC does not have direct responsibility to
oversee. Yet as we have reported in the past, while we recognize the
need to balance the cost of data collection efforts against the
usefulness of the data, a regulatory system should have data
sufficient to identify risks and problem areas and support
decisionmaking.[Footnote 58] Given the significant growth in the
financial planning industry, ongoing concerns about potential
conflicts of interest, and consumer confusion about standards of care,
regulators may benefit from identifying ways to get better information
on the extent of problems specifically involving financial planners
and financial planning services.
Some Changes in the Oversight of Financial Planners Could Be
Beneficial, but Most Stakeholders Believe Substantial Overhaul Is Not
Needed:
Stakeholders Have Suggested a Variety of Approaches to the Regulation
of Financial Planners:
Over the past few years, a number of stakeholders--including consumer
groups, FINRA, and trade associations representing financial planners,
securities firms, and insurance firms--have proposed different
approaches to the regulation of financial planners. Following are four
of the most prominent approaches, each of which has both advantages
and disadvantages.
Creation of a Board to Oversee Financial Planners:
In 2009, the Financial Planning Coalition--comprised of the Certified
Financial Planner Board of Standards, Financial Planning Association,
and the National Association of Personal Financial Advisors--proposed
that Congress establish a professional standards-setting oversight
board for financial planners. According to the coalition, its proposed
legislation would establish federal regulation of financial planners
by allowing SEC to recognize a financial planner oversight board that
would set professional standards for and oversee the activities of
individual financial planners, although not financial planning firms.
For example, the board would have the authority to establish baseline
competency standards in the areas of education, examination, and
continuing education, and would be required to establish ethical
standards designed to prevent fraudulent and manipulative acts and
practices. It would also have the authority to require registration or
licensing of financial planners and to perform investigative and
disciplinary actions. Under the proposal, states would retain
antifraud authority over financial planners as well as full oversight
for financial planners' investment advisory activity. However, states
would not be allowed to impose additional licensing or registration
requirements for financial planners or set separate standards of
conduct. Supporters of a new oversight board have noted that its
structure and governance would be analogous to the Public Company
Accounting Oversight Board, a private nonprofit organization subject
to SEC oversight that in turn oversees the audits of public companies
that are subject to securities laws. According to the Financial
Planning Coalition, a potential advantage of this approach is that it
would treat financial planning as a distinct profession and would
regulate across the full spectrum of activities in which financial
planners may engage, including activities related to investments,
taxes, education, retirement planning, estate planning, insurance, and
household budgeting. Proponents argue that a financial planning
oversight board would also help ensure high standards and consistent
regulation for all financial planners by establishing common standards
for competency, professional practices, and ethics.
However, many securities regulators and financial services trade
associations with whom we spoke said that they believe such a board
would overlap with and in many ways duplicate existing state and
federal regulations, which already cover virtually all of the products
and services that a financial planner provides. Some added that the
board would entail unnecessary additional financial costs and
administrative burdens for the government and regulated entities. In
addition, some opponents of this approach question whether "financial
planning" should be thought of as a distinct profession that requires
its own regulatory structure, noting that financial planning is not
easily defined and can span multiple professions, including
accounting, insurance, investment advice, and law. One consumer group
also noted that the regulation of individuals and professions is
typically a state rather than a federal responsibility. Finally, we
note that the analogy to the Public Company Accounting Oversight Board
may not be apt. That board was created in response to a crisis
involving high-profile bankruptcies and investor losses caused in part
by inadequacies among public accounting firms. In the case of
financial planners, there is limited evidence of an analogous crisis
or, as noted earlier, of severe harm to consumers.
Augmenting Oversight of Investment Advisers with an SRO:
A number of proposals over the years have considered having FINRA or a
newly created SRO supplement SEC oversight of investment advisers.
These proposals date back to at least 1963, when an SEC study
recommended that all registered investment advisers be required to be
a member of an SRO.[Footnote 59] In 1986, the National Association of
Securities Dealers, a predecessor to FINRA, explored the feasibility
of examining the investment advisory activities of members who were
also registered as investment advisers. The House of Representatives
passed a bill in 1993 that would have amended the Advisers Act to
authorize the creation of an "inspection only" SRO for investment
advisers, although the bill did not become law.[Footnote 60] In 2003,
SEC requested comments on whether one or more SROs should be
established for investment advisers, citing, among other reasons,
concerns that the agency's own resources were inadequate to address
the growing numbers of advisers.[Footnote 61] However, SEC did not
take further action. Section 914 of the Dodd-Frank Act required SEC to
issue a study in January 2011 on the extent to which one or more SROs
for investment advisers would improve the frequency of examinations of
investment advisers.[Footnote 62]
According to FINRA, the primary advantage of augmenting investment
adviser oversight with an SRO is that doing so would allow for more
frequent examinations, given the limited resources of states and SEC.
The Financial Services Institute, an advocacy organization for
independent broker-dealers and financial advisers, has stated that an
industry-funded SRO with the resources necessary to appropriately
supervise and examine all investment advisers would close the gap that
exists between the regulation of broker-dealers and investment
advisers. FINRA said that it finds this gap troubling given the
overlap between the two groups (approximately 88 percent of all
registered advisory representatives are also broker-dealer
representatives). FINRA adds that any SRO should operate subject to
strong SEC oversight and that releasing SEC of some of its
responsibilities for investment advisers would free up SEC resources
for other regulatory activities.
However, NASAA, some state securities regulators, and one academic
with whom we spoke opposed adding an SRO component to the regulatory
authority of investment advisers. NASAA said it believed that
investment adviser regulation is a governmental function that should
not be outsourced to a private, third-party organization that lacks
the objectivity, independence, expertise, and experience of a
government regulator. Further, NASAA said it is concerned with the
lack of transparency associated with regulation by SROs because,
unlike government regulators, they are not subject to open records
laws through which the investing public can obtain information. Two
public interest groups, including the Consumer Federation of America,
have asserted that one SRO--FINRA--has an "industry mindset" that has
not always put consumer protection at the forefront. In addition, the
Investment Adviser Association and two other organizations we
interviewed have noted that funding an SRO and complying with its
rules can impose additional costs on a firm.[Footnote 63]
Extending Coverage of the Fiduciary Standard:
Proposals have been made to extend coverage of the fiduciary standard
of care to all those who provide financial planning services. Some
consumer groups and others have stated that a fiduciary standard
should apply to anyone who provides personalized investment advice
about securities to retail customers, including insurance agents who
recommend securities. The Financial Planning Coalition has proposed
that the fiduciary standard apply to all those who hold themselves out
as financial planners. Proponents of extending the fiduciary standard
of care, which also include consumer groups and NASAA, generally
maintain that consumers should be able to expect that financial
professionals they work with will act in their best interests. They
say that a fiduciary standard is more protective of consumers'
interests than a suitability standard, which requires only that a
product be suitable for a consumer rather than in the consumer's best
interest. In addition, the Financial Planning Coalition notes that
extending a fiduciary standard would somewhat reduce consumer
confusion about financial planners that are covered by the fiduciary
standard in some capacities (such as providing investment advice) but
not in others (such as selling a product).
However, some participants in the insurance and broker-dealer
industries have argued that a fiduciary standard of care is vague and
undefined. They say that replacing a suitability standard with a
fiduciary standard could actually weaken consumer protections since
the suitability of a product is easier to define and enforce.
Opponents also have argued that complying with a fiduciary standard
would increase compliance costs that in turn would be passed along to
consumers or otherwise lead to fewer consumer choices.
Clarifying Financial Planners' Credentials and Standards:
The American College has proposed clarifying the credentials and
standards of financial professionals, including financial planners. In
particular, it has proposed creating a working group of existing
academic and practice experts to establish voluntary credentialing
standards for financial professionals. As noted previously, consumers
may be unable to distinguish among the various financial planning
designations that exist and may not understand the requirements that
underpin them. Clarifying the credentials and standards of financial
professionals could conceivably take the form of prohibiting the use
of certain designations, as has been done for senior-specific
designations in some states, or establishing minimum education,
testing, or work experience requirements needed to obtain a
designation. The American College has stated that greater oversight of
such credentials and standards could provide a "seal of approval" that
would generally raise the quality and competence of financial
professionals, including financial planners, help consumers
distinguish among the various credentials, and help screen out less
qualified or reputable players.
However, the ultimate effectiveness of such an approach is not clear,
since the extent to which consumers take designations into account
when selecting or working with financial planners is unknown, as is
the extent of the harm caused by misleading designations. In addition,
implementation and ongoing monitoring of financial planners'
credentials and standards could be challenging. Further, the issue of
unclear designations has already been addressed to some extent--for
example, as noted earlier, some states regulate the use of certain
senior-specific designations and allow five professional designations
to satisfy necessary competency requirements for prospective
investment adviser representatives. State securities regulators also
have the authority to pursue the misleading use of credentials through
their existing antifraud authority.
Most Stakeholders Saw Little Need for an Additional Oversight Body
Governing Financial Planners:
In general, a majority of the regulatory agencies, consumer groups,
academics, trade associations, and individual financial services
companies with which we spoke did not favor substantial structural
change in the regulation of financial planners. In particular, few
supported an additional oversight body, which was generally seen as
duplicative of existing regulation. Some stakeholders in the
securities and insurance industries noted that given the dynamic
financial regulatory environment under way as a result of the Dodd-
Frank Act--such as creation of a new Bureau of Consumer Financial
Protection--more time should pass before additional regulatory changes
related to financial planning services were considered. Several
industry associations also noted that opportunities existed for
greater enforcement of existing law and regulation, as discussed
earlier.
Conclusions:
Existing statutes and regulations appear to cover the great majority
of financial planning services, and individual financial planners
nearly always fall under one or more regulatory regimes, depending on
their activities. While no single law governs the broad array of
activities in which financial planners may engage, given available
information, it does not appear that an additional layer of regulation
specific to financial planners is warranted at this time. At the same
time, as we have previously reported, more robust enforcement of
existing laws could strengthen oversight efforts. In addition, there
are some actions that can be taken that may help address consumer
protection issues associated with the oversight of financial planners.
First, as we have reported, financial markets function best when
consumers understand how financial providers and products work and
know how to choose among them. Yet consumers may be unclear about
standards of care that apply to financial professionals, particularly
when the same individual or firm offers multiple services that have
differing standards of care. As such, consumers may not always know
whether and when a financial planner is required to serve their best
interest. While SEC is currently addressing the issue of whether the
fiduciary standard of care should be extended to broker-dealers when
they provide personalized investment advice about securities, the
agency is not addressing whether this extension should also apply to
insurance agents, who generally fall outside of SEC's jurisdiction.
Sales practices involving some high-risk insurance products, such as
annuities, have drawn attention from federal and state regulators. A
review by NAIC of consumers' understanding of the standards of care
with regard to the sale of insurance products could provide
information on the extent of consumer confusion in the area and
actions needed to address the issue.
Second, we have seen that financial planners can adopt a variety of
titles and designations. The different designations can imply
different types of qualifications, but consumers may not understand or
distinguish among these designations, and thus may be unable to
properly assess the qualifications and expertise of financial
planners. SEC's recent changes in this area--requiring investment
advisers to disclose additional information on professional
designations and certifications they list--should prove beneficial.
Another opportunity lies in SEC's mandated review of financial
literacy among investors. Incorporating issues of consumer confusion
about financial planners' titles and designations into that review
could assist the agency in assessing whether any further changes are
needed in disclosure requirements or other related areas.
Finally, SEC has limited information about the nature and extent of
problems specifically related to financial planners because it does
not track complaints, examination results, and enforcement activities
associated with financial planners specifically, and distinct from
investment advisers as a whole. However, a regulatory system should
have data sufficient to identify risks and problem areas and support
decisionmaking. SEC staff have noted that additional tracking could
require additional resources, but other opportunities may also exist
to gather additional information on financial planners. Because
financial planning is a growing industry and has raised certain
consumer protection issues, regulators could potentially benefit from
better information on the extent of problems specifically involving
financial planners and financial planning services.
Recommendations:
We recommend that the National Association of Insurance Commissioners,
in concert with state insurance regulators, take steps to assess
consumers' understanding of the standards of care with regard to the
sale of insurance products, such as annuities, and take actions as
appropriate to address problems revealed in this assessment.
We also recommend that the Chairman of the Securities and Exchange
Commission direct the Office of Investor Education and Advocacy,
Office of Compliance Inspections and Examinations, Division of
Enforcement, and other offices, as appropriate, to:
* Incorporate into SEC's ongoing review of financial literacy among
investors an assessment of the extent to which investors understand
the titles and designations used by financial planners and any
implications a lack of understanding may have for consumers'
investment decisions; and:
* Collaborate with state securities regulators in identifying methods
to better understand the extent of problems specifically involving
financial planners and financial planning services, and take actions
to address any problems that are identified.
Agency Comments:
We provided a draft of this report for review and comment to FINRA,
NAIC, NASAA, and SEC. These organizations provided technical comments,
which we incorporated, as appropriate. In addition, NAIC provided a
written response, which is reprinted in appendix II. NAIC said it
generally agreed with the contents of the draft report and would give
consideration to our recommendation regarding consumers' understanding
of the standards of care with regard to the sale of insurance products.
NASAA also provided a written response, which is reprinted in appendix
III. In its response, NASAA said it agreed that a specific layer of
regulation for financial planners was unnecessary and provided
additional information on some aspects of state oversight of
investment advisers. NASAA also said that it welcomed the opportunity
to continue to collaborate with SEC to identify methods to better
understand and address problems specifically involving financial
planners, as we recommended. In addition, NASAA expanded upon the
reasons for its opposition to proposals that would augment oversight
of investment advisers with an SRO.
We are sending copies of this report to interested congressional
committees, the Chief Executive Officer of FINRA, Chief Executive
Officer of NAIC, Executive Director of NASAA, and the Chairman of SEC.
In addition, the report will be available at no charge on GAO's Web
site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-8678 or . Contact points for
our Offices of Congressional Relations and Public Affairs are on the
last page of this report. GAO staff who made major contributions to
this report are listed in appendix IV.
Signed by:
Alicia Puente Cackley:
Director, Financial Markets and Community Investment:
List of Congressional Addressees:
The Honorable Bob Corker:
The Honorable Tim Johnson:
The Honorable Herbert Kohl:
The Honorable Richard C. Shelby:
United States Senate:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
Our reporting objectives were to address (1) how financial planners
are regulated and overseen at the federal and state levels, (2) what
is known about the effectiveness of regulation of financial planners
and what regulatory gaps or overlap may exist, and (3) alternative
approaches for the regulation of financial planners and the advantages
and disadvantages of these approaches.
For background information, we obtained estimates for 2000 and 2008,
and projections for 2018, from the Bureau of Labor Statistics on the
number of individuals who reported themselves as "personal financial
advisers," a term that the agency said was interchangeable with
"financial planner." The bureau derived these estimates from the
Occupational Employment Statistics survey and the Current Population
Survey.[Footnote 64] According to the bureau, the Occupational
Employment Statistics' estimates for financial planners have a
relative standard error of 1.9 percent, and the median wage estimate
for May 2009 has a relative standard error of 1.5 percent. Because the
overall employment estimates used are developed from multiple surveys,
it was not feasible for the bureau to provide the relative standard
errors for these financial planner employment statistics. To estimate
the number of households that used financial planners, we analyzed
2007 data from the Board of Governors of the Federal Reserve's Survey
of Consumer Finances. This survey is conducted every three years to
provide detailed information on the finances of U.S. households.
[Footnote 65] Because the survey is a probability sample based on
random selections, the sample is only one of a large number of samples
that might have been drawn. Since each sample could have provided
different estimates, we express our confidence in the precision of our
particular sample's results as a 95 percent confidence interval (e.g.,
plus or minus 2.5 percentage points). This is the interval that would
contain the actual population value for 95 percent of the samples that
could have been drawn. In this report, for this survey, all percentage
estimates have 95 percent confidence intervals that are within plus or
minus 2.5 percentage points from the estimate itself.
To identify how financial planners are regulated and overseen at the
federal and state levels, we identified and reviewed, on the federal
level, federal laws, regulations, and guidance applicable to financial
planners, the activities in which they engage, and their marketing
materials, titles, and designations. We also reviewed relevant SEC
interpretive releases, such as IA Rel. No. 1092, Applicability of the
Investment Advisers Act to Financial Planners, Pension Consultants,
and Other Persons Who Provide Investment Advisory Services as a
Component of Other Financial Services. We also discussed the laws and
regulations relevant to financial planners in meetings with staff of
the Securities and Exchange Commission (SEC), Financial Industry
Regulatory Authority (FINRA), Department of Labor, and Internal
Revenue Service. We also interviewed two legal experts and reviewed a
legal compendium on the regulation of financial planners. At the state
level, we interviewed representatives from the North American
Securities Administrators Association (NASAA) and the National
Association of Insurance Commissioners (NAIC) and reviewed model
regulations developed by these agencies. In addition, we selected five
states--California, Illinois, North Carolina, Pennsylvania, and Texas--
for a more detailed review. We chose these states because they had a
large number of registered investment advisers and varying approaches
to the regulation of financial planners, and represented geographic
diversity. For each of these states, we reviewed selected laws and
regulations related to financial planners, which included those
related to senior-specific designations and insurance transactions,
and we interviewed staff at each state's securities and insurance
agencies.
To identify what is known about the effectiveness of the regulation of
financial planners and what regulatory gaps or overlap may exist, we
reviewed relevant federal and state laws, regulations and guidance. In
addition, we spoke with representatives of the federal and state
agencies cited above, as well as FINRA and organizations that
represent or train financial planners, including the Financial
Planning Coalition, The American College, and the CFA Institute;
organizations that represent the financial services industry,
including the Financial Services Institute, Financial Services
Roundtable, Securities Industry and Financial Markets Association,
Investment Advisers Association, American Society of Pension &
Professional Actuaries, National Association of Insurance and
Financial Advisors, American Council of Life Insurers, Association for
Advanced Life Underwriting, American Institute of Certified Public
Accountants, American Bankers Association; and organizations
representing consumer interests, including the Consumer Federation of
America and AARP. We also spoke with selected academic experts
knowledgeable about these issues. In addition, we reviewed relevant
studies and other documentary evidence, including a 2008 study of the
RAND Corporation that was commissioned by SEC, "Investor and Industry
Perspectives on Investment Advisers and Broker-Dealers"; "Results of
Investor Focus Group Interviews About Proposed Brokerage Account
Disclosures," sponsored by SEC; results of the FPA Fiduciary Task
Force, "Final Report on Financial Planner Standards of Conduct"; "U.S.
Investors & The Fiduciary Standard: A National Opinion Survey,"
sponsored by AARP, the Consumer Federation of America, the NASAA, the
Investment Adviser Association, the Certified Financial Planner Board
of Standards, the Financial Planning Association, and the National
Association of Personal Financial Advisors; and the 2009 National
Financial Capability Study, commissioned by FINRA. We determined that
the reliability of these studies was sufficient for our purposes. In
addition, we reviewed relevant information on the titles and
designations used by financial planners, including FINRA's Web site
that provides the required qualifications and other information about
the designations used by securities professionals.
We also obtained and reviewed available data on complaints and
selected enforcement actions related to financial planners from the
Federal Trade Commission, Better Business Bureau, and SEC. We
collected from the Federal Trade Commission complaint data from its
Consumer Sentinel Network database, using a keyword search of the term
"financial planner" for complaints filed from 2005 to 2010. From the
Better Business Bureau, we collected the number of complaints about
the financial planning industry received in 2009. From SEC, we
collected complaints from the agency's Investor Response Information
System that had been coded as relating to "financial planners" from
November 2009 to October 2010. We also reviewed data from SEC's Tips,
Complaints, and Referrals database that resulted from a keyword search
for the terms "financial planner," "financial adviser," "financial
advisor," "financial consultant," and "financial counselor" from March
2010 to October 2010. In addition, at our request, SEC and NASAA
provided us anecdotally with examples of enforcement actions related
to individuals who held themselves out as financial planners. SEC
identified 10 formal enforcement actions between August 2009 and
August 2010 and NASAA provided us selected examples of state
enforcement actions involving financial planners from 1986 to 2010
from 30 states. We gathered information on SEC-and state-registered
investment advisers from SEC's Investment Adviser Registration
Database. FINRA did not provide us with data on complaints,
examination results, or enforcement actions specific to financial
planners; FINRA officials told us they do not track these data
specific to financial planners.
To identify alternative approaches for the regulation of financial
planners and their advantages and disadvantages, we conducted a search
for legislative and regulatory proposals related to financial
planners, which have been made by Members of Congress, consumer
groups, and representatives of the financial planning, securities, and
insurance industries. We identified and reviewed position papers,
studies, public comment letters, congressional testimonies, and other
documentary sources that address the advantages and disadvantages of
these approaches. In addition, we solicited views on these approaches
from representatives of the wide range of organizations listed above,
including organizations that represent financial planners, financial
services companies, and consumers, as well as state and federal
government agencies and associations and selected academic experts.
We conducted this performance audit from June 2010 through January
2011 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the National Association of Insurance
Commissioners:
NAIC:
National Association of Insurance Commissioners:
And The Center For Insurance Policy And Research:
Executive Office:
444 N. Capital Street NW, Suite 701:
Washington, DC 20001-1509:
Central Office:
2301 McGee Street, Suite 800:
Kansas City, MO 66103-2662;
Securities Valuation Office:
48 Wall Street, 6th Floor:
New York, NY 10505-2906:
January 10, 2011:
Alicia Puente Cackley:
Director, Financial Markets and Community Investment:
United States Government Accountability Office:
441 G Street NW:
Washington, D.C. 20548:
Dear Ms. Cackley:
Thank you for the opportunity to review the Government Accountability
Office's draft report, "Consumer Finance: Regulatory Coverage
Generally Exists for Financial Planners, but Consumer Protection
Issues Remain" (GAO-11-235). The NAIC appreciates the important role
the GAO plays in maintaining consumer protections and ensuring
appropriate implementation of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (P.L. 111-203). Consumer protection is
at the heart of the NAIC's and state insurance regulators' activities
involving regulating markets, ensuring company solvency and protecting
the public interest.
We generally agree with the contents of this draft report and we do
not have any substantive comments to submit at this time. Furthermore,
our association will give further consideration to the recommendation
of your office regarding an assessment of consumers' understanding of
standards of care with regard to insurance products. Under the
leadership of our current president, Susan E. Voss, Commissioner of
Insurance for the State of Iowa, state insurance regulators will
include this matter as a topic for discussion during our 2011
deliberations.
Thank you again for this opportunity. If you are in need of further
information, please be in touch with Eric Nordman, Director of
Regulatory Services, at (816) 783-8005, or Ethan Sonnichsen, Director
of Government Relations, at (202) 471-3990.
Sincerely,
Signed by:
Andrew J. Beal:
Chief Operating Officer and Chief Legal Officer:
[End of section]
Appendix III: Comments from the North American Securities
Administrators Association:
North American Securities Administrators Association, Inc.
750 First Street N.E., Suite 1140:
Washington, D.C. 20002:
202-737-0900:
Fax: 202/783-3571:
[hyperlink, http://www.nasaa.org]
President: David Massey (North Carolina):
President-Elect: Jack Herstein (Nebraska):
Past-President: Denise Voigt Crawford (Texas):
Executive Director: Russ Iuculano:
Secretary: Rick Hancox (New Brunswick):
Treasurer: Fred Joseph (Colorado):
Ombudsman: Matthew Neubert (Arizona):
Directors: Joseph P. Borg (Alabama):
Preston DuFachard (California):
Pamela Snuck (Wisconsin):
Frank Widmann (Florida):
January 6, 2011:
Ms. Alicia Puente Cackley:
Director:
Financial Markets and Community Investment:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Cackley:
Thank you for the opportunity to comment on the Government
Accountability Office (GAO) draft report entitled Consumer Finance:
Regulatory Coverage Generally Exists for Financial Planners, but
Consumer Protection Issues Remain (GAO-11-235) ("report"). We also
appreciate the opportunity to respond to inquiries from GAO staff and
to provide information needed for the completion of this report. The
report covers important matters to investors and regulators, and we
commend the GAO staff for its thoroughness in preparing this report.
NASAA concurs with the report that a specific layer of regulation for
financial planners is unnecessary. NASAA offers the following comments
in order to convey our position on several issues discussed in the
report and to provide additional information on state regulation of
investment advisers and financial planners.
Augmenting Oversight of Investment Advisers with an SRO:
As noted in the report, regulation of financial planners is primarily
covered under state and federal laws governing investment advisers.
State securities regulators and the Securities and Exchange Commission
("SEC") share responsibility for regulating investment advisers based
primarily on the assets an investment adviser has under management.
Since 1996, investment advisers with $30 million or less in assets
under management have been regulated by the states, while those with
assets under management in excess of $30 million have been regulated
by the SEC. However, the Dodd-Frank Wall Street Reform and Consumer
Protection Act increased this regulatory dividing line to $100
million. As a result, we estimate that approximately 4,000 investment
advisers will switch from SEC to state registration, leaving the SEC
to focus on the larger more systemically significant advisers.
Regulation of investment advisers is a topic of considerable debate,
and the report covers various proposals on how the oversight of
financial planners and investment advisers should be handled. One of
the proposals discussed in the report is the formation of a self-
regulatory organization ("SRO") for investment advisers. The report
considers potential advantages and disadvantages of this approach, and
NASAA believes there arc significant concerns with this concept beyond
those noted in the report that must be considered.
NASAA's position is that investment adviser regulation is a
governmental function that should not be outsourced to a private,
third-party organization that does not have expertise or experience
with investment adviser regulation. One can readily conclude that the
designation of an SRO for the oversight of investment advisers, with
its attendant direct and indirect costs, its opaque structure and
attendant lack of accountability and transparency, would outweigh any
perceived benefits to the investing public.
The chief concerns the states have with the designation of an SRO for
the oversight of investment advisers are the collaboration,
transparency, accountability, and conflict issues that have always
been inherent to the SRO model. While industry SROs had historically
worked as a partner with the SEC and the states (creating what was
referred to as the "three-legged stool" of regulation), this model
recently changed based on an over-broad construction of the
"government actor doctrine." It has been our experience that, to avoid
a classification as a "government actor", the relevant SRO has
restricted the release of information to the government and has
affirmatively taken the position that it is prohibited from active
collaboration with governmental regulators, including the governmental
entity responsible for its oversight. As such, previous synergies with
the SRO have been lost, and it has become increasingly difficult for
the governmental regulators to meaningfully control oversight or
investigations over registrants subject to the current SRO model.
Collaboration issues aside, the regulatory work performed by SROs
lacks transparency. Although SROs have been performing governmental
functions for decades, they are not subject to similar Freedom Of
Information Act (FOIA) and public records requirements as are the SEC
and slate securities regulators. Even where there is public disclosure
by SROs regarding members, as in the case of BrokerCheck, the SRO has
placed limitations and filters on regulatory records that far exceed
FOIA provisions. The end result is that vital information is withheld
from the investing public. Without greater transparency, investors
cannot obtain the information they need to make informed decisions.
Finally, the current SRO model raises accountability and conflict
concerns. Even where there is an independent Board of Directors, SROs
remain organizations built on the premise of self-rule and are, as a
matter of first principle, accountable to their members rather than
the investing public. Ultimately, no matter how many safeguards are
instituted, an SRO has substantial conflicts of interest that
governmental regulators do not. This is particularly true in
situations where industry and investor interests conflict, as in the
case of mandatory pre-dispute arbitration clauses and the disclosure
or expungement of historical settlements, judgments, and investor
claims. Ultimately, SROs simply cannot match the accountability of
government regulators, nor the proximity and familiarity of state
regulators, in particular, when considering investor protection and
regulatory thoroughness.
State Regulation of Investment Advisers and Investment Adviser
Representatives:
The report discusses both state and SEC regulation of investment
advisers, including the registration forms required by the SEC and the
disclosure of that information to investors. We believe it is
important to note that these forms, the ADV Parts 1 and 2, are also
required by the state securities regulators.
In addition to these forms, state-registered advisers are also
required to submit additional forms and supplemental information such
as client contracts or financial statements. State regulators also
require investment advisers to complete additional disclosure
questions. Specifically, in Part 2 of the ADV, commonly referred to as
the firm brochure, an investment adviser registering with a state
securities regulator must disclose additional information about
outside business activities, certain fee arrangements, and arbitration
claims against the adviser or a management person. The information
contained in these registration forms is available to the investing
public from the adviser, state securities regulators, or online at
[hyperlink, http://www.adviserinfo.sec.gov]. As explained in the
report, most states register investment adviser representatives and
important information about the backgrounds of these individuals is
also available on the same website.
Conclusions and Recommendations:
The report's conclusions include a reference to the lack of complaint
information available to state and federal regulators. While states
track complaint and enforcement information on investment advisers as
noted in the report, that information generally does not distinguish
between complaints or enforcement actions lodged against an investment
adviser versus a financial planner. NASAA understands the GAO's
concern with potential complaints against financial planners given the
increase of individuals and firms providing financial planning
services. NASAA is taking steps to gauge whether there are in fact
significant numbers of complaints against investment adviser firms
providing financial planning services and, if so, how better to track
this information and address potential problems.
Finally, the report includes a recommendation that the SEC
"collaborate with state securities regulators in identifying methods
to better understand the extent of problems specifically involving
financial planners and financial planning services, and take actions
to address any problems that are identified." Over the years, NASAA
has worked closely with the SEC on matters specific to the regulation
of investment advisers, including revisions to registration forms, the
development of the electronic system for registration used by
investment advisers, and the upcoming implementation of the increased
assets under management threshold. NASAA welcomes the opportunity to
continue to work with the SEC and to address potential issues
involving financial planners as recommended in the report.
Thank you again for the opportunity to review and comment on the draft
report. We look forward to working with the GAO on future studies.
Sincerely,
Signed by:
David Massey:
NASAA President and North Carolina Deputy Securities Administrator:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Alicia Puente Cackley (202) 512-8678 or :
Staff Acknowledgments:
In addition to the contact named above, Jason Bromberg (Assistant
Director), Sonja J. Bensen, Jessica Bull, Emily Chalmers, Patrick
Dynes, Ronald Ito, Sarah Kaczmarek, Marc Molino, Linda Rego, and
Andrew Stavisky made key contributions to this report.
[End of section]
Footnotes:
[1] While the Bureau of Labor Statistics reports these statistics
using the term "financial adviser," bureau officials said that this
term could be used interchangeably with financial planner. The bureau
broadly defined a "personal financial adviser" as an individual who
provides financial planning services and that private bankers or
wealth managers would also be categorized as financial advisers.
[2] Our percentage estimates based on the 2007 Survey of Consumer
Finances have 95 percent confidence intervals of +/-2.5 percentage
points or less. For example, we are 95 percent confident that between
8.2 and 11.8 percent of households in the bottom quartile used
financial planners for investment decisions. See appendix I for
additional information.
[3] Investment Adviser Act Release No. 1092, 52 Fed. Reg. 38400, 38401
(Oct. 16, 1987) (IA Rel. No. 1092).
[4] The Advisers Act defines an investment adviser as any person
(i.e., individual or firm) who is in the business of providing advice,
or issuing reports or analyses, regarding securities, for
compensation. 15 U.S.C. � 80b-2(a)(11); IA Rel. No. 1092. In addition
to applicable securities law, investment advice related to a
retirement savings plan, such as a 401(k) plan, may also be subject to
the Employee Retirement Income Security Act. The requirements under
that act are outside the scope of this study. A forthcoming GAO
report, GAO-11-119, will provide more information on investment advice
in 401(k) plans.
[5] In SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 189-
192 (1963), the U.S. Supreme Court recognized that the Advisers Act
imposes a fiduciary duty on investment advisers. This standard imposes
an affirmative duty to act solely in the best interests of the client.
The investment adviser also must eliminate or disclose all conflicts
of interest.
[6] 15 U.S.C. � 80b-3a. The term investment adviser can refer to a
person or firm. Investment adviser firms generally register with SEC
or state securities departments as registered investment advisers.
According to NASAA, certain natural persons that are employed by firms
generally register with the state securities departments as investment
adviser representatives.
[7] Id. Under 17 C.F.R. � 275.203A-1, SEC registration has been
optional for certain investment advisers having assets under
management between $25 and $30 million. Firms also may have a
different basis for registering with SEC (other than the amount of
client assets the firm has under management), such as whether the
principal office and place of business are within a state that has no
registration requirement.
[8] Pub. L. No. 111-203, � 410, 124 Stat. 1376, 1576-77 (2010).
[9] In registering with SEC or a state, investment adviser firms are
required to report whether they provide financial planning services in
Part 1A of the Uniform Application for Investment Adviser
Registration, Item 5 G(1). SEC does not provide a definition of
financial planning services for firms to use when completing the
registration form. The total number of investment adviser firms
overseen--including both those that do and do not provide financial
planning services--is 15,016 for the states and 11,873 for SEC. For
data on investment adviser firms, firms that were registered with both
SEC and the states were counted with SEC-registered investment adviser
firms.
[10] See 75 Fed. Reg. 77052 (Dec. 10, 2010) (SEC proposed rule, which,
if finalized, would give advisers until August 20, 2011, to report the
market value of their assets under management to the SEC as the first
step in the process).
[11] GAO, Securities and Exchange Commission: Steps Being Taken to
Make Examination Program More Risk-Based and Transparent, [hyperlink,
http://www.gao.gov/products/GAO-07-1053] (Washington, D.C.: Aug. 14,
2007). As we noted, since the detection of mutual fund trading abuses
in late 2003, in light of limited resources, SEC has shifted its
approach to examinations of investment advisers from one that focused
on routinely examining all registered firms, regardless of risk, to
one that focuses on more frequently examining those firms and industry
practices at higher risk for compliance issues.
[12] [hyperlink, http://www.gao.gov/products/GAO-07-1053]. SEC
reported in February 2010 that it is now placing a greater emphasis on
fraud detection, in addition to identifying potential violations of
securities laws and rules, strengthening procedures and internal
controls to maximize limited resources, recruiting examiners with
specialized skills, and increasing expertise through enhanced training.
[13] According to NASAA, New York, Minnesota, and Wyoming do not
register investment adviser representatives, although New York and
Minnesota do have certain examination and other requirements that must
be met.
[14] The brokerage and insurance services provided by these investment
adviser firms are not necessarily a part of their financial planning
services. In addition, many financial planners may sell securities-or
insurance-related products through affiliated brokers or agents.
[15] The primary law for regulating broker-dealers is the Securities
Exchange Act of 1934, codified at 15 U.S.C. �� 78a-78oo. Brokers
effect transactions for the account of others, while dealers buy and
sell securities for their own accounts. 15 U.S.C. � 78c. The term
registered representative is generally used to refer to certain
employees of a broker-dealer firm who are engaged in providing
securities recommendations. Broker-dealers must be members of a
qualifying self-regulatory organization (either a national exchange or
a registered securities association). 15 U.S.C. � 78o(b)(8).
[16] Under NASD Conduct Rule 2310, a FINRA member making an investment
recommendation to a customer must have grounds for believing that the
recommendation is suitable for that customer's financial situation and
needs. In November 2010, SEC approved FINRA's proposed new
consolidated rules governing the suitability obligations of its
members. 75 Fed. Reg. 71479 (Nov. 23, 2010). This rule, proposed FINRA
Rule 2111, requires salespersons to have a reasonable basis for
believing, based on adequate due diligence, that a recommendation of a
transaction or strategy is suitable for at least some investors; that
the recommendation is suitable for a specific customer, based on that
customer's profile; and that a series of recommended transactions is
not excessive and unsuitable for the customer.
[17] NAIC amended this model regulation in March 2010; according to
NAIC, one state has adopted the updated model and additional states
are expected to do so.
[18] According to NAIC, in 4 of these 32 states the regulation applies
only when the consumers are senior citizens.
[19] NASD Notice to Members 96-86 outlines that variable contracts for
insurance products are subject to suitability requirements.
[20] NASD Interpretive Material 2210-2 outlines guidance concerning
communications with the public about variable life insurance and
variable annuities. FINRA has proposed that this guidance be replaced
by a separate new FINRA Rule 2211. See FINRA Rule Filing No. SR-FINRA-
2009-070.
[21] GAO, Insurance Reciprocity and Uniformity: NAIC and State
Regulators Have Made Progress in Producer Licensing, Product Approval
and Market Conduct Regulation, but Challenges Remain, [hyperlink,
http://www.gao.gov/products/GAO-09-372] (Washington, D.C.: Apr. 6,
2009). Reciprocity refers to the extent to which state regulators
accept other states' regulatory actions. Uniformity refers to the
extent to which states have implemented either the same, or
substantially similar, regulatory standards and procedures.
[22] 17 C.F.R. � 275.206(4)-1.
[23] NASD Rule 2210.
[24] SEC and the states use Form ADV to register investment adviser
firms and collect information from them. Part 2 of Form ADV provides
information about the investment adviser and its business for use of
the clients and is publicly available on the Investment Adviser Public
Depository Web site. The SEC adopted amendments to Form ADV that were
effective October 12, 2010, requiring Part 2 of Form ADV be written in
a plain English narrative format. See Amendments to Form ADV, 75 Fed.
Reg. 49,234 (Aug. 12, 2010) (to be codified at 17 C.F.R. pt. 275 and
279).
[25] The District of Columbia and Puerto Rico also include financial
planners in their definitions of investment adviser, according to
NASAA.
[26] GAO, Life Insurance Settlements: Regulatory Inconsistencies May
Pose a Number of Challenges, [hyperlink,
http://www.gao.gov/products/GAO-10-775] (Washington, D.C.: July 9,
2010).
[27] Section 1011 of the Dodd-Frank Act established the Bureau of
Consumer Financial Protection to regulate "the offering and provision
of consumer financial products or services under the Federal consumer
financial laws." A financial product or service is defined in section
1002(15)(A)(viii) of the act to include financial advisory services to
consumers on individual financial matters, with the exception of
advisory services related to securities provided by a person regulated
by SEC or a state securities commission to the extent that such person
acts in a regulated capacity. Accordingly, it appears that the bureau
may have jurisdiction over financial planners to the extent that they
may offer services that would not be under the jurisdiction of SEC or
a state securities commission.
[28] The members of this coalition include the Certified Financial
Planner Board of Standards, Inc.; the Financial Planning Association;
and the National Association of Personal Financial Advisors.
[29] 15 U.S.C. � 80b-2(a)(11); IA Rel. No. 1092(II)(B), at 38403.
Under 15 U.S.C. � 80b-2(a)(11)(C), brokers and dealers also cannot
receive any special compensation for their services in order to be
exempt from registration as an investment adviser.
[30] Id.
[31] Id. The Advisers Act excludes bank and bank holding companies
from the definition of investment adviser. Further, a bank and a bank
holding company is an investment adviser under the act to the extent
that the bank or bank holding company serves or acts as an adviser to
a registered investment company. If such services are performed in a
separate department or division of a bank, the department or division
and not the bank itself is the investment adviser.
[32] The SEC has, in effect, established rules of conduct for
investment advisers, including requirements for disclosing conflicts
of interest, obtaining the best execution on behalf of clients,
allocating investments among clients fairly, ensuring that investments
are suitable for clients, and ensuring that there is a reasonable
basis for recommendations. SEC also requires investment advisers to
maintain records pertaining to client accounts and business operations.
[33] A broker-dealer must have an adequate and reasonable basis for
any recommendation and must make recommendations based on a customer's
financial situation, needs and other securities holdings.
[34] Letter from Marc Menchel, Executive Vice President and General
Counsel, FINRA, to Elizabeth M. Murphy, Secretary, SEC 4 (Aug. 25,
2010), available at [hyperlink,
http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/indus
try/p121983.pdf].
[35] The standards of conduct for broker-dealers may also be based on
antifraud provisions of the securities law and agency principles.
Broker-dealers also have a duty of fairness in their contracts with a
customer, which requires them to disclose material information that
the customer would consider important as an investor. In addition,
broker-dealers that handle discretionary accounts are generally
thought to owe fiduciary obligations to their customers.
[36] FINRA officials have stated that they believe that the regulation
of broker-dealers--while lacking an express fiduciary duty--prescribes
in great detail the conduct and supervision of broker-dealers who
provide investment advice to retail customers.
[37] Black's Law Dictionary (9th ed. 2009) defines the term "conflict
of interest" as a "real or seeming incompatibility between one's
private interests and one's public or fiduciary duties."
[38] Final Report on Financial Planner Standards of Conduct, FPA
Fiduciary Task Force, June 2007.
[39] Angela A. Hung et al., RAND Institute for Civil Justice, Investor
and Industry Perspectives on Investment Advisers and Broker-Dealers
(2008).
[40] Infogroup, Opinion Research Corporation, U.S. Investors & The
Fiduciary Standard: A National Opinion Survey, September 15, 2010. The
survey was conducted among a sample of 2,012 adults living in the
continental United States, including 1,319 who identified themselves
as investors. The survey was sponsored by AARP, the Consumer
Federation of America, NASAA, the Investment Adviser Association, the
Certified Financial Planner Board of Standards, the Financial Planning
Association, and the National Association of Personal Financial
Advisors.
[41] Amendments to Form ADV, 75 Fed. Reg. 49234 (Aug. 12, 2010)
(requires investment advisers registered with SEC to provide new and
prospective clients with a brochure and brochure supplements clearly
setting forth a meaningful, current disclosure of the business
practices, conflicts of interest and background of the investment
adviser and its advisory personnel; and requires the brochures to be
filed with SEC electronically, which will make them available to the
public through its Web site).
[42] FINRA Regulatory Notice 10-54.
[43] Infogroup, Opinion Research Corporation, U.S. Investors & The
Fiduciary Standard: A National Opinion Survey, September 15, 2010.
[44] See, for example, Securities and Exchange Commission Rule 151A
and Annuities: Issues and Legislation, CRS Report for Congress 7-7500
(July 29, 2010).
[45] State regulation applies so long as a state has adopted NAIC's
Suitability in Annuity Transactions model regulation or if an
insurance company adopts and implements practices on a nationwide
basis that meet or exceed the minimum requirements established by
NAIC's model regulation. Indexed annuities are products that guarantee
a purchaser's principal and a certain rate of return, and offer a
chance for additional returns linked to a securities index or indices.
[46] GAO, Financial Regulation: A Framework for Crafting and Assessing
Proposals to Modernize the Outdated U.S. Financial Regulatory System,
[hyperlink, http://www.gao.gov/products/GAO-09-216] (Washington, D.C.:
Jan. 8, 2009).
[47] Results of Investor Focus Group Interviews About Proposed
Brokerage Account Disclosures. Report to the Securities and Exchange
Commission by Siegel & Gale LLC and Gelb Consulting Group, Inc., Mar.
10, 2005.
[48] According to NASAA, all but three states--New York, Minnesota,
and Wyoming--register investment adviser representatives and require
that they pass either the Series 65 (Uniform Investment Adviser Law
Examination) or the Series 66 (Uniform Combined State Law
Examination), or obtain a recognized professional designation. While
New York and Minnesota do not register individual investment adviser
representatives, their state laws require that the representatives
meet other requirements, such as passing certain examinations or
obtaining a professional designation accepted by the state.
[49] The five designations recognized as such are Certified Financial
Planner�, Chartered Financial Consultant�, Personal Financial
Specialist, Chartered Financial Analyst, and Chartered Investment
Counselor.
[50] Protecting Senior Investors: Report of Examinations of Securities
Firms Providing "Free Lunch" Sales Seminars by the Office of
Compliance Inspections and Examination, Securities and Exchange
Commission; North American Securities Administrators Association; and
the Financial Industry Regulatory Authority, September 2007.
[51] See [hyperlink,
http://apps.finra.org/DataDirectory/1/prodesignations.aspx].
[52] Applied Research & Consulting LLC, Financial Capability in the
United States: Initial Report of the Research Findings from the 2009
National Survey, prepared for the FINRA Investor Education Foundation
(New York: December 2009).
[53] [hyperlink, http://www.gao.gov/products/GAO-09-216].
[54] The Consumer Sentinel Network database is a secure online
database of millions of consumer complaints available only to law
enforcement. In addition to storing complaints received by FTC, the
Consumer Sentinel Network also includes complaints filed with the
Internet Crime Complaint Center, Better Business Bureaus, Canada's
PhoneBusters, the U.S. Postal Inspection Service, the Identity Theft
Assistance Center, and the National Fraud Information Center, among
others.
[55] GAO, Telecommunications: FCC Needs to Improve Oversight of
Wireless Phone Service, [hyperlink,
http://www.gao.gov/products/GAO-10-34] (Washington, D.C.: November
2009), p. 18.
[56] Of these 51 complaints or inquiries, 29 involved allegations of
fraud, 9 involved allegations of unsuitable investments, and the
remaining 13 represented questions on a variety of topics.
[57] Of these 124 allegations, 13 were coded as "fraudulent or
unregistered offer or sale of securities, including Ponzi schemes,
high yield investment programs or other investment programs"; 12 as
"manipulation of a security's price or volume"; 6 as "theft or
misappropriation of funds or securities"; 5 as "false or misleading
statements about a company"; 3 as "problems with my brokerage or
advisory account"; and 2 as "insider trading." An additional 14 were
coded as "other fraudulent conduct" and 69 were coded simply as
"other."
[58] GAO, Managing for Results, Using GPRA to Help Congressional
Decisionmaking and Strengthen Oversight, [hyperlink,
http://www.gao.gov/products/GAO/T-00-95] (Washington, D.C.: March
2000), p. 13. GAO, Executive Guide, Effectively Implementing the
Government Performance and Results Act, [hyperlink,
http://www.gao.gov/products/GAO/GGD-96-118] (Washington, D.C.: June
1996), p. 27.
[59] See Securities and Exchange Commission, News Digest Issue No. 63-
4-3, 8 (1963), which describes SEC's report to Congress, regarding the
adequacy of the rules of national securities exchanges and national
securities associations, pursuant to Pub. L. No. 87-196, 75 Stat. 465
(1961), wherein SEC points out that the framework of industry self-
regulation permitted many broker-dealer firms and registered
investment advisers to remain outside of any official self-regulatory
group. According to the SEC News Digest, the report suggested that
membership in an SRO should be a prerequisite to registration with SEC
as a broker-dealer or investment adviser.
[60] H.R. 578, 103RD Cong. (1993).
[61] Investment Advisers Act Release No. 2107, 68 Fed. Reg. 7038 (Feb.
11, 2003).
[62] SEC is required to report the results of its study within 180
days of enactment of the Dodd-Frank Act.
[63] The Investment Adviser Association is a not-for-profit
association that represents the interests of SEC-registered investment
adviser firms.
[64] As explained by the Bureau of Labor Statistics, the Occupational
Employment Statistics program produces employment and wage estimates
for over 800 occupations. These are estimates of the number of people
employed in certain occupations, and estimates of the wages paid to
them. Since self-employed persons are not included in the estimates,
the bureau also considers information from the Current Population
Survey, a monthly survey of households conducted by the Bureau of
Census for the Bureau of Labor Statistics, to derive its occupation
estimates.
[65] Additional information on the sample design and data collected by
the Survey of Consumer Finances is available at [hyperlink,
http://www.federalreserve.gov/pubs/oss/oss2/about.html].
[End of section]
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Which of the following would not be considered an investment adviser according to the Investment Advisers Act of 1940 quizlet?EXPLANATION According to the Investment Advisors Act of 1940, an investment advisor is an individual who receives compensation for investment advice. The exclusions from this definition include any bank or bank holding company and any person whose advice or services is related only to U.S. Government securities.
Who would be defined as an investment adviser under the Investment Advisers Act of 1940?Terms in this set (32) Definition of IA. -Under the Investment Advisers Act of 1940, an investment adviser is defined as a "person who receives compensation for advising others about securities, or about the advisability of investing in securities."
Who is subject to the Investment Advisers Act of 1940?Investment Advisers Act of 1940
Since the Act was amended in 1996 and 2010, generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission.
Which of the following are not required to register as investment advisers under the Investment Advisers Act of 1940 persons who give advice?Under the Investment Advisers Act of 1940, which of the following persons is exempt from registration with the SEC? Under the Investment Advisers Act of 1940, anyone who gives advice about securities only to insurance companies is exempt from registration.
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Which of the following would not be considered an investment adviser according to the Investment Advisers Act of 1940?
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