1. Topic 10 Financial Services Regulations and Requirements

2. Topic 10: Financial Services Regulations and Requirements Learning Objectives – Identify the regulatory authorities that impact elements of the financial planning process. (Examples include regulation of accountancy, legal practice, real estate law, insurance regulation, etc.) – Differentiate between investment knowledge that is proper to use in the evaluation of securities and insider information. – Demonstrate a comprehensive understanding of investment advisor regulation and financial planning aspects of the ERISA. – Explain the relevant licensing, reporting and compliance issues that may affect the business model used by a financial planning firm.

3. Topic 10: Financial Services Regulatory Authorities Planning Area Regulatory Authority Investment advice SEC/State securities administrator Sale of securities SEC/FINRA/State securities administrator Sale of insurance State insurance commission Income tax preparation IRS Legal advice State/ABA Accounting services State/AICPA Real estate law State real estate commission Banking OCC, FED, OTS Municipal securities MSRB

4. Topic 10: Financial Services Regulations and Requirements Topics: – Registration and licensing – Reporting – Compliance – State securities and insurance laws

5. Topic 10: Investment Advisers Act of 1940 Requires registration with SEC if – A - Advice – B - in the Business – C - Compensation All of these elements must be present Anyone who is: (1) in the business (2) of providing advice about securities (3) for compensation.

6. Topic 10: Investment Advisers Act of 1940 The following entities and persons are not required to register – Any bank or holding company that is not an investment company – Any lawyer, accountant, engineer or teacher when the advisory services are “solely incidental” to the practice of these professions – Any broker or dealer whose performance of advisory services is solely incidental and who receives no special compensation for these services – The publisher of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation – Any person whose advice, analyses or reports relate only to securities which are direct obligations of, or guaranteed by, the United States – Other persons not within the intent of the law as determined by the SEC

7. Topic 10: Investment Advisers Act of 1940 Trick “Big Plate” – B = Bank – I = Incidental services – G = Government securities – P = Publisher – L = Lawyer – A = Accountant – T = Teacher – E = Engineer

8. Topic 10: Investment Advisers Act of 1940 The following advisers are not required to register with the SEC – An intrastate adviser provided all clients reside in the same state where the adviser has his or her principal office and the adviser does not give advice on any listed securities or on any securities admitted to unlisted trading privileges on any national security exchange – An adviser with only insurance companies as clients – An adviser with fewer than fifteen clients per year and who does not hold himself or herself out to the public as an investment adviser – An adviser whose only clients are venture capital funds – A foreign adviser without a US office or other place of business that manages less than $25 million of client assets or has fewer than 15 clients Last two added by Dodd-Frank Act

9. Topic 10: Compliance Under the Investment Advisers Act of 1940, investment advisers must – Disclose conflicts of interest – Maintain fiduciary status – Not use performance fees unless managing ≥ $1.0 million of client’s assets or if client’s net worth is ≥ $ 2.0 million – Not assign advisory contract without client’s consent – Assure no insider trading by self or employees – Follow brochure rule – Keep records – Not use initials RIA, but may use Registered Investment Adviser

10. Topic 10: Reporting An investment adviser required to register with the SEC must file Form ADV – Part 1 General and background information concerning the applicant and clients – Part 2A Includes 18 disclosure items that must be included in the advisor’s brochure – Part 2B Supplemental information about supervised persons who may provide advisory services to the client – Adviser must refile Part 1 along with a current balance sheet on an annual basis – Individual advisers or the adviser’s organization may register

11. Topic 10: Brochure Rule An investment adviser must deliver a disclosure statement to each client within 48 hours before entering into an investment advisory contract – If the adviser delivers the statement at the time the contract is signed, the client has five days to cancel the agreement The disclosure statement must be – A narrative written in plain English describing the adviser's business, conflicts of interest, disciplinary history, and other important information that would help clients make an informed decision about whether to hire or retain the adviser (including the 18 disclosure items in Part 2A or Form ADV) – The information contained in Part 2B of Form ADV must be included as a supplement to the brochure for each supervised person of the advisor who provides investment advice or interacts with the client

12. Topic 10: The “Coordination Act” of 1996 Exempts from SEC registration an adviser who – Has total assets under management of less than $110 million (increased from $30 million by Dodd-Frank Act); and – Does not advise a registered investment company; and – Is registered as such by a state Must register with state if manage less than $100 million (increased from $25 million by Dodd-Frank Act) Choice to register with SEC or state if managing between $100 million and $110 million If state does not have an applicable state registration law, then the adviser must register with the SEC No state in which an adviser is registered may impose more burdensome record keeping requirements than those of the adviser's home state of registration

13. Topic 10: Financial Industry Regulatory Authority (FINRA FINRA (previously called NASD) is not associated with the SEC – FINRA was started by the securities industry as a way of regulating itself Anyone selling stocks, bonds, tax shelters, options or mutual funds must register with the FINRA – An individual may not register separately as all individuals must be associated with a broker-dealer – The individual must file Form U-4, Uniform Application for Securities Industry Registration, and pass certain exams depending on the products the individual sells

14. Topic 10: Most Common FINRA Exams Series 6 – Allows individuals to sell mutual funds and variable life insurance Series 7 – Allows individuals to sell everything except for commodities and certain options Series 63 – Allows individuals to sell securities in several states Series 65 – Allows individuals to become registered in certain states as an investment adviser

15. Topic 10: State Securities Laws “Blue sky” laws are state laws dealing with the regulations of the securities business which require – Set standards that must be met by a new security before it may be sold – The filing of financial information regarding new securities with state regulatory bodies – The registration of financial planners and other individuals who sell securities and the licensing of brokers and security firms

16. Topic 10: State Insurance Laws State laws require insurance agents to obtain licenses to sell life insurance and annuity products – A person selling variable life insurance and variable annuity contracts must obtain a state insurance license in addition to a FINRA license

17. Topic 10: Insider Trading The Insider Trading and Securities Fraud Enforcement Act of 1988 requires the creation and strict enforcement of written policies and rules to prevent the misuse of material, nonpublic information by an RIA or any associated person – Violations will occur if the inside information is used by the planner for personal gain (or loss avoidance) as well as client gain (or loss avoidance) in client accounts

18. Topic 10: Dodd-Frank Wall Street Reform and Consumer Protection Act Created the Consumer Financial Protection Bureau (CFPB) as an independent bureau of the Federal Reserve System – Mission is “to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products” Has had, and will continue to have, a significant impact on financial planning Gave the SEC authority to adopt a uniform fiduciary standard for both broker-dealers and investment advisors who provide personalized investment advice to retail customers. – The SEC is in the process of analyzing the effect and cost of such a standard, and has sought input from those affected, although a final rule has not yet been determined

19. Topic 10: Business Models Financial planners may work under a number of different business and/or compensation models – CFP Board is model-neutral (does not favor one model over another) If the business model limits the practitioner to only certain products or proprietary products, it must be disclosed to clients CFP Board requires strict adherence to the use of the term fee-only in the planner’s brochure and/or Forms ADV – Acceptable descriptions of compensation include “fee only”, “commission only”, or “fee plus commission”

20. End of Topic 10