A. Presentation today will consist of an overview of regulation and regulatory issues of

Transcription

1 A Look at the Regulation of Financial Planners in this Shifting Regulatory Landscape A. Presentation today will consist of an overview of regulation and regulatory issues of interest to you as financial planners and how the regulatory changes that are occurring now, or being proposed, may affect your business. Some oftoday's material has been taken from the GAO's Report on Regulatory Coverage of Financial Planners to Congress issued in January If you haven't read it I would recommend you spend some time with it, even though it isn't the most exciting read. Today, I'm including a little theory and conjecture along with some practical information. As a result of the Dodd Frank Act the GAO was mandated to study the oversight of financial planners. The GAO report examined 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. After hearing from stakeholders the GAO reported that a majority of regulatory agencies and fmancial services industry representatives did not favor significant structural change to the overall regulation of FPs because existing regulation provides adequate coverage of most fmancial planning activities. The conclusion was that a separate, or additional layer of regulation specific to FPS does not appear warranted at this time. The GAO did not recommend any substantial changes, to say the least. Only, more studying, more assessing. GAO recommends that 1) N AI C assess consumers understanding of the standards of care associated with the sales of insurance products, 2) SEC assess investors understanding of fmancial planners' titles and designations, and 3) SEC collaborate with the states to identify methods to better understand problems associated specifically with FPs activities as investment advisers. Not surprising if we take a closer look at why regulators act, and why FPs don't fit within those reasons:

2 1. Regulators are spurred to act when certain events happen: a. events happen that are too big to ignore, i.e. market meltdown, auction rate securities, to a certain degree the VA product and the use of free lunch seminars for their marketing b. Public scandals, Madoff case laid bare the inefficiencies and gaps in the SEC in a very public way that led to sweeping changes in the agency 2. Regulation in the United States is rules based as opposed to principles based used in Europe and to some degree by the CFTC. The difference being that rules based regulation primarily focuses on activities, or behavior and principle based is a general rule on conduct. So, to regulate FPs as a separately would require extensive rulemaking and statutory action. Not something easily done and not relished by regulators. 3. "Adequate coverage of most" regulators seem to recognize the possible gaps and inefficiencies in the current regulatory scheme for FPs but weighing that with the alternative of a separate regulatory structure, they came down on the side of "adequate and most" B. Because it now seems doubtful that a separate regulatory framework for FPs will be created, and we are left with continuing to operate under the current existing regulatory structures, we need to understand how then FPS will be affected by the changes occurring in the existing regulatory structures. Of course, the biggest changes we are going to see come from the Dodd Frank Act. So if we look at Dodd Frank's Application to FPs what we find is: 1. SEC to State Registration for Investment Advisers NASAA's position and lobbying for jurisdiction over RIAs with AUM of $100 rather than the $25 million now because the states feel SEC is not diligent enough in its enforcement and the belief states can do a better job. (See Denny Crawford letter) newly state registered advisers in Missouri

3 SEC proposed Rule 203A-5 requiring advisers to file an amendment to their ADV as of July 21,2011 to update their ADM by August 21,2011. This reporting will determine if the adviser is eligible for SEC registration (elimination of bubble in calculating ADM). After the Switch: State rules now on compliance, books & records, etc. govern the adviser rulemaking- Advisory Release the new IA rule changes in MO to increase uniformity between Missouri securities law and other state and federal regulations. Replacing investment adviser qualifying officer with chief compliance officer, adds a definition for CCO and supervised person and updates supervision guidelines. examinations and enforcement- now every three years audit cycle, desk audits Securities Division's new website for IAs is found at: 3. Fiduciary Duty Standard for BDs in Section 913 Dodd Frank Act's attempt to harmonize regulation; NAPF A comment letter to SEC urging fid duty from 40 Act to apply to BDs and a professional regulatory organization not funded by members Dodd Frank required the SEC to study this issue, in January 2011 SEC isued their report. In the report the SEC recommended to the Commission: 1) the Commission engage in rulemaking specifying a uniform fiduciary duty in the Advisers Act; 2) that would apply to broker-dealers (and investment advisers) when providing personalized investment advice about securities to retail customers Recommendation: The Commission should engage in rulemaking to implement the uniformfiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. Specifically, the Staff recommends

4 that the uniform fiduciary standard of conduct established by the Commission should provide that: the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provides, shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice. C. What Now? What the near future may bring to FPs: The perfect storm of events leading up to Dodd Frank all happened during a Democratic Congress and President. Now, the political reality of today's Congress versus when Dodd Frank was passed is completely different. That is going to impact the implementation of the Dodd Frank. Congress by holding the purse strings, and apparently they have been doing so very tightly, has for example hampered the SEC efforts to bring on the staff needed to implement Dodd Frank changes. On the SEC's website is a Release that implementation of some provisions of Dodd Frank have been put on hold due to budge uncertainty. Commissioners with differing viewpoints on major issues such as Paredes objection to extending the fiduciary duty standard I.States' Efforts to Meet Increased Numbers in Oversight: April 8, 2011 letter to NASAA from the SEC and NASAA seem to have agreed to push this implementation date back. The SEC Div. of Investment Management expects the SEC will consider extending the dates by which: a. all SEC registered las must report their eligibility based on a current calculation of AUM;

5 b. mid-sized advisers must withdraw from federal registration and complete their transition to state registration; and c. private advisers must comply with new requirements under Dodd Frank See Advisory Release now extending the Dodd Frank Act's regarding delays in advisers transitioning to state registration. "According to the SEC, the changes in advisers registration require that Investment Adviser Registration Depository be reprogrammed to accommodate the transitioning advisers' registrations. The SEC Division of Investment Management expects that this reprogramming will take until the end of Because of this delay, the SEC has now stated that the they are considering postponing the deadline for eligibility reporting into "the first quarter of2012." 2. Private Advisers registration requirements are expected to be extended by the SEC until the first quarter of SRO for Investment Advisers that financial planners would be under too, or for FPs in particular? Section 914 of Dodd Frank requires the SEe to conduct a study on whether Congress should authorize the SEC to designate one or more SRO such as FINRA to oversee IAs. 4. Creation of a federally chartered board overseeing FPs as a distinct profession 5. Specifying standards for fmancial planners and the designations they use