CFP Notes: Professional Conduct and Regulation - Financial Services Regulations and Requirements

Registration and Licensing (FINRA)
The Financial Industry Regulatory Authority, Inc., or FINRA registers all people who sell stocks, bonds, tax-sheltered investments, options, mutual funds, and other securities. FINRA is an independent group supervised by the SEC. In order to register with FINRA, securities dealers have to fill out a Uniform Application for Securities Industry Regulation, a Form U-4, and pass one or more exams. FINRA has designed a series of exams to test the competence of various financial professionals, from commodities traders to investment advisers. Once the individual passes the appropriate tests, he or she can become a registered representative and is licensed to sell certain securities.

Registration and Licensing (Insurance, SEC Release No. IA-770)
There are 3 ways in which insurers sell insurance, and therefore there are 3 different ways for them to register. Insurance agents are direct representatives of an insurance company; insurance brokers act as liaisons between the insurance companies and the insured, though they actually represent the insured; and insurance service representatives are hired by insurance companies to assist insurance agents, and may not require licensure.
According to the SEC, the Investment Advisers Act of 1940 provides the foundation for the regulation of financial planners. SEC Release No. IA-770 states that a financial planner must give investment advice as part of his or her business; must give advice that is specific and action-oriented; and must receive compensation for this advice.

Registration and Licensing (Investment Advisers Act of 1940 and Exemptions from Registration)
According to the Investment Advisers Act of 1940, financial planners are not subject to the control of the act if they are: a bank or holding company that is not an investment company; a lawyer, accountant, engineer, or teacher who provides investment advice incidentally; a broker, dealer, or registered representative whose advice is incidental; the publisher of a magazine or journal that discusses financial planning; a person whose advice is limited to those securities guaranteed by the federal government; or any other person not within the law as specified by the SEC. Also, financial professionals may be exempt if they provide advice only to people who live within the same state, if they provide advice only to insurance companies, if they have fewer than 15 clients every year, or if they provide advice exclusively to churches.

Registration and Licensing (Investment Advisers Supervision Coordination Act of 1996 and Regulation of Insurance Industry)
According to the Investment Advisers Supervision Coordination Act of 1996, financial planners must be registered with either the SEC or with the state authorities, but not necessarily with both. There are some specific provisos: advisers with more than $30 million in assets under their control must register with the SEC, and those with less than $30 million must register with the state (these asset thresholds were later modified by the Dodd-Frank Act of 2010). There are a few ways that the government tries to regulate the insurance industry. For one, the legislative bodies in each individual state frequently create laws that restrict the insurance industry. The courts may also rule on the constitutionality of state insurance laws and adjudicate disputes between policyholders and insurance companies. Finally, each state's Commissioner of Insurance enforces the insurance laws and may recommend specific investigations.

Modifications to Investment Adviser Registration by the Dodd-Frank Act of 2010
When passed by the Obama Administration in 2010, the Dodd-Frank Act modified the Advisers Supervision Coordination Act of 1996 by establishing new asset thresholds for investment advisers. The Act created three distinct thresholds:
- “Small” advisers, which manage less than $25 million in assets
- “Mid-sized” advisers, which manage between $25 million and $100 million in assets
- “Large” advisers, which manage at least $100 million in assets

Small advisers are prohibited from registering with the SEC as long as the principal office and place of business are in a state that regulates advisers (only Wyoming does not). Mid-sized advisers are prohibited from registering with the SEC and must register with their individual state unless their principal office and place of business is not in New York or Wyoming. If the principal office and place of business is in one of those two states, they are required to register with the SEC unless a registration exemption is available. Large advisers must register with the SEC unless a registration exemption is available.
To avoid the burden of frequent changes in registration between the states and the SEC for advisers around the $100 million mark, the
Dodd-Frank Act created a buffer or transitional range spanning $90 million to $110 million. Mid-sized advisers whose assets grow to $100 million are required to register with the SEC only after reaching $110 million (but permitted to do so at $100 million), while large advisers who assets decrease below $100 million are required to register with their state only after reaching $90 million (but permitted to do so below $100 million).

Reporting
When an investment adviser registers with the SEC, he or she will fill out Form ADV, which has two parts. The first part asks for background information about the applicant and his or her expected clients; the second part asks for information about the planned fee structure, services offered, method of business operation, and the adviser's degree of involvement in securities transactions. This form typically restricts advisers from collecting fees based on investment performance, though the adviser may still base fees on a percentage of total holdings. According to the so-called “brochure rule,” registered investment advisers (RIAs) are required to submit a written disclosure to potential clients.

Compliance, State Securities, and Insurance Laws
The SEC requires financial advisers to keep detailed records. Any illegal actions committed by a planner constitute fraud. If an adviser fails to meet any of the requirements set forth by the Investment Advisers Act of 1940 or the process of registration, the SEC is allowed to investigate and confiscate all records. According to the Insider Trading and Securities Fraud Enforcement Act of 1988, investment advisers must keep detailed records in order to prove the absence of insider trading. As for state securities, investment advisers are encouraged to be aware of the “blue sky laws” in the state of their operation. Many states will require a minimum capitalization amount in exchange for registration. The insurance industry is always regulated by the states. Advisers must be registered for each specific product they wish to sell.