NAIFA GovWatch

GAO, SEC Release Studies on Financial Planning, Investment Adviser Examinations and Standards of Care

Issue: Financial Planning

Date: January 24, 2011

On Tuesday, January 18 the Government Accountability Office (GAO) reported to Congress the results of its study on the regulation of financial planning. The purpose of the study, which was mandated by the Dodd-Frank Wall Street Reform Act, is to provide Congress with guidance on whether financial planners should be subject to a specific set of regulations and standards imposed by a newly created oversight board. The GAO’s recommendation to Congress is that no additional regulation of financial planners is warranted.

Background: During the Dodd-Frank Act negotiations in Congress last year, NAIFA opposed an effort by the Financial Planning Coalition to include in the bill a new regulatory oversight board for financial planners. If establishment of such as oversight board had gone unchallenged by NAIFA and our industry partners, the new entity would have been created in The Act. The impact on NAIFA members would have been significant as it would have resulted in additional fees, standards, and oversight for any financial services professional who makes general or specific recommendations about securities, insurance, savings, and anticipated retirement. NAIFA argued that our members who are engaged in those activities are already regulated by the appropriate state and federal regulators and therefore additional oversight is unnecessary. Because of NAIFA’s opposition, Congress agreed to instead study the issue and NAIFA is pleased that the findings of the GAO’s report support our position on this matter.

Issue: Investment Adviser Examinations:

On January 19 the Securities and Exchange Commission (SEC) sent to the Congress its report on the need for enhanced examination and enforcement resources for investment advisers (IAs). Section 914 of the Dodd Frank Act required the SEC to examine 1) the number and frequency of examinations of IAs over the preceding five years, 2) whether designating one or more self-regulatory organizations to augment the SEC’s oversight of IAs would increase the frequency of IA examinations, and 3) ways to examine the investment advisory activities of those registered as both broker-dealers and IAs. Rather than making a specific recommendation or recommendations to Congress, the SEC study presents three options for Congress to consider: 1) have the SEC conduct enhanced and more frequent examinations of IAs and fund these exams through user fees imposed on IAs; 2) authorize one or more SROs to examine IAs; and 3) authorize FINRA to examine dual registered IA/BDs for compliance with the 1940 Advisers Act.

Background: IAs are registered and examined by the SEC. On average, IAs are examined by the SEC once every decade. The Dodd Frank Act asked the SEC to investigate and analyze IA regulation. The brokerage industry as a whole generally supports having an SRO for IAs as a way to have more frequent examinations for IAs, and many b/ds want FINRA to be the SRO. IAs and adviser organizations oppose a separate SRO and in general support beefing up the SEC’s examination and enforcement capabilities.

Issue: Standard of Care for Investment Advisers and Broker Dealers:

On January 21 the SEC presented to Congress the results of an SEC staff study that examined the current regulatory standards of care for broker dealers and investment advisers. The key conclusion in the study is a recommendation that the SEC adopt a uniform fiduciary standard of conduct for broker-dealers and investment advisers who provide personalized investment advice to retail investors, and that this standard of conduct be no less stringent than the current standard for IAs under the 1940 Advisers Act.

Background: One of the main issues debated during the consideration of the Dodd Frank Act concerned the different standards of care applicable to broker-dealers and investment advisers. Section 913 of the Act directed the SEC to conduct a study evaluating the effectiveness of the existing standards of care applicable to broker-dealers and IAs and to look into whether there are any gaps or shortcomings in the protection of investors that were related to the standards of care. Section 913 also authorizes, but does not require, the SEC to adopt a rule imposing the same standard of care on broker-dealers as IAs are subject to under the 1940 Advisers Act. NAIFA raised concerns regarding the possible adverse impact such a rule would have on the level of service and advice available to middle market investors. NAIFA’s efforts led to the inclusion of two important safe harbors in the Dodd Frank Act—for the sale of a limited range of products and for the receipt of compensation in the form of commissions.

NAIFA Staff Contact: Gary Sanders, Vice President – Securities and State Government Relations; or Jill Hoffman, Assistant Vice President – Federal Government Relations.

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