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Financial Planning Regulation

A financial advisor explaining financial planning regulations to a client

The term ‘financial planner’ can apply to a broad range of professionals, including accountants, insurance agents and investment advisors. If you work in any of those capacities or a related field, it’s important to understand the regulatory guidelines that apply. Financial planning regulation encompasses a broad range of requirements and rules. The type of regulation that you’re subject to as a financial professional depends largely on which segment of the industry you’re employed in and what you do.

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Who Regulates Financial Planners?

Financial planners can be subject to regulation at both the federal and state levels. At the federal level, the Securities and Exchange Commission (SEC) is the agency that’s primarily responsible for regulating financial planning professionals. The Financial Industry Regulatory Authority (FINRA) also plays a part in enforcing federal regulation guidelines.

The SEC regulates registered investment advisors (RIAs). An RIA is an individual advisor or an advisory firm that provides securities advice to clients. An investment advisor must register with the SEC if they have $110 million or more in assets under management.

State agencies can regulate investment advisors with less than $100 million in assets under management. Investment advisors with more than $100 million but less than $110 million in AUM may opt to register with the SEC or their state’s regulatory agency.

FINRA, meanwhile, is an independent agency that’s authorized by Congress to regulate firms that deal in securities. That includes broker-dealers, capital acquisition brokers and funding portals. FINRA’s primary duty is to protect investors against unfair practices and ensure that the market operates fairly.

SEC Registration Requirements for Advisors

The Investment Advisers Act of 1940 established baseline regulations and rules for investment advisors in the U.S. Under the Act, an investment advisor is anyone who engages in providing securities advice for compensation. That definition encompasses money managers, investment consultants and financial planners.

Investment advisors are required to register with the SEC unless they qualify for an exclusion or exemption. For instance, domestic banks are excluded from registration as are accountants who only perform advisory services incidentally to their main work. As another example, an investment advisor may claim an exemption if their only clients are insurance companies, rather than individual investors.

To register with the SEC, investment advisors must submit Form ADV. This document has two parts which include specific details about the advisor and their business practices.

Part 1 requires advisors to disclose information about the business, including who owns it and whether any owners have been subject to disciplinary or legal actions for violating securities law. Part 2A covers things like the advisor’s compensation structure, investment strategies and conflicts of interest. Form ADV must be filed electronically with the Investment Adviser Registration Depository (IARD).

SEC Regulatory Rules for Investment Advisors

CFP working remotely with a client

Once an advisor is registered with the SEC, they’re subject to a lengthy list of rules as outlined in the Investment Advisers Act. Under the Act, advisors must:

  • Use a qualified RIA custodian to maintain client funds and securities
  • Submit an updated Form ADV annually
  • Adhere to a fiduciary standard and act in clients’ best interests at all times
  • Maintain accurate records of client accounts
  • Properly disclose conflicts of interest or disciplinary sanctions

These and other conditions must be satisfied for an RIA to be compliant with SEC rules and regulations. Violations of financial planning regulation guidelines could result in fines or censuring for the advisor.

FINRA Regulation of Broker-Dealers

Most broker-dealers must register with the SEC and join a self-regulatory organization (SRO). FINRA is an SRO that works under the supervision of the SEC to ensure integrity in the financial system. Specifically, it does that by:

  • Writing and enforcing rules that are applicable to the ethical activities of registered brokers and broker-dealers
  • Examining registered firms for compliance
  • Fostering transparency in the markets
  • Educating investors

Individuals and firms can register with FINRA to engage in business as brokers or broker-dealers. There are 14 standards FINRA uses when determining whether to approve a broker or broker-dealer’s registration. These standards span everything from the completion of an accurate application to adherence to federal securities laws.

FINRA enforces its own rules as well as rules established by the Municipal Securities Rulemaking Board (MSRB). Similar to the SEC, FINRA has the authority to impose sanctions against brokers and broker-dealers that are found to be non-compliant. That can include assessing fines and barring offenders from FINRA outright.

State Financial Planning Regulation

State regulatory boards can establish their own rules and guidelines for regulating, in accordance with the rules set under the Investment Advisors Act of 1940.  For instance, smaller firms that are seeking to conduct investment advisory business in New York State must still file Form ADV through IARD. They must also meet other licensing requirements in order to do business with clients.

Financial planners may be subject to additional regulations at the state level that are specific to their field of work. A financial planner who is also an insurance agent, for example, may be required to obtain certain licenses or meet other requirements by their state Department of Insurance.

Financial Planning Regulation by Other Entities

In addition to state and federal regulation, financial professionals may be subject to other rules and professional standards. These rules may be enforced by professional associations or boards that issue financial certifications.

Certified financial planners, for example, are expected to adhere to all of the guidelines established in the CFP Board’s Code of Ethics and Standards of Conduct. Specifically, certified financial planners must act ethically and in the best interests of their clients at all times, in accordance with their fiduciary duties. The CFP Board also requires CFPs to meet continuing education requirements to maintain their certification.

If a certified financial planner fails to meet these requirements, the CFP Board may temporarily suspend or permanently revoke their certification.

Bottom Line

CFP studying for an exam

As a financial planner or advisor, your clients trust you to help them reach their goals. If you’re interested in pursuing a career in the financial services industry, it’s important to first understand when and where you need to register and what regulations you might be subject to.

Tips for Growing Your Advisory Business

  • In addition to finding new clients, you might also be interested in retaining the clients you currently have. Building trust with your clients can help to encourage loyalty so that they’re not tempted to look elsewhere for financial advice. Hosting a client appreciation event can be a great way to let them know how important they are to you and your business.

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