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in 2010, planners who have at least $100 million of assets under management, or advise a registered investment company, must register with the SEC. Other planners are required to register at the state level. Of course, the 1940 Act covers many more aspects of investment. Today, most states require investment advisors to pass a test (Series 65) verifying that they have read the Act and understand the many nuances of the law.

      Federal regulations occurred only incrementally from the 1940s through the later part of the twentieth century. A major law impacting financial planners was drafted in 2002 – the Sarbanes-Oxley Act. This law mandates corporate responsibility and enhanced financial disclosures to combat corporate and accounting fraud. The Act also created the Public Company Accounting Oversight Board to oversee the activities of the auditing profession.

      More recently, the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was instituted as the most far-reaching piece of financial industry regulation since the Great Depression. The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. The SEC describes the Act as follows: “The legislation set out to reshape the U.S. regulatory system in a number of areas including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency.”25 Potential impacts of the law on financial planners include likely changes to state and federal regulations defining more explicitly what financial planning entails from a consumer perspective, who may practice as a financial planner, and how financial planners may be compensated.26

      Although many financial planners are less directly impacted, financial planners also need to be aware of banking and insurance regulations. For example, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the S.A.F.E. Mortgage Licensing Act, the Truth in Lending and Savings Acts, the Sarbanes-Oxley Act, the Fair and Accurate Credit Transactions Act, and laws related to privacy of consumer financial information all come into play during the course of a planner’s career. Thus, it is important not only to be aware that these types of banking and insurance regulations exist, but also to acknowledge that certain planning activities may fall under the watchful eye of non-traditional financial planning regulators. For example, financial planners should be mindful that in 1945 the McCarran-Ferguson Act granted the states, rather than the federal government, regulatory authority of insurance companies and products. Although some aspects of the Gramm-Leach-Bliley Act conflict with the 1945 law, it is essential for any planner who works with, provides recommendations about, or sells insurance products to understand the unique laws and rules issued by each state in which the planner works. Rather than reporting to one federal agency or self-regulatory organization, those who practice financial planning using insurance products might be subject to multiple regulatory constraints.

      LEARNING OBJECTIVE

      The student will be able to:

      a. Compare the secondary market institutions and their regulators for each security (stocks, bonds, ETFs, real estate, commodities, and options exchanges) and of primary market institutions (investment banking firms, mutual funds, and hedge funds).

Rationale

      Each country regulates securities markets, broker-dealers, insurance professionals, and financial planners differently. Nearly all federal rules, regulations, and laws directed at the oversight of American financial institutions have resulted from abuses observed in the marketplace. Although financial institutions serve a multitude of stakeholders, including governments and firms, federal regulators tend to introduce laws that limit the market power and scope of operations of banks, trust companies, credit unions, insurance companies, and other investment companies when consumers at the household level are harmed. As such, regulation tends to be reactionary, which often results in a time lag after abuses are noted and laws are enacted to counter such abuses.

      It is important for financial planners to have a working knowledge of not only how financial institution regulation is created and applied, but also which regulator deals with what type of entity. For example, the Securities and Exchange Commission (SEC), which was created with passage of the Securities Exchange Act of 1934, regulates both secondary market institutions as well as certain primary market firms. The SEC also plays a role in regulating how financial planners interact with consumers.

      Regulation of the secondary markets occurs through a number of mechanisms. Financial planners may fall under the enforcement power of state and federal regulators. It is equally likely, however, that a financial planner will have more contact on a regular basis with self-regulatory organizations. Brokers, dealers, and registered representatives typically fall under the rules and regulations of the Financial Industry Regulatory Authority (FINRA). Financial service professionals who deal most often at the primary and secondary market level will interact with numerous self-regulatory organizations, including the Chicago Board Options Exchange (CBOE), Municipal Securities Rulemaking Board (MSRB), National Futures Association (NFA), New York Stock Exchange (NYSE), and the Options Clearing Corporation (OCC). Planners who deal primarily with insurance products will find it useful to be well informed of the National Association of Insurance Commissioners’ (NAIC) rule making.

       Related Content Areas Associated with the Learning Objective

      ■ This learning objective is conceptually related to all aspects of the financial planning process.

      ■ Financial regulations serve to provide a working framework for financial planners when interacting with clients.

      ■ The function and purpose of financial institution regulations is closely aligned with business law, financial services requirements, and consumer protection regulations.

      IN CLASS

      *Appropriate for on-campus course.

      **Appropriate for both on-campus and distance courses.

      PROFESSIONAL PRACTICE CAPABILITIES

      Entry-Level: An entry-level planner working in a financial planning office environment should be able to differentiate among commercial banks, credit unions, trust companies, insurance companies, and brokerage firms as sources of consumer loans and investment assets. Additionally, entry-level planners should be well versed in basic financial institution and securities regulations and laws. The planner should be able to explain the fundamental aspects of the seven most important financial institution laws as outlined by the SEC, as well as explain the role and limitations associated with Federal Deposit Insurance Corporation (FDIC) deposit insurance.

      Competent: A competent personal financial planner will have either completed Form ADV – application for registration of investment advisor – or, if not required to register, will have completed disclosure forms similar to what a registered investment advisor would provide clientele.

      Expert: An expert personal financial planner should fully understand the history of financial institution regulation, SEC rules, rule-making procedures, and sources for researching rules and procedures. Additionally, someone who is an expert will monitor, on a regular basis, regulatory actions as published in the Federal Register, as well as regulatory actions, proposed rules, and rules releases as published by the SEC. This knowledge, when combined with experience and professional judgment, allows a financial planner to predict real and perceived violations of financial institution laws and ethical guidelines. An expert will be able to anticipate which, and when, personal and business actions will lead to violations of known laws.

      IN PRACTICE

Rebecca

      Rebecca has been working in the financial services marketplace for 10 years. She began her career as a stockbroker at a regional firm. She easily passed the Series 7 licensing requirements necessary to sell securities to the general public. About three years ago, she started the process of converting her practice away from compensation strictly by commission to one primarily based on assets under management fees. She recently resigned her position as a broker and opened her own firm.

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