as a registered representative, insurance agent, or pension consultant?
__________YES __________NO
If yes, you may trigger financial planner status in some states where they have a holding out or title statute to define a financial planner. This holds true even if you gave a no answer to 7.
TO FURTHER DETERMINE if you are a financial planner, take the following two steps. First, look at your business activities, comparing them to SEC Release IA- 1092. If your activities match the definition, you are a financial planner. Second, if you are not providing financial planning, look to your state statutes and rules for a holding out provision. You may be a planner just because you hold yourself out as one.
If you are indeed a planner, and this may be a shock to some financial advisers and professionals, you might as well call yourself one. You will be bound by the rules affecting planners regardless of how you label yourself. This will put you squarely under the SEC and state rules and regulations, which endeavor to make sure the public is not misled. Consequently, the SEC staff and state securities departments smile upon financial advisers who give fair and honest disclosure about their true business activities.
If you cannot tell if you are legally a planner, get a written opinion from your insurance company’s home office, broker-dealer, or an attorney who specializes in this area. In some cases you may want to contact the SEC or your state securities department directly for a no-action letter to clarify your position.
Finally, if you are not providing planning services, do not call yourself a planner: it may trigger unnecessary rules, requirements, and obligations.
CHAPTER 2
THE INVESTMENT ADVISER
ONE OF THE MOST complicated, confusing, and misunderstood subjects in the financial services industry is the role, registration, and regulation of the investment adviser. Whether your firm is a large organization managing assets for multiple mutual funds or a one-person investment consultant on Main Street, many of your responsibilities and liabilities are determined by whether or not you or your firm are legally required to be registered as an investment adviser.
There are many benefits to being an RIA. It is the only way you can legally charge fees, whether an hourly rate, a flat fee, or a percentage of assets under management. It allows you legally to provide a wider range of services and financial planning recommendations, which can increase your revenues and market penetration. Finally, this license can be a big advantage when it comes to attracting more sophisticated and upscale clients.
The confusion starts with how to spell adviser. English teachers have long favored the use of “advisor.” Then, in 1940, Congress opted for adviser with its passage of the Investment Advisers Act. Over the next half century, a dual spelling system – adviser vs. advisor – fought it out in the legal and popular press. In the end, many journalists yielded to Congress. Bloomberg Press style now conforms to that of Congress and uses only the adviser spelling. As Congress has yet to pass an “advisery” rule, that word remains true to its original form and is spelled “advisory.”
This chapter makes the whole subject more clear and offers strategies for avoiding common but dangerous land mines. Look for two main things in this chapter and how their application will affect you and your practice:
1. The definition of investment adviser on both federal and state levels. Does your firm fit that definition, or are you and your firm exempt or excluded from having to register?
2. If your firm is an investment adviser, are you responsible to the SEC, your state, or both for oversight? The 1996 Investment Advisers Supervision Coordination Act created a distinction between large RIAs, which must be registered with the SEC, and smaller firms, which must be registered with state securities administrators. How does this legislation affect your practice?
IT IS IMPORTANT TO DIFFERENTIATE at the outset between firm and individual registration. Large investment advisers are typically corporations who retain individuals who are investment adviser representatives or associated persons. These are the people who are actually meeting with clients and giving investment advice. Sometimes an RIA is an unincorporated sole proprietor. Both the large corporate entity and the unincorporated sole proprietor are considered to be the RIA or the “firm.” However, only when a sole proprietor is registered as an RIA is the individual person an RIA. This distinction is frequently misunderstood and used erroneously in the industry where it is not uncommon to hear individuals say they are RIAs when in fact it is their corporation that is the RIA and the individuals are technically representatives or associated persons of the firm. In this book, when using the phrase “registering as an RIA,” it means either the individual must register as an RIA or affiliate with an RIA.
The distinction between individual and firm registration becomes important under recent legislation which requires large RIAs, typically corporations managing institutional assets, to register solely with the SEC. Smaller RIAs and individuals who are RIA representatives must register with state securities administrators. This legislation was designed to eliminate the old system of dual state and federal registration for firms. However, as you will see later in this chapter, it is possible to own a firm or be part of a firm that is registered with the SEC, but be an individual who is required to be registered with a state as an RIA representative.
Penalties for failing to register with the SEC as an investment adviser are horrifying. In addition to fines of up to $10,000, there is also the felony penalty of up to five years in jail. 20 These penalties apply per case. Simultaneously violating state investment adviser laws can increase the fines and jail time. Failing to register can also make all contracts advisers have with their clients void and unenforceable. This means clients do not have to pay the fees owed to the adviser, and the adviser may have to refund fees previously paid.
IN 1940, CONGRESS ENACTED the Investment Advisers Act and authorized the SEC to regulate a business that then consisted primarily of advising institutional investors. Since the Act has not kept up with the current business climate, one of the problems financial services providers have today is applying retail situations to definitions that were designed for institutional advisers and their clients.
Use the following brief summary and chart as your guideline. You, or your firm, must register with the SEC if you meet the definition of Investment Adviser, have more than $30 million of assets under management, and are neither excluded nor exempted from registration.
The term “investment adviser” is defined in Section 202(a)(11) of the Advisers Act to mean:
[A]ny person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include:
a. A bank or any bank holding company as defined in the Bank Holding Company Act of 1956, which is not an investment company, b. Any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession, c. Any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefore,
• You meet the definition of Investment Adviser21, and
• You have more than $30 million of assets under management, and
• You are not among the following who are excluded from the Definition:22
– banks
– broker/dealers, lawyers, accountants, teachers, and others whose advice about securities is incidental to their business
– certain publishers, or
• You are not among the following and others