Compliance Update in Plain English

Journal of Financial Planning: August 2011

Staying compliant with ever-evolving regulations in the financial planning field can seem overwhelming. Not only are advisers told to stay vigilant on the bigger issues that could transform their profession, many wonder whether they are even keeping up with compliance changes requiring immediate action on their part.

“In the past, we could easily put together a Top 5 or Top 10 list of what advisers are asking when it comes to compliance,” says Brian Hamburger, J.D., CRCP, AIFA®, founder and managing director of MarketCounsel in Englewood, New Jersey. “But with myriad news coming out regarding new regulations and laws, advisers are feeling bounced around all over the place.”

Although the larger issues highlighted in the Dodd-Frank Wall Street Reform and Consumer Protection Act, such as fiduciary standards and investment adviser oversight, are discussed, this article focuses on the practical aspects of compliance requiring consideration and action today, depending on one’s professional circumstances. And it concludes with a summary of proposals to keep an eye on as we move into 2012 and the profession continues to develop in the wake of the financial crisis.

State Regulation or Federal—and When?

The Securities and Exchange Commission (SEC) proposed a rule1 late last year that seeks to shift oversight of “mid-sized advisers”—those having between $25 million and $100 million in assets under management (AUM)—from the SEC to state securities authorities. Advisers falling under the $100 million threshold will need to withdraw registration with the SEC and register with one or more states, based on individual state laws. Reprogramming within the Investment Adviser Registration Depository system, which will handle transition filings, is expected to take through the end of the year.

The SEC clarified timing of the transition, which it estimates will affect 3,200 of the 11,500 advisers registered with them, in amendments adopted during an Open Meeting on June 22. The SEC announced: “Advisers registered with the Commission will have to declare that they are permitted to remain registered in a filing in the first quarter of 2012, and those no longer eligible for Commission registration will have until June 28, 2012, to complete the switch to state registration.”2

Mid-sized advisers in New York, Minnesota, and Wyoming, however, will remain registered with the SEC. Those states do not meet Dodd-Frank requirements for regular adviser exams.

Dan Barry, director of government relations for the Financial Planning Association (FPA) in Washington, D.C., suggests, “Advisers implicated in the switch should be reaching out now, individually or collectively, to securities regulators in the state or states where they do business, if they have questions about how to go about the process.” Barry believes advisers near the cusp of the threshold will experience more of a challenge with this change than other planners, as they could find themselves bouncing back and forth as they straddle the $100 million limit. “But these types of issues were dealt with in the 1990s when the federal-state split was first made at the $25 million threshold, so there is at least some precedence and experience—what’s new is the level,” says Barry.

One reason for this transition is concern about capacity and resources at the SEC to oversee the number of individuals and firms currently under its purview. In its budget request to Congress for fiscal year 2012, the SEC details its need for increased funding to meet the new demands of the Dodd-Frank Act, as well as just to keep pace with its standing responsibilities—including adviser oversight and examination. The SEC explains in the request:

The SEC experienced three years of frozen or reduced budgets from FY 2005 to 2007 that forced a reduction of 10 percent of the agency’s staff. Similarly, the agency’s investments in new or enhanced IT systems underwent a decline of about 50 percent from FY 2005 to 2009. SEC staffing levels are just now returning to the level of FY 2005, despite the fact that the size and complexity of the securities markets have undergone tremendous growth since then.3

The budget request also provided stats on the actual percentage of investment advisers the SEC examined in fiscal year 2010—9 percent—as well as those conducted with broker-dealers by the Financial Industry Regulatory Authority (FINRA)—44 percent. In addition to a larger budget request to handle this shortfall and other concerns, the SEC conducted a “Study on Enhancing Investment Adviser Examinations”4 in January, which suggested Congress consider three options to address capacity constraints in performing such exams. These suggestions included imposing user fees on registrants, authorizing one or more self-regulatory organizations (SROs) to examine advisers, and authorizing FINRA to examine dually registered advisers. Congress has yet to act on the suggestions.

“The SEC got a modest increase this fiscal year, which runs through the end of September, but the budget is so politically charged, where the line is drawn for fiscal year 2012 remains to be seen,” says Barry. “But regardless of where the SEC budget comes out, at the end of the day, resources for oversight of advisers are likely to remain an issue.”

Custody Rules

There are many reasons to despise the practices of fraudulent investment advisers, and more regulation as a result of their misdeeds is one of them. An SEC custody rule finalized in 2009 was inspired by a comprehensive review of existing rules for safekeeping client assets that stemmed from investigation of several fraud cases during the market downturn. The result was a rule5—effective March 12, 2010—meant to strengthen existing custody rules. The new amendments require registered advisers with custody of client securities to:

  1. Undergo an annual surprise examination by an independent public accountant to verify client assets
  2. Have the qualified custodian maintaining client funds and securities send account statements directly to clients
  3. And (unless maintained by an independent custodian), obtain a report of the internal controls relating to the custody of assets from an independent public accountant6

To remain compliant, advisers with custody responsibilities were to enter into written agreements with accountants to have the first surprise exam conducted by December 31, 2010. The internal control report (for those who maintain client assets as a qualified custodian) was due by September 12, 2010. But issues around the rule remain today.

“I’ve been hearing that for some planners it’s hard to find an audit firm who’ll do it,” Barry points out. “If an adviser has a fairly limited custody base, and won’t be a significant client, it may not be worth the trouble for an accountant to take on the business. That’s one challenge—finding someone who’s willing to do it.”

In mid-June, the SEC announced a proposal7 to also strengthen annual audits of broker-dealers with an increased focus on custody. Specifically, if adopted, the amendments would require broker-dealers that maintain custody of client assets to undergo examination by a registered public accounting firm to review compliance and the controls in place for compliance. Broker-dealers that do not maintain custody would need to undergo review by an independent public accountant to verify this fact.

B-D exams, for those that maintain custody, would also be augmented to allow examiners access to work papers of the registered public accountant that performed the audit, and discussion of findings with the accounting firm. Lastly, the proposed amendments would require broker-dealers to file quarterly reports with information on whether and how they maintain custody of client assets.

As of early August, public comments are still being taken on the B-D custody proposal at the SEC website,

Revising Form ADV, Part 2

The SEC adopted amendments to Part 2 of Form ADV last year, which requires investment advisers registered with the SEC to include in their annual update to Form ADV a brochure for clients and prospective clients with plain English disclosures “that [clients] are likely to read and understand.”8 Examples of such disclosures given in the ruling include disciplinary history, financial industry affiliations, and compensation methods. Part 2 used to be set up in a “check the box” format, with advisers responding to a list of multiple choice and fill-in-the-blank questions—sometimes including additional narrative explanation. In 2008, the SEC proposed changing the format to a narrative approach; the proposal also sought to have advisers file their brochures electronically to be made public on the SEC website.

Part 2, in the rulemaking that became effective last year, includes both sub-parts—2A and 2B, 2B being the brochure supplement that relays information about supervised advisory personnel who provide investment advice and interact with clients. Completion of the new brochure by SEC-registered advisers was required by March 31, 2011. Within 60 days, the brochure was to be sent to existing clients (new clients were to receive it immediately following the brochure’s initial filing).

Although well past the deadline, several compliance consultants still report advisers coming to them for help with the matter. The consequences of a late filing are not clear, and a few states have extended their deadlines for those advisers registered with them. For example, Pennsylvania’s deadline is set for September 30, 2011,9 and Texas isn’t requiring the new Form ADV, Part 2 until March 31, 2012.10

“Advisers are still in the process of getting their arms around this—it’s a whole new type of disclosure and description of your business,” says Barry. “We will see how much time the states and SEC are able to put into reviewing these new disclosures, and what kind of additional clarity they might give before advisers have to update it—what is acceptable and what is not.”

Social Media

The public’s captivation with social media has exploded over the past decade, and advisers are looking for ways to use the venue as a personalized communication tool for reaching existing and potential clients. Because applying this type of communication—LinkedIn, Twitter, Facebook, YouTube, and blogs, to name a few—in a professional setting is rather new, advisers have sought internal and regulator direction on how to stay compliant in this relatively uncharted territory.

In response to industry requests for FINRA to elaborate on how rules about communicating with the public apply to social media, FINRA released Regulatory Notice 10-06 in January 2010 titled “Social Media Web Sites: Guidance on Blogs and Social Networking Web Sites.”11 FINRA had previously provided guidance on general website usage, such as stating in 1999 that engagement in an Internet chat room discussion was equivalent to giving a presentation in person before investors. This example became part of NASD Rule 2210, in which the definition of a public appearance includes “participation in an interactive electronic forum.”

FINRA created a webpage, Guide to the Internet for Registered Representatives (, to clarify a variety of rulemakings, notices, and interpretive letters on Internet usage. For social networking sites and blogs, the page suggests that static content—a profile, background information, etc.—is usually considered an advertisement. Advertisements and sales literature must be approved by a registered principal at a firm, and this goes for static content on social networking sites as well. Because interactive content by a registered rep., such as online discussions, is considered a public appearance and is extemporaneous, those interactions do not require pre-approval but must be supervised.

As when speaking before a group of investors in person, the FINRA webpage states that with social media participation: “There are no filing requirements, but RRs are accountable under FINRA rules and the federal securities laws for what they say. Like all public communications, interactive electronic postings must be fair, balanced, and not misleading.”

John R. Wurth, a securities compliance consultant in Minneapolis, Minnesota, says he is most heavily occupied with social media inquiries from advisers at the moment, particularly because there are still a lot of gray areas about what exactly needs to be done to stay compliant. He also expects the SEC will come out with more rules on the matter.

“Large firms recently announced they are letting reps use social media, which is to a firm’s advantage; it’s a great marketing tool!” Wurth suggests that, despite the risks associated with sometimes vague rules, building a compliance program at a firm can allow advisers to get involved in certain aspects of social media in a more orderly way. Such compliance programs usually include a detailed internal policy and pre-approved templates.

Operations Professional Registration

In mid-June, the SEC approved a FINRA proposal to establish a registration category for operations personnel, to include a qualification exam and continuing education requirements.12 FINRA filed this rule change proposal with the SEC in March, and received 17 public comment letters, all of which opposed the rule. In response, FINRA amended the proposed rule to clarify who would be covered under this new registration requirement—particularly, “senior management with direct responsibility over the covered functions,”13 as well as related supervisors/managers/persons with authority in direct furtherance of covered functions.

Sixteen “covered functions” were identified, and a person responsible for even one of them would need to register as an Operations Professional. The functions listed include responsibilities such as client on-boarding, receipt and delivery of funds, trade confirmation and account statements, approval of pricing models used for valuations, contributing to financial regulatory reports, and defining and improving business security requirements and policies for IT.

FINRA announced in July that the new rule will become effective October 17, 2011. Affected individuals must be identified by that date, and registered as operations professionals within 60 days—by December 16, 2011.

How to Prepare Your Office

In order to keep an office compliant as new regulations come and go, many compliance experts recommend regularly updating a firm’s policies and procedures to reflect regulatory changes. Reconfirming client investment objectives on an ongoing basis is also a useful endeavor. And preparing in advance for a regulatory exam will help highlight other areas needing attention.

Wurth is surprised that more advisers aren’t focusing on changes FINRA announced to its strategy for conducting exams going forward—which he says will typically be shorter and much more focused on potential problem areas.

“Previously, an examiner would just walk in the door and ask for basic things like a blotter,” Wurth explains. “Now FINRA is going to be more targeted … asking firms in advance of an exam questions to determine where the highest risk areas are.” Wurth recommends that compliance officers have frank discussions with their advisers, and play the role of a FINRA examiner, constantly asking themselves, “If we came into our shop, what would we be concerned with?”

Firms need to be proactive in figuring out, whether through internal sources or outside experts, what their particular practices need to be prepared to take on. “Gone are the days when most firms can succeed just by catching news in a magazine and taking action at that point,” says Hamburger. And it is just as important to know which regulatory pieces require no action. As Hamburger explains, “Just like in the case of investment advisers deciding what to change in client accounts, sometimes doing nothing is more valuable.”

What to Keep an Eye On

The SEC will be finalizing rules required under Dodd-Frank over the coming months. Two of the biggest issues being tracked by FPA’s government relations team are decisions around the fiduciary standard for all who provide retail investment advice, and whether an SRO will be instituted to help with SEC capacity issues in regulating advisers.

“The SEC indicated it could propose fiduciary rules before the end of the year, but it could spill into next year,” says Barry. Although the fiduciary standard is often talked about in terms of its impact on brokers who give advice, Barry explains that the planning community will have to be prepared for any new fiduciary rules, too, with the SEC trying to harmonize the standards for B-Ds and investment advisers. “If the SEC does promulgate fiduciary rules for brokers, there may be corollary rules for advisers,” Barry says. “Currently, the advisers’ standard is not enforced through a strict rules-type structure—but that could change and it would likely implicate and dictate with greater specificity how disclosures are made, particularly conflicts of interest.”

And potentially complicating this decision is the controversial Department of Labor (DOL) proposed rule “Definition of the Term ‘Fiduciary’” from October 2010. It more broadly defines the circumstances under which a person is considered a fiduciary in giving investment advice to employee benefit plans or plan participants.14 The Employee Retirement Income Security Act (ERISA) gives DOL oversight of retirement plans, and according to Barry, the rules around advice to plan participants are more restrictive than those for advisers under the Investment Advisers Act of 1940. “The concern among many advisers and brokers is that the ERISA fiduciary standard could be too broadly applied to individual retirement accounts, which could prove too costly for some firms to make doing that business worth their while,” says Barry.

As for the prospects of adviser oversight by one or several self-regulatory organizations, the issue is still in the discussion stage, but because of the very real resource constraints vocalized by the SEC, talk is growing. And FINRA has thrown its hat into the ring of potential SRO candidates, saying it is prepared to undertake that responsibility.15 “It would take congressional action to require that, and there is nothing pending at this time, but it is something that Congress may start looking at in the coming months,” says Barry.

Other compliance issues, such as revised suitability rules from FINRA slated to go into effect next summer, will continue to shine brightly on the radar screens of advisory firms around the country. As Hamburger explains to his adviser clients in calming the waters around new regulations: “Firms have to anticipate that the only thing constant in this space is change. There’s no cause for concern here.”

Christina Nelson is a senior editor with the Journal of Financial Planning in Denver, Colorado. Prior to joining FPA she was a public policy analyst in Denver and Washington, D.C.

Disclaimer: The contents of this article are for informational purposes only and do not constitute legal advice.


  1. Securities and Exchange Commission 17 CFR Parts 275 and 279 [Release No. IA-3110; File No. S7-36-10] RIN 3235-AK82 Rules Implementing Amendments to the Investment Advisers Act of 1940.
  2. Securities and Exchange Commission. June 22, 2011. “SEC Adopts Dodd-Frank Act Amendments to Investment Advisers Act.”
  3. Securities and Exchange Commission. February 2011. “In Brief: FY 2012 Congressional Justification.”
  4. Staff of the Division of Investment Management of the U.S. Securities and Exchange Commission. January 2011. “Study on Enhancing Investment Adviser Examinations.”
  5. Securities and Exchange Commission 17 CFR Parts 275 and 279 [Release No. IA–2968; File No. S7–09–09] RIN 3235–AK32 Custody of Funds or Securities of Clients by Investment Advisers. In the Federal Register 75, 6. January 11, 2010.
  6. Ibid.
  7. Securities and Exchange Commission 17 CFR Parts 240 and 249 [Release No. 34-64676; File No. S7-23-11] RIN 3235-AK56 Broker-Dealer Reports.
  8. Securities and Exchange Commission 17 CFR Parts 275 and 279 [Release No. IA-3060; File No. S7-10-00] RIN 3235-AI17 Amendments to Form ADV.
  9. Pennsylvania Securities Commission Order, February 15, 2011,
  10. Texas Rule 116.9(d), notice,
  11. FINRA. January 2010. Regulatory Notice 10-06, “Social Media Web Sites: Guidance on Blogs and Social Networking Web Sites.”
  12. Securities and Exchange Commission [Release No. 34-64687; File No. SR-FINRA-2011-013],
  13. Ibid.
  14. Department of Labor Employee Benefits Security Administration 29 CFR Part 2510 RIN 1210–AB32 Definition of the Term ‘‘Fiduciary.’’ In the Federal Register 75, 204. October 22, 2010. Proposed Rule.
  15. FPA Retreat conference presentation, “The SRO Option—Crossroads for Adviser Oversight.” Moderator Don Saxon and panelists Thomas Selman and Neil A. Simon. Wednesday, May 4, 2011, in Bonita Springs, Florida.


Keeping Current

As legislation, regulations, and rulemakings have a fluid lifespan, reading one article will not satisfy the ongoing needs of planners for up-to-date information on the compliance front. Luckily, one of FPA’s best kept secrets—Capitol Update newsletter—informs readers on many of the policy initiatives FPA is following. Produced by FPA’s government relations team, it offers the latest tax, securities, insurance, and professional issues information—federal and state—important to financial planners. Read the most current issue (or back issues) of Capitol Update at

General Financial Planning Principles
Professional Conduct & Regulation