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1)Review, summarize the topic of the paper discussing the current laws and regulations and the proposals made for the future of the industry.

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Focus Compiiance Update in Piain Engiish bv Christina Nelson S taying compliant with everevolving 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 20 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, JOURNAL OF FINANCIAL PLANNING | August 2011 J.D., CRCP, AIFA, founder and metnaging director of MarketCounsel in Englewood, New Jersey. "But with m)Tad news coming out regarding new regulations and laws, advisers are feeling bounced around all over the place." -Mthough the larger issues highlighted www.FPAnet.org/Journal Focus in the Dodd-Frank Wall Street Reform and Consumer Protection Act, such asfiduciarystandards 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 rule' 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 afilingin 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."^ 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 www.FPAnet.org/Journal 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 experiencewhat'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 forfiscalyear 2012, the SEC details its that the size and complexity of the securities markets have undergone tremendous grovrth since then.^ The budget request also provided stats on the actual percentage of investment advisers the SEC examined in fiscal year 20109 percentas 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"'' in January, which suggested Congress consider three options to address capacity constraints in performing such exams. These suggestions Advisers are still in the process of getting their arms around thisit's a whole new type of disclosure and description of your busineSS,5i need for increased funding to meet the new demands of the Dodd-Frank Act, as well as just to keep pace with its standing responsibilitiesincluding 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 fi-om FY 2005 to 2009. SEC staffing levels are just now returning to the level of FY 2005, despite the fact - D a n Barry 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 forfiscalyear 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." August 2011 I JOURNAL OF FINANCIAL PLANNING 21 Focus Custody Rules 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 challengefinding someone who's willing to do it." ing to the custody of assets from an independent public accountant'' To remain compliant, advisers with custody responsibilities were to enter into written agreements with accountants to have thefirstsurprise exam conducted by December 31, 2010. The internal control report (for those who maintain client assets as a qualified custodian) was due by As of early August, public comments are still being taken on the B-D custody proposal at the SEC website, www. sec.gov. with the SEC to include in their annual update to Form ADV a brochure for There are many reasons to despise the clients and prospective clients with practices of fraudulent investment plain English disclosures "that [clients] advisers, and more regulation as a are likely to read and understand."* result of their misdeeds is one of them. Examples of such disclosures given in An SEC custody rule finalized in 2009 the ruling include disciplinary history, was inspired by a comprehensive financial industry affiliations, and review of existing rules for safekeepcompensation methods. Part 2 used to ing client assets tbat stemmed from be set up in a "check the box" format, investigation of several fraud cases with advisers responding to a list of during the market downturn. The multiple choice and fiU-in-the-blank result was a rule^effective March 12, In mid-June, the SEC armounced quc'Stionssometimes including 2010meant to strengthen existing a proposal' to also strengthen annual custody rules. The new amendments audits of broker-dealers with an increased additional narrative explanation. In 2008, the SEC proposed changing the require registered advisers with focus on custody. Specifically, if adopted, format to a narrative approach; the custody of client securities to: the amendments would require brokerproposal also sought to have advisers dealers that maintEiin custody of client assets file their brochures electronically to be made public on the SEC website. to undergo examination by a registered Part 2, in the rulemaking that Now FINRA is going public accounting firm became effective last year, includes to review compliaince to be more targeted ... both sub-parts2A and 2B, 2B being and the controls in the brochure supplement that relays asking firms in advance place for compliance. information about supervised advisory of an exam questions Broker-dealers that do personnel who provide investment not maintidn custody ad\\ ice and interact with clients. to determine where the would need to undergo Completion of the new brochure by highest risk areas J^ review by an indepenSEC-registered advisers was required dent public accountant by March 31, 2011. Within 60 days, -JohnR.Wurth to verify this fact. the brochure was to be sent to existing B-D exams, for those clients (new clients were to receive it immediately following the brochure's 1. Undergo an annual surprise exami- that maintain custody, would also be augmented to allow examiners access initial filing). nation by an independent public to work papers of the registered public accountant to verify client assets yUthough well past the deadline, accountant tbat performed the audit, several compliance consultants still 2. Have the qualified custodian and discussion of findings with the report advisers coming to them for help maintaining client funds and accounting firm. Lastly, the proposed with the matter. Tbe consequences securities send account statements amendments would require brokerof a late filing are not clear, and a few directly to clients dealers to file quarterly reports with states have extended their deadlines for 3. And (unless maintained by an information on whether and how they those advisers registered with them. For independent custodian), obtain a ex;imple, Pennsylvania's deadline is set report of the internal controls relat- maintain custody of client assets. 22 Revising Form ADV, Part 2 The SEC adopted amendments to Part 2 of Form ADV last year, which requires investment advisers registered JOURNAL OF FINANCIAL PLANNING | August 2011 for September 30, 2011,' and Texas isn't rec|uiring the new Form ADV, Part 2 until March 31, 2012.' "Advisers are still in the process of getting their arms around thisit's a v/bole 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 www.FPAnet.org/Journal Focus these new disclosures, and what kind of additional clarity they might give before advisers have to update itwhat 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 fewin 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."" 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 (www.finra.org/Industry/Issues/ Advertising/p006118), to clarify a variety of rulemakings, notices, and interpretive letters on Internet usage. For social networking sites and blogs, the page suggests that static contenta 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 www.FPAnet.org/Journal 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 sociid 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 afirm'sadvantage; 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 Professionai 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.'^ 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 requirementparticularly, "senior management with direct responsibility Gone are the days when most firms can succeed just by catching news in a magazine and taking action at that point.5 -Brian Hamburger, J.D., CRCP, AiFA' over the covered functions,"" 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. At the writing of this article, FINRA was expected to announce an effective date for this new requirement in July, and employees affected by the rule would need to be identified within 60 days of that date. August 2011 I JOURNAL OF FINANCIAL PLANNING 23 Focus How to Prepare Your Office In order to keep an office compliant as new regulations come and go, many compliance experts recommend regularly updating afirm'spolicies 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 forwardwhich he says will typically be shorter and much more focused on potential problem cireas. "Previously, an examiner would just 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 fiAs for the prospects of adviser spill into next year," oversight by one or several selfsays Barry. Although regulatory organizations, the issue the fiduciary standard is often talked about in is still in the discussion stage.55 terms of its impact on brokers who give advice, Barry explains that the planning community walk in the door and ask for basic things will have to be prepared for any new fiduciary rules, too, with the SEC trying like a blotter," Wurth explains. "Now to harmonize the standards for B-Ds and FINRA is going to be more targeted investment advisers. "If the SEC does ... asking firms in advance of an exam promulgate fiduciary rules for brokers, questions to determine where the there may be corollary rules for advishighest risk areas are." Wurth recomers," Barry says. "Currently, the advisers' mends that compliance officers have standard is not enforced through a strict frank discussions with their advisers, rules-type structurebut that could and play the role of a FINRA examiner, change and it would likely implicate constantly asking themselves, "If we and dictate with greater specificity came into our shop, what would we be how disclosures are made, particularly concerned with?" Firms need to be proactive in figuring conflicts of interest." out, whether through internal sources And potentially complicating this or outside experts, what their particular decision is the controversial Departpractices need to be prepared to take ment of Labor (DOL) proposed rule on. "Gone are the days when most firms "Definition of the Term 'Fiduciary'" can succeed just by catching news in from October 2010. It more broadly 24 JOURNAL OF FINANCIAL PLANNING | August 2011 defines the circumstances under which a pijrson is considered afiduciaryin giv! ng investment advice to employee benefit plans or plan participants." The Employee Retirement Income Security Act (ERISA) gives DOL oversight of retirement plans, and according to Barry, the rules around advice to plan participants cire more restrictive than those for advisers under the Investment Advisers Act of 1940. "The concern among many advisers and brokers is that the ERISAfiduciarystandard 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. y^s 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 ha.s thrown its hat into the ring of potential SRO candidates, saying it is prepared to undertake that responsibility.'^ "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 efl^ect next summer, will continue to shine brightly on the radar screens of advisory firms around th(; 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 ami Washington, DC. www.FPAnet.org/Journal Focus Disclaimer:The contents of this article are for informational finra.Org/web/groups/industry/@ip/@reg/@ purposes only and do not constitute legal advice. notice/documentsotices/pl20779.pdf. Keeping Current 12. Securities and Exchange Commission Endnotes [Release No. 34-64687; File No. SR- As legislation, regulations, and 1. Securities and Exchange Commission 17 FINRA-2011-013], www.sec.gov/rules/sro/ rulemakings have a fluid lifespan, CFR Parts 275 and 279 [Release No. IA-3110; finra/2011/34-64687.pdf. reading one article will not satisfy File No. S7-36-10J RIN 3235-AK82 Rules 13. Ibid. Implementing Amendments to the Investment 14. Department of Labor Employee Benefits Advisers Act of 1940. www.sec.gov/rules/ proposed/2010/ia-3110.pdf. 2. Securities and Exchange Commission. June 22, 2011. "SEC Adopts Dodd-Frank Act Amend- ments to Investment Advisers Act." www.sec. govews/press/2011/2011-133.htm. 3. Securities and Exchange Commission. Febru- the ongoing needs of planners 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. webapps.dol.gov/Federal Register/PdfDisplay.aspxPDocId=24328. 15. FPA Retreat conference presentation, for up-to-date information on the compliance front. Luckily, one of FPA's best kept secretsCap/to/ Update newsletterinforms readers on many of the policy initiatives FPA is following. Produced by "The SRO OptionCrossroads for Adviser FPA's government relations team, Oversight." Moderator Don Saxon and it offers the latest tax. securities, Justification." www.sec.gov/about/secfyl2 panelists Thomas Selman and Neil A. Simon. insurance, and professional issues congbudgjust.pdf. Wednesday, May 4, 2011, ary 2011. "In Brief: FY 2012 Congressional 4. Staff of the Division of Investment Manage- in Bonita Springs, Florida. informationfederal and stateimportant to financial planners. Read ment of the U.S. Securities and Exchange Com- the most current issue (or back mission. January 2011. issues) of Capitol Update at www. "Study on Enhancing Investment Adviser Examinations." wvnv.sec. FPAnet.org/professionals/Govern- govews/studies/2011/914studyfinal.pdf. mentRelations/CapitolUpdate. 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. www.sec.gov/rules/finai/2009/ia2968fr.pdf. 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, www.sec.gov/rules/ proposed/20n/34-64676.pdf. FPA would like to recognize its NATIONAL SPONSOR: 8. Securities and Exchange Commission 17 CFR Parts 275 and 279 [Release No. IA-3060; File No. S7-10-00] RIN 3235-An7 Amendments to Form ADV. www.sec.gov/rules/final/2010/ Ameritrade Institutional ia-3060.pdf. 9. Pennsylvania Securities Commission Order, February 15, 2011, www.psc.state.pa.us/ licensing/licensingorder.pdf. 10. Texas Rule 116.9(d), notice, www.ssb.state. tx.us/Important_Notice/Notice_Regarding_ Form_ADV_Part_2 .php. 11. FINRA. January 2010. Regulatory Notice 10-06, "Social Media Web Sites: Guidance on When the right people come together, THEY CAN REACH NEW HEIGHTS. Blogs and Social Networking Web Sites." www. www.FPAnet.org/Journal August 2011 I JOURNAL OF FINANCIAL PLANNING 25 Copyright of Journal of Financial Planning is the property of Financial Planning Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. 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