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Page 1: Input on the Report to Congress on How To Modernize and Improve

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$amp()+-amp()0 12+(3204+5+2678927(+(+0 1+lt2=+73)+2+892gt- amp 1+2amp2-amp()0 amp I appreciate the opportunity to provide the Federal Insurance Office (ldquoFIOrdquo) with my personal comments 37)33=35+27+75=lt23A+)+8gt8+=378927(+2+B9377)+C7+5D+8-=(+78+5E+B+77F8+8FD++B8+2+567A+8=+75A8+20F4GHF+2(70432=+2G2+85+73)+6789+3F+2+5477(G77+280E387B++8IJKKKL7532=+2F)2=73)+477(G777B883(37E387B++8IMNNNL-432lt92lt38+83)889O=883767+7532+82(=gt(3==+78752+(3==+753783(3789=+2758+732lt23+(37889+80)+(P37379732=gt3D+78927(+2+B9378075)+2+B932gt(+787Blt23(+8832+Q)+)B+7875lt2359(+28- )-$=64amp6amp()amp)3)+6=amp=)8)=amp+amplt)+64amp6)ltampamp()amp$4)ampamp4$+6lt)amp0$=3amp )amp))4lt46=amp63amp3)4+6=)amp)lt6$)Iamp amp bull $+6lt)amp+3$lt)+amp6+)amplt7)4-amp+amp()amp67)amp+4==4ampamp48)7)amp

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(3=+8)2++97()8+=72832392829BB7B8+7328T 678927(+lt2359(88)395O+5A+28+53283587A+8=+7lt2359(807=gt 3lt7370O9=7gt(3=lt7+875=2P+7B32B73782+8+7Blt2359(889()8 75+X779+80X+575A2O+779+8075+XX+575A2O++78927(+lt2359(888+Y48)7)ZA+)(+8328+732(+780lt23A57BB927++3 lt27(lt+75B927++52+32+927O8+537)+(=8ltgt7BOgt3)+(3=lt7gt 757)+(8+3)++78927(+lt2359(80X2++)52832+- A+23237532837+0)5O++75+lt38+57X+575A2O+779+8Ogt)++753MNJN752378=32+53282+P+gt3O+278+22+57)+7+XJNgt+288 OOgtO33=+282+2+758++P8+2A+)(+32)+22+2+=+77(3=+-WA+7=32+=37+gt)8O++7278+22+53Y2O+C7A+287575+X+5+78927(+lt2359(8-((3257B37+895gt2++8+5Ogt)+67892+5+2+=+76789+75F3B+7 +8+2()7$3A+=O+23MNJJ03A+23)25835A8+288+7B779+8)A+2+lt32+52+(+A7B+837+(+72+Z9+8327779gt757+2gt3)2583(+78+5lt2359(+28(922+7gt3+27B779+83lt7+)B927++57(3=+3lt3787(2+8+7=lt327(+3A+2)+7+XA+gt+28- 6)82+75(3779+8)395+Z9+(3789=+2lt23+(3703A+28B)089lt+2A837095 327gtP75359(2gtOgt()7B3)+8+2+(3==+753732+B9+58+(92+87O23P+2B+325A832gt((39783(+)+lt92()8+38578927(+ lt2359(80(3955=78))+=39732++(ltAO+327A+8=+77=+2(75)A+75A+28+++(373922+B9+5=2P+875737+X()7B+8-WX(gt)88 )ltlt+77B)8=+O+(98+37)+67A+8=+75A8+2[8(3JKN75(P332+8B)37)+lt2378927(+2+B9328- 67798)+]2+B8+2+57A+8=+75A8+2)859(2gt59gt3)8(+7)+2+B8+2+52+lt2+8+7A+3O23P+25++2)859gt3P73)8(+7752+(3==+7537gt89O+lt2359(8-^SWYW0778927(+B+7)8$$W3)+8+59+8-^+QD)+ (70)39A37B)+02+(3==+759789O+lt2359(832)8Q)+2(983=+28))+83+lt92lt38+3lt97B(3==88377)832)+2lt3(P+-75)7(3788+7(gt7+B3OB378873278lt2+73)+(983=+28O+(98+)+gt3+75373P73))+gt2+5+7B)778927(+B+7)387+)+2767A+8=+75A8+2732 2+B8+2+52+lt2+8+7A+0O982lt8)+=8+A+87(3P3+B=(gtOgt(=7BU+8V05+8B737832lt23+8837(2+5+78)2+3+7=+77B+8875)A+73A9+- )+=_32()+7B+8(7B)88+(323)+78927(+75982gt868++)+=2+ bull 1()+)amp4amp=4=)amp+ampamp$4+74amp4amp()amp+)-$=64ampamp()amp$4)ampamp4$+6lt)amp

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+]$7]amp4amp6amp6=6+74-amp+)3Bamp6+4lt$=6+=amp0()amp76+T)4-ampamp)4+amplt445)Samp 1()+)amp4amp=4=)amp+ampamp$4+74amp4amp()amp+)-$=64ampamp()amp$4)ampamp4$+6lt)amp6lt+amp 96)amp=4)Iamp S)+68O++A+))+lt2=2gt2+8lt378Ogt322+B97B753A+28++7B78927(+lt2359(+288)395(3779+32+8)75A59D+8=+77B975O+7+(2+32= 78lt+((2+83)+O987+88378927(+032+X=lt+82++8377(8+2A(+ lt23+88378I77(lt77+28078927(+B+7875O23P+28L(395O+()+A+5)239B)+)+2])+(2+373+5+29732=89+3O+53lt+5OgtD+8322+A8373)+amp(F227`4+2B9837(-)+=lt38373+5+28_98+5975+2)+)+32gt))+ 8+3(+277829=+785+A+3lt+5Ogt78927(+(3=lt7+87)+MJ8F+792gt0I3+7 5A+28+588A7B802+2+=+7327A+8=+7A+)(+8L3((92789()A39=+8389O87gt+(7+28+(3==+2(+0)+737+(373=gt07378+(92+8+X()7B+80753)+28+(92+8=2P+8-)+O98+8)7)+2+B9+58+(92+8=2P+85927B)+JKMN[875JKaN[8O+(=+89O_+(3+5+22+B93732)+8+8=+2+8378- amp(F227`4+2B98370)()B27+5D+8)+9)32gt32+B9+)+O987+883 78927(+08+7(+5O+(98+3D9lt2+=+F3925+(83772+-C7+5D+8A-D39)RW8+27C75+22+28883(370aMMC-D-baaIJKL0)()3A+2927+5lt2+A3985+(83772+G9AY2B7075)+2+Ogt2+(3B7+5)++5+2B3A+27=+7[89)32gt32+B9+)+O987+88378927(+975+2)+F3==+2(+F98+3)+F3789370BA7B F37B2+88)+9)32gt32+B9+32lt23)+O987+88378927(+85++=+57 )+7377+2+835383- )+2+8739732=gt3lt2359(+2(+787B0Z9(3732=7532gt(37797B+59(37O+++7)+D+8-)+8+889+8(395+8gtO+2+83A+5Ogt(2+7B737 875253O+53lt+5)+8++A+-ampgt2+(3==+7537395O++5+2=75+3+8N)39283(88233=277B33+5Ogt2+7+X=0aN)39283O8((37797B+59(373778927(+2++5=+287+()3gt+2(+787Blt+235ltlt23A+5Ogt+()D+[85+lt378927(+I97+88)+8+2+5gt)8)B)+22+Z92+=+78Llt983)39283+)(875)5537)392832)38+8+7B37B+2=(2+lt2359(80+Z9gt75+X75A2O+779+8-I)+8+2+(922+72+Z92+=+787FO973+8+)+2+L 67=7gtD+8)+2+2+8+lt2+7gt832(3978+32(+787B2+Z92+=+7832)38+5+827B3()2B+U++328+2A(+V325A(+7)+O987+88378927(+2)+2)73

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67F3270)+F1+lt-3F32lt3237875)+F1+lt-3678927(+2+)+3D+B+7(+82+8lt378O+32)+89lt+2A8373=3875A598752=8)3)35398lt23A57BU77(lt777BV8+2A(+80)()7(95++8+lt777B08+73275+5+2 lt777B-^3+A+20)+58lt2gt758(3892+803A+28B)7589lt+2A837=37B)38+lt23+88378)3U)35398V77(lt77+2808+7325A832832+Xlt+288)9B+- 46$+B8+2+5+lt2+8+7A+82+83=+)2+82(+5797B)++2=77(lt77+2325A+287BU77(lt777BV8+2A(+8Ogt)+2O23P+25++28O+(98+)+2 _3O5+8(2lt373lt23A57B7A+8=+75A(+78+(92+8))+937389()+2=83957+(+88+2+B823787A+8=+75A8+22+lt2+8+7A+83)+2=- ^3+A+203A+28B)7589lt+2A837)+c23P+21++2+A+83+A+8=9()3O+5+82+50758B7(753(9=+737(7O+lt23A5+53+B83288)37B)+gtlt+83O98+(3789=+2889+2)+)758397+)(759789lt+2A8+52+B8+2+52+lt2+8+7A+87578927(+B+78-68)39583O+32(+9gt(37A+gt+53+B8328

)]78927(+(3=lt7+8537389lt+2A8+09503A+28++32+X=7+)+5A+287B328+8lt2((+83)+2B+78- F327[889+8(377)3lt++8880)())+O3A+7B9B+395X-F922+7gt0)+F1+lt3F32lt323787+2lt2+8)+689++2gt05+2+7+8O+++7)++2=77(Ult77+2V7577(Ult777BV75B732+87gt75A59322=)33+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67 )+MJ8-F+792gt0)7+75+X(++57Bgt(3=lt+Xlt2359(80)()(7+8gt=8+5lt+283773O++A7B)+gt2+8+(92+8lt2(92gt)+7)+gt2+5A+28+575 =2P++58)A7B3)+9lt85+3)+83(P=2P+)737+3)+53785+V0)8395+5=35+32+B937=P+8738+78+)83+A+2- 6=P+88+78+321+lt3F32lt32378+X=7+28389lt+2A8+09575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt77A+8=+75A832gt2=)+7)+gtlt(+++27+5Ogt59(2gt5A8+28O+++7jM0NNNRj0NNN32lt77A3A7BjbNN0NNN-NN388+80)+7892+gt=P+8+A+7=32+8+78+39575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt737R59(2gt78927(+B+7)3(=833+2)+U8=++A+V3 +Xlt+277(02+2+=+775+8+lt777B8+2A(+8)++277B7A+2B+3 jb0NNN-NN3787B+jbNN0NNN75+X779gt278(37053+873T +2+=+7G777B0W8+G777B0XG777B08Pamp7B+=+775)+lt2+lt23737+32)0(8)375O95B+7B8+=+788lt237gt77(lt72+Z92+8 8B7(7+Xlt+28+0737+3)()8(922+7gt(377+5)7)+8+2+8l32db3278927(+(+787B(922(99=-33lt+2837398+)++U77(lt77+2V3+2)+8+8+2A(+838+78Ogt322++752+((3=lt+37)59(2gt7A+8=+75A8+2875+7BB+7U77(75+5+2lt777BV)3989lt+2A837Ogt)+F1+lt3F32lt323788=ltgtO+(98+)+gt(=7333+25A(+78+(92+88877+7553+8 73+7(392B++)((3759(0O92)+20(9gt2+258)38+)33lt39355372+B937089lt+2A8377595)+882+8lt378Ogt75Ogt32)+2(378- )+2B+879=O+23(3=lt7837B)239B)2+B93287bN8+8)8=+72+B2583X+57575+X779+875+lt2359(88++=3O+35B+5B7878927(+B+78)3)35398+Xlt+28777(02+2+=+775+8+lt777B75)39++=3378O8+58+7B+()7Z9+89B)U)+779gtC7A+28gtVI=37B3)+28L3U7A+8V7X+575WZ9gt675+X779+875+lt2359(8-67)+(8+3+Z9gt75+Xlt2359(80)()2+732+B9+588+(92+80(=82+3+7=5+)89()lt2359(8 3+2)+9lt85+3)+83(P=2P+)737+3)+53785+-B+782+9B)3lt7lt238lt+(873(327+27532)+lt238lt+(3O+B32Z95373)+2 8+(92+8lt32337A3237779gt-cgt537B830)+97(+78+5B+7A3587gt 59(2gtOgt37)+U2+(3==+753738+V75)+2+87359(2gtOgt3289lt+2A83772+(3==+757B)+lt92()8+3775+X779gt32778927(+B+7073

<777BV>Hh99amp()amp6=amp)+amp6384<)amp4quotampY)<$+44)ZS67>mailto3+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67

+5)46$2=-67F327+80lt295+7+Xlt+287525(7O+88+2+5B7877(lt777B()278975+2D+(37aalM3)+FA(35+-^3+A+20353830)+5=B+5lt2gt7++58389+7(A(39275)+Z9+837gt88P+580)8)++X+73)+5=B+875)lt78)38+B++X(++58lNRebgt+287=7gt(8+80)3=7gtgt+28lt238+(9+)+(8+0lt2(92gt87(+)+2+8 75537++=+73(3785+2h S)++Z9gt75+X779+8)JJgt+283lt+7+8=gtO+3gt7ltlt23lt2+32=7gt8+732(+78lt2(92gt)+2B+95+7(+33A+2lbgt+2358=7gtB+788++P 390)+((397A9+8O+32+8922+75+2()2B+882++()+77A+8=+7-C7)+(3789=+2+X8)+(372()+2+2+735=B+8-67)8(8+0822+)gt+2P+89()(8+37(377B+7(gt75)+(383B3732lt3325A(+23=737R59(2gt77(lt77+2Q78927(+B+78lt23)OA+BA+7)+Ult+2(+A+5V(P35=B+8-)+D+327+gti+7+2[83(+753(582(327+gt82+3)+3lt238+(9+89()(8+8O+(98+)+8+7+7(+8)+gt(7+Xlt+(3()+A+23=89((+889lt238+(937789())B)ltlt+2(2=+2+lt2gt75)+2O95B+82+O++28lt+737=32+8+2398(2=+8-5537gt0gt+282+3+7O+33O72+8(883737)+(372(75)+2+927397583)+(+7)7389+50O98373(3=lt7+5B78)+UB+7V0)3=gt(3779+8+7Blt2359(97O+5- W+(A+gt0)+8+3(+283)+(392(+)+(2=+8lt+2lt+2+5Ogt97+)(lt77+28)239B)7(3775)+(P389lt+2A837753A+28B)389()23B9+lt77+28 Ogt)+1+lt3F32lt32378751+lt3678927(++A+8=38(3789=+283)+2375+A(+8O+(98+)+2+2+73++(A+5=782A+2+=+5+8AO+750)++B8gt8+=+7892+)+(3759((3779+8O+(98+)+(+778)+2=37+gtO(P)393=9()988- (378O+7BP+778+875Ogt46$38+=)+5+397+)(lt2((+87)875982gt-amp382+(+7gt046$889+52+B93782+Z927Bc23P+21++2889lt+2A8+8+83+Z9gt75+X779+8=5+Ogt)+22+B8+2+52+lt2+8+7A+8-82+890=7gt3)++88+)(2+lt2+8+7A+82++A7BO23P+25++280523ltlt7B)+2 8+(92+8(+78+83+X(98A+gt3+275+Xlt2359(83985+346$[889lt+2A832gt829(92+-C73297+gt0)+33lt)3+87F327[8875(P32+B9373UV 77(lt77+280+A+8F327[8(3789=+28)+=+2(gt3)+8+97+)(75A598- 5537gt0F6FD+(37MJKM-a+8)+839)+(922+77+(+88gt3(+7892+758lt+83977+(+882gt5+0)(3789+8U5A(+7)+O987+88378927(+V073)+2(37+7398889+=37B77(lt77+280)()O839+gt7++583O+552+88+5075(395O++5+2+A+3=P+)+2+B9379732=(2388bN8+8-)8O27B8 =+3 amp

1()amp$4)ampamp4$+6lt)amp4ampamp63)X$6)=amp3)4)3Iamp c+32+Y1()ampA$4)ampVamp$+6lt)Z(7O+++(A+gt75+(+7gt2+B9+5 7375+0=9828O+5+Z9+gt5+7+57=7gtD+8- +5+2((395(2++9732=5+737832U83(37V0U7+B337V0U278(37V7505537gt0U7+(+88gt3(+7892+Q2+B8237V3275A598)353737+753 U8+V78927(+8B+783)+7892+20O92)+207+753lt23A5+5A(+327+B3+5++75Q32389lt+2A8+75ltlt23A+)+(3783(+78+578927(+B+7 )=99(+7O+(98+37+X87B2+378)lt75+2+7(lt(gt-IWX=lt+87(95+83(PO23P+28077(lt77+2807A+8=+75A8+2875FG[8L7+X(983723= 2+B8237395O+gt+280)3=gt5A8+378lt+(83(372(75)3 lt+28378)395)35+388+8- 6758(98837ltlt+25+5D+lt+=O+2Mb0JKKe0)+F327G2359(+2E(+787B S32P7Bi239lt2+(3==+75+55+77BU83(37V7)+337B=77+2 A5amp+PC+252lt20+$0(0+2(0QRS(307+)02$+90102 320amp527+102)02$+amp+)-2$-+1062$)02$+T$-12+9 320amp+92amp+25UQESlt1amp1$0(0+$(30lt110+0++25050660amp6 )24+9320amp52+320amp5920amp)0+T$+020$+)0+55)-2amp1$++ +$-2+amp0)23-amp8 )8+32+57)+F327+B892+- F327832+(+7gt+4)3amp$amp64=)3amp3+7(D+(37MJKM-aR$+(+88gt3E(+78+ gt10655lt+amp40$20+00()62(5amp0+$-20-+302HCM+$-2+amp0H30 A0amp+RVWR970amp-$01020320amp520503$5amp+9+0+920660amp+ 10$506+$-2+amp0P XY)5++$93$amp-$$+$92+02)20+$69+36602+6)++$2 20amp((0+3+$+9+$-2+amp0amp4020$90)$-20$95($9)20(-($920$9 303-amp750$9)(0+)5+$92+102+$-2+amp0amp+2amp92)0+5+$-2+amp0 amp+2amp902($8 XZ0amp((0+3++3[234$+92-2+))5amp+$[)0+5))5amp+$[ )5amp15302$))5amp+$62+$-2+amp0amp40209)0+5))5amp+$62+$-2+amp0 amp402092)5amp15302$7-)2amp-52+$-2+amp0)5amp0$2+$-20lt1 )2amp-52amp()+0$2+$-202$8 X+3+6+$-2+amp0amp4020$8

D9()7B9B+395O+97+Z9A3(75(395O+7(32lt32+5734+5+2(-6 lt+7+8+2+8+739B)039532(+)38+lt23A57B+B5A(+7)+O987+883 78927(+32++389O=3D+32+5+2=75+5(+787B0+X=73775 (37797B+59(37)78(+27O+875255+A+3lt+5Ogt)+D+324+5+2+B932- )+2+87553737B37Blt23O+=)78927(+=2P+7BB+7(+8(+78+57 =9lt+8+83+27B29875+8+lt777B8+2A(+80I298amp8L)()(3789+8 )+979lt2((+30327)++2A+0)+9798)27B3+B++8)737Rgt+28-67+28+298=80=7gt3)+=3(+57$+A5)8=+07583=+297 Ogt32B73782+5gt7+532(+7892+573)+28+83lt+7gt83(78927(+B+78 75+7(392B+)+=398+O(PR53328+7B+()7Z9+87325+23B78+732(+78 298)+B)+27B8B7(777(732=37)+2O+98+538+ 779+832+78927(+lt2359(8-)8lt2((+82=lt775(3779+85+8lt+)+ 72359(3732+B937878+889()8F327-+5+2()8+287(37875lt+7+832A3378(3952+59(+32+=7+)+8+lt2((+8- 9)lt4$amp)=3)+)6)amp=64-amp3)4-64I )+2+8)395O+O23575(3=lt2+)+78A+lt23)O37378lt+(398+5+275+8+lt777B5+8B73780))+72359(3732+B93788=23)38+7F327-87F3270D+1+lt2=+7[83678927(+395lt2+lt2+83ltlt23A+5 5+8B7378753955+A+3ltA+7Blt23(+8837(95++X=7373+59(37 ++=+7802+A+7B)+)+2)++X=737lt23(+888lt23(32+5323lt+7O33P0)+)+2D+ltlt23A+5(37797B+59(3782+Z92+53=77322+7+7gt89()5+8B7370)+)+27gt5A(+BA+78537+837)+(lt(gt359(2gt075) lt3(+875lt23(+592+82+7lt(+3((+lt(3=lt7803258(lt7+)35+2837gt89()(+2(37875)+77+(+882gtlt23(+592+8322+A3(37752+lt327B358(lt72gtlt23(+592+83)+9)32+8-)8=75+(395O+=lt38+5)+5+2- C46lt46=ampD=6)+ampampC46lt46=ampD=64-Iamp 678927(+B+782+lt2+A+7+523=97B8lt+(398+5+275+8+lt777B5+8B73787325+23O2(+)+ltlt+27(+3+Xlt+28+08P+gt)+gt9273 )+37gt3)+2+AO+3)+=0)377(lt77+2-75)803(3928+0O27B8=+9(2(+3=gtlt2+A398(3==+7837)+7+(+88gt3()7B+7)+C732=67A+8=+75A8+28(-ID9lt2L)+2+32+6lt23lt38+))++2=77(lt77+27577(lt777BO+2+82(+5755+7+5975+2+5+203O+7(32lt32+5738+ 75)7gtlt+2837)3)35839877(lt77+2323+2877(lt777B8+2A(+8I833O+5+7+5LO+2+Z92+532+B8+2877A+8=+75A8+275lt23A5+ 89()5A(+859(2gt22+8lt+(A+3)+)+2)+gt833+27gt5A(+83)+A9+

37A+87B72+B9+58+(92+8-7+X+78A+895gt8lt+232=+52+5gtOgt)+i3A+27=+7((397Ogt(+37)+3lt(377(lt77+287577(lt777B I2+lt32()+5L750)+65373B2++))+2(37(983780)+gt=P+A+2gt89+3O8+2A3780)+7(+)+7(983732(37+X9lt92lt38+8087()=+73)82+lt32- 6O+)ltltgt3+Xlt75377gt3)+8+3lt(875lt23A5+5537732=3775 2+R++X=lt+8757+(53+89lt372+Z9+8-

+8lt+(9gtD9O=+50

gt32o883(+8 aJN-MdN-JJMd

$B+cgt320F4GH

Illegal Practices OfFee-Only Financial PlannersIn The Business Of Insurance

(Problems amp Solutions)

Prepared ByNigel Brian Taylor CFPreg

Santa Monica CA(Copyright copy2002 - 2009 Nigel Brian Taylor CFPreg All Rights Reserved)

Tel 310 260 1126 Website wwwiamafiduciarycom

Illegal Activities in the Business Of Insurance By Fee-Only Financial Planners (Problems And Solutions)

Prepared by Nigel Brian Taylor CFPreg

Santa Monica CA CA Insurance License Nr 0716446

INTRODUCTION

Overwhelming media focus on ldquomethods of compensationrdquo for financial services in the recent past rather than competence and regulatory compliance has fueled an ever increasing consumer-driven demand for FEE-ONLY advice in insurance planning Media and marketing hype has influenced the consumerrsquos perception and led many to conclude that ldquofee-only plannersrdquo are the only planners capable of giving objective unbiased advice relating to insurance matters because they receive no compensation from third parties are not affiliated with represent or take compensation from insurers and therefore have no conflicts of interest and loyalty that could impair their ability to provide objective and unbiased information Unfortunately however many fee-only financial planners in California and 38 other States with similar regulations are operating outside the law in order to provide this ldquoobjective and untaintedrdquo advice This discussion will highlight these illegal insurance activities and provide potential solutions (initially for California although the suggested solutions could be used as a model for other States) to increase compliance with current California insurance law It will also discuss developing trends in the business of offering insurance advice in California particularly in relation with the provision of insurance advice as a component of a ldquoComprehensive Financial Planrdquo All Statutes herein are California statutes unless otherwise indicated

INSURANCE LICENSING

The three most widely held insurance licenses issued to individuals who provide general advice to families and consumers on general insurance matters in California are The Life Agent License(LX) the Fire and Casualty Broker-Agent (FX) and to a negligible degree the Life and Disability Analyst License(LA) A full list of other licenses is available at wwwinsurancecagov

Life Agent (LX)

The licensing requirements for a Life Agent license are set forth in Chapter 5 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit I A Life Agent (LX) is defined as a person authorized by and on behalf of a life or disability or life and disability insurer to transact life disability or life and disability insurance1

Generally a life agent advises consumers as to the benefits and disadvantages of life health disability and long term care insurance etc and transact business on behalf of one or more insurance companies offering products to consumers A Life Agent must be compensated

Confidential Page 1 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

by the insurer on the sale of product in the form of commissions and cannot accept fees for service from the consumer There are approximately 154664 resident and non-resident LX agents serving Californians2

Fire amp Casualty Broker-Agent (FX)

A fire and casualty licensee is a person authorized to act as an insurance agent broker or solicitor and a fire and casualty broker-agent license is a license so to act The FX licenseersquos authority to act is determined by which documents are initially submitted

bull A $10000 Bond of Insurance Broker form 417-5 authorizes the licensee to act as an insurance broker An insurance broker is a person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurer

bull An Action Notice of Appointment form 447-54 authorizes the licensee to act as an insurance agent An insurance agent is a person authorized by and on behalf of an insurer to transact all classes of insurance except life insurance

bull An Action Notice of Solicitor form 417-31 authorizes the licensee to act as an insurance solicitor An insurance solicitor is a natural person employed to aid an insurance agent or insurance broker in transacting insurance other than life

There are approximately 88300 resident and non-resident FX agents serving Californians3

Life amp Disability Analyst (LA)

The licensing requirements for a Life and Disability Analyst license are set forth in Chapter 8 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit II A Life and Disability Insurance Analyst is defined as a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto4

Generally a LA is trained to a significantly higher level than a LX and can advise a consumer not only as to the advantages and disadvantages of all forms of insurance but can also provide competent unbiased comparative analysis of various policies for a fee as well as interpret the rights of consumers under any insurance contract The LA must among other things

bull Have been licensed as a Life Agent (LX) for a period of at least 5 years preceding a LA application5 and

bull Must complete a comprehensive course of education covering significantly more topics than the LX and

bull Pass a rigorous examination before obtaining the LA license

Confidential Page 2 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

It should be noted that the LA license currently authorizes a person to provide advice for a fee on all insurance related matters but does not currently require any training or examination in Long-Term Care insurance or require a minimum number of hours of continuing education credit in each licensing period In the past ten years the number of CA Life And Disability Analysts has remained stable at approximately 44 (forty four) for the entire Statersquos population6

ldquoFINANCIAL PLANNERSrdquo OFFERING INSURANCE ADVICE

There are over 34000 (thirty four thousand) Registered Investment Advisors and Investment Advisor Representatives in California7 An Investment Advisor in California is authorized under sect25009(b) California Corporations Code8 to utilize the title of ldquofinancial plannerrdquo (without any statutory requirement to substantiate his her competence to perform the tasks of a financial planner) and perform comprehensive financial planning services on a fee-only basis The examination and qualification requirements for the Series 65 (Uniform Investment Adviser Law Examination) are attached hereto as Exhibit III NO knowledge of insurance products or the business of insurance is required in order to register as an Investment Advisor ldquoFinancial Planningrdquo and ldquoFinancial Plannersrdquo are having an ever increasing and significant impact on the provision of insurance services in California It is important that State Agencies and boards such as the CA Dept of Insurance (CDI) Agent and Broker Advisory Committee (ABAC) provide input to regulators and legislators alike regarding allied ldquoprofessionsrdquo impacting the business of insurance to ensure that consumers are properly protected A copy of this discussion will therefore be forwarded to both the CDI and the ABAC for their consideration

Many fee-only planners offer ldquocomprehensiverdquo financial planning services that by definition include risk management analysis and recommendations as part of the planning process These recommendations include calculations regarding the amounts and types of life insurance recommendations with regard to the benefits and disadvantages of various individual and or group health insurance plans disability and long term care plans etc In some cases advice is provided on a fee basis regarding homeowners auto and other types of property casualty and general liability coverage

To avoid real and ldquoperceivedrdquo conflicts of interest many fee-only financial planners choose not to maintain affiliations or representation agreements with any insurer and therefore are unable to license themselves as LXrsquos or FXrsquos Some let their LX or FX licenses lapse when they transition to fee-only planning In both these cases California law is clear Any person accepting fees for insurance related matters from any third party other than an insurer unless otherwise exempt must be licensed as a LA9 In an attempt to circumvent the law other planners obtain a LX and or FX license to create the appearance of legal compliance but never have any intention of actually ldquotransacting businessrdquo or utilizing the license for the purpose for which it was originally issued or intended This practice is prohibited under CA law10 because it is the fee-only plannerrsquos true intention to charge the consumer for

Confidential Page 3 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance advice rather than to be compensated by an ldquoinsurerrdquo as CA Insurance Code Sections 32 amp 1622 (supra) require

Many fee-only planners quote an often-abused section of Californias Insurance code Section 1831(e) which provides a limited exemption from insurance licensing for Registered Investment Advisers to justify their unlawful behavior The following is an excerpt from a letter originally addressed to Errold Moody CFPtrade (A California Life amp Disability Analyst who has concerned himself with the illegal activities of fee-only financial planners in insurance matters for over 10 years in California) on July 27 1995 by Patricia Staggs the then Assistant General Counsel and Chief Compliance Bureau of the Legal Division Compliance Bureau of the California Department of Insurance who wrote regarding the Investment Adviser exemption

That exemption appears at Insurance Code Section 1831(e) and provides an exemption to the chapter regarding life and disability analysts for an investment adviser as defined in section 25009 of the Corporations Code when acting in that capacity (Emphasis added) Section 25009 of the Corporations Code provides as follows

Investment adviser means any 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 regular business publishes analyzes or reports concerning securities Investment Adviser does not include (a) a bank trust company or savings and loan association (b) an attorney law accountant engineer or teacher whose performance of these services is solely incidental to the practice of his profession (c) a broker-dealer whose performance of the services is solely incidental to the conduct of his business as a broker-dealer and who receives no special compensation for them or (d) a publisher of any bona fide newspaper news magazine or business or financial publication of general regular and paid circulation and the agents and servants thereof but this clause (d) does not exclude any person who engages in any other activity which would constitute him as an investment adviser within meaning of this section

A life and disability insurance analyst is defined in insurance code 325 as follows

Life and disability insurance analyst means a person who for a fee or compensation paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as a beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The Departments view to that exemption set forth in insurance code 1831(e) is that an investment adviser need not submit to regulation by the Department of Insurance so long as the activities engaged in by the investment adviser fall within the defined activities of an investment advisor as set forth in Corporations Code section 25009 It is noteworthy that the definition of an investment adviser contains no reference to insurance related activities

Confidential Page 4 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Emphasis Added) Therefore any activities included within the definition of life and disability analyst such as advising as the life insurance products are clearly outside the capacity of an investment adviser and would subject the person to the provisions of law relating to life and disability insurance analysts

Very Truly Yours Patricia Staggs

Since as early as 1995 the CDI has taken the documented position that the Investment Advisor exemption applies ONLY when a Registered Investment Advisor acts ldquoin that capacityrdquo and as defined in section 25009 of the Corporations code It is the authorrsquos conclusion based on conversations with CDI staff counsel Jody Miller therefore that the only time a Registered Investment Advisor in the State of California may lawfully provide ldquoinsurancerdquo related advice to a consumer for a fee would be for example if he were advising a client as to the allocation of sub accounts containing regulated securities within an already existing variable life insurance or variable annuity policy

This exemption does NOT however permit a Registered Investment Advisor to discuss the merits or disadvantages of any type of insurance including Life Health Disability Long Term Care Property Casualty Homeowners General Liability Auto insurance etc that do not contain any elements related to the provision of investment advisory services Under current law then any Registered Investment Advisor who provides such advice and is compensated directly by the consumer without having first obtained a LA license is guilty of a misdemeanor11

The position of the CDI was illuminated in a letter addressed to representatives of the financial services sector who attended a series of meetings held with the Dept of Insurance in late 1997 In as letter dated February 3 1998 Assistant Ombudsman and Legislative Liaison Jeffrey Kenny wrote

February 3 1998

On July 30 1997 a discussion concerning the life and disability insurance analyst license was held between the California Department of Insurance (CDI) and members of the financial planning industry As you participated in this dialog I am writing to communicate CDIs policy on this matter

The focal point for this issue is consumer protection not the interests of the individual factions With all parties based in customer service it is sad that this detail has been lost in much of the discussion As defined by insurance code Section 325 a life and disability insurance analyst is

a person who for a fee or compensation of any kind paid by or derived from any person or source other than the insurer advises purports to advise or offers to advise any person

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

insured under named as beneficiary of or have any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The fact that there are only 46 life and disability analyst in California is not a valid argument for repealing this code In fact the limited number of licensees and population in noncompliance begs for increased education and enforcement While the easy solution for those in noncompliance may be to repeal this law consumers who pay for fee advise on insurance matters deserve an analyst educated in insurance per CDI standards The current licensing requirements ensure that relationship Any legislative effort to repeal this law will likely be opposed on the basis that such action is harmful to consumers by consumer groups insurers agents and brokers and the California Department of Insurance

At the July 30 1997 meeting representatives from the financial planning industry raised two additional suggestions concerning CDIs examination requirement The first seeks to allow issuance of a Life and Disability Analyst license to Certified Financial Planners and Certified Public Accountants following the successful completion of their own professional examinations Again this is an idea that requires legislation and will certainly face opposition CDIs position remains at only those individuals who pass CDIs exam are to be issued a life and disability analyst license CDI is the agency charged with enforcing this license and will remain via its examination and related or regulatory functions the authorizing agency for this license

The final suggestion request a waiver of the requirement than an examinee must have five (5) years experience as a life licensee or employment experience under said licensee to sit for CDIs examination Again this is an idea that requires legislation CDI will reserve judgment until the full breadth of this proposal has been introduced to the state legislature

Despite some groups interest in changing current law there is an existing law which is and has always been quite clear While a financial planner may be illegally engaging in insurance analyst activities and may not be aware of their violation it is my hope that this the explanation of policy will provide them with the impetus to come into compliance or cease the illegal activity immediately Per insurance code Section 1844 any person who acts offers to acts assumes to act as a life and disability insurance analyst when not licensed by the commissioner per this article is guilty of a misdemeanor Consistent with current practice information obtained on individuals in noncompliance will be aggressively pursued

Sincerely

Jeffrey Kenny Assistant Ombudsman and Legislative Liaison

However successful criminal prosecutions for a violation of CIC sect1844 are apparently rare because the CDI must turn these matters over to local district attorneyrsquos offices Statewide Their failure to enforce the law is probably attributable to a lack of funding to prosecute

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

non-violent misdemeanor counts of this nature where no victim can be produced Unfortunately and to the detriment of Californiarsquos consumers this lack of enforcement has had the effect of creating a Cavalier attitude towards compliance with State law that essentially seems to tolerate this unlawful activity permitting fee-only planners to operate almost with impunity

There are a number of fee-only financial planners who claim in their firms disclosure form that they have no affiliations or representation agreements with any insurance carriers and that they do not represent or offer for sale any kind of insurance products However in reality they maintain LX or FX licenses and have contracts with life insurance carriers who do not require a minimum annual production level without any intention of ldquotransactingrdquo on behalf of an insurer (a violation of CA Insurance code section 1668 sub (c) amp (g) supra) while making no disclosures anywhere on their disclosure statements or advertising materials as to their active insurance licenses which is in and of itself a violation of Section 17255 of the Insurance Code12

Other fee-only financial planners claim that any insurance advice given by them to their clients as part of a comprehensive financial plan is given ldquofree of chargerdquo They claim that a fee is charged for all the other elements (investment tax retirement amp estate planning) but not for the risk management portion of the plan They point to the fact that they never ldquoact in any of the capacities defined in Article 1 (commencing with Section 1621)rdquo because they do not appoint themselves with or represent an insurance company or any particular insurance product and do not actually ldquotransactrdquo insurance business (Thereby avoiding in their minds a licensing requirement under CIC Sections 32 amp 1622) Furthermore they claim they do not charge the consumer a fee for the advice they provide regardless of the complexity of that advice (Charging a fee would trigger a licensing requirement under section 325 Insurance Code) The result if the courts upheld this logic would be that the Dept of Insurance would lose all control and authority for the provision of insurance advice to consumers by fee-only financial planners in California to the California Dept of Corporations Worse still the only recourse damaged consumers would then have against fee-only financial planners in the business of insurance would be the California Dept of Corporations a state agency woefully equipped to enforce state insurance laws

One problem that requires statutory revision is the lack of a suitable definition for ldquotransactingrdquo in the business of insurance While the Dept of Insurance has considerable leeway in determining what constitutes ldquotransactingrdquo the code itself provides little or no useful information or guidance for fee-only planners who often feel based on the wording of the current definition that they acting inside the law when performing certain services Transaction is defined under sect35 of the Insurance code as

35 Transact as applied to insurance includes any of the following a) Solicitation b) Negotiations preliminary to execution c) Execution of a contract of insurance d) Transaction of matters subsequent to execution of the contract and arising out of it

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

While the requirements under sub(s) b c amp d is self-explanatory ldquoSolicitationrdquo (sub A) Is not defined and the legislature has to date been loathe to define it leaving the interpretation to the CDI and creating a ldquofact at issuerdquo that requires administrative or judicial interpretation and determination in cases where fee-only planners dispute their activities as ldquotransactingrdquo This is not the first time the issue of defining ldquosolicitationrdquo has been brought to the attention of the Department of Insurance In a discussion paper dated September 25 1998 the Producer Licensing Working Group recommended defining ldquosolicitationrdquo in the following manner

Solicitation Any oral or written statement or image (1) made by any person either directly or by another person acting pursuant to the first persons authorization direction or control (2) which statement is made with the intention or likely effect of provoking directly or indirectly a recipients interest in potentially purchasing an insurance product

This author believes a clarification of what constitutes Solicitation under the Insurance Code will assist Registered Investment Advisors fee-only financial planners and others in assessing which license if any would be appropriate given their particular facts and circumstances If the legislature decides not to act the Dept of Insurance should issue authoritative guidelines or advisory opinions similar to those of other regulatory agencies such the SEC NASD and IRS in an effort to bolster compliance This is extremely important given recent trends and developments in the delivery methods and current practices of individuals providing insurance services in California

The issue of ldquotransactingrdquo and what constitutes ldquosolicitationrdquo aside and with regard to the practice of giving advice in insurance for free CIC Section 1631 does not mention compensation as a criteria for triggering a licensing requirement13 Even setting aside the current CDI determination of what constitutes ldquotransactingrdquo which is ambiguous Californiarsquos Insurance code for purposes of interpretation is also governed by Section 1858 of the California code of Civil Procedure (CCCP)14 There is voluminous precedent under CCCP section 1858 supporting the authorrsquos opinion that the interpretation of a statute that produces an absurd or anomalous result will not prevail when used as a defense In interpreting a statute Supreme Court avoids any construction that would produce absurd consequences15 In construing statute state Supreme Court will not parse each literal phrase of statute if doing so contravenes obvious underlying intent or leads to absurd or anomalous result16

Since it is already well settled in law that ldquoThe business of Insurance is a business affected with a public interestrdquo17 this author believes the circumvention of State Insurance licensing laws by fee-only financial planners in any manner irrespective of compensation or level of competence presents a clear and present danger to Californiarsquos consumers and is contrary to the public interest The intent and desire of the Legislature to require State licensure for insurance professionals is clearly set forth in CA Insurance Code Sections 1631 1633 amp 1633518 and is unambiguous in the authorrsquos opinion

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UNLICENSED INSURANCE ADVICE CURRENT REMEDIES

CA Insurance Code Section 1668 applies in the case of fee only planners who maintain a license but do not intend to actively transact business as LXrsquos The sole remedy for such conduct is that under this section ldquo the commissioner may deny an application for any license issued pursuant to this chapter if

helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this staterdquo

CA Insurance Code Section 1668 is problematic in that it is difficult if not impossible to enforce unless insurers are ldquorequiredrdquo to terminate all LXrsquos amp FXrsquos not actively ldquotransactingrdquo insurance business and unless the Dept of Insurance requires proof be provided to the department by the insurer that a LX or FX is in fact actively transacting business The code could require insurers to review commissions paid to appointed agents on an annual basis and terminate the appointments of all agents who do not ldquotransactrdquo over a period of 12 months unless valid cause can be shown Exceptions could be made for salaried employee of insurers and persons engaged in the regulation of insurance business in whatever form

CA Insurance Code Section 1844 is applicable to fee only planners who provide insurance advice for a fee or ldquofor freerdquo and provides that any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

Again this is difficult if not impossible to enforce because the Dept of Insurance must rely on local district attorneyrsquos offices most of which have no funds to prosecute non-violent misdemeanor counts particularly when most DArsquos offices consider this a matter for the Insurance Commissioner in the first place Therefore rather than seek prosecution under this section the Dept of Insurance should actively enforce State law against violators under the recently introduced CIC section 129218 (discussed below) It makes no sense for the Dept to refer these cases to local district attorneyrsquos offices if their decision to prosecute under the Statersquos criminal statutes is based on ldquofinancial considerationsrdquo rather than the evidence of malfeasance

There are two other remedies available to the Dept of Insurance The first is California Insurance Code (CIC) 790 et Seq The Unfair and Deceptive Trade Practices Act The second is the aforementioned and recently introduced CIC Section 129218

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Prosecution under CIC 790 et Seq does not require compensation because under section 79001 the Insurance Code applies to all persons engaged in the ldquobusinessrdquo of insurance19

Under section 79004 the Dept of Insurance is authorized to investigate any person engaged in the business of Insurance in California20 Transacting in the business of insurance without a valid license with or without compensation is clearly an unfair and deceptive competitive practice because violators seek to avoid and evade ascertainable standards in training examination licensing and continuing education required by the State for agents and brokers appointed by insurers who are performing essentially the same tasks while at the same time claiming to take the ldquoethical high groundrdquo in terms of the advice given State licensing places the agent at a competitive disadvantage because a licensed agent can only accept compensation from an insurer unless that agent is also a Life and disability Analyst Section 790035 provides substantial administrative penalties including fines and restraining orders for persons violating this Act21 The provision of unlicensed insurance advice whether for a fee or ldquofree of chargerdquo by fee-only planners is detrimental to the consumers of California because there is no ascertainable standard of education or requirement to keep current present unless such planners are subjected to the licensing requirements of the CA Dept of Insurance

The second remedy available is authorized under CIC Section 12921822 which provides for greater administrative remedies against those individuals who transact the business of insurance without proper licensure A CA Life amp Disability analyst whose business has been severely impacted filed complaints in early 2002 against prominent California fee-only planners who are flagrantly violating the law To date the CDI has taken no action against these planners and it remains unclear whether these new powers will be utilized on a proactive basis to seek out fee-only financial planners offering insurance advice or whether the Dept of Insurance will remain reactive to ldquoconsumerrdquo complaint only in the enforcement of Californiarsquos insurance laws

On a final note the CDI is considering proposed regulations pursuant to the authority granted to the Insurance Commissioner under the provisions of in SEC 8 of Assembly Bill 393 Chapter 321 Statutes of 2000 that among other things address the necessity for licensing These new regulations include a proposed section 21923

Draft

Section 21923 - Necessity of License

The following activities are not exempt from licensure under CIC Insurance Code Section 1631 because they are directly related to solicitation negotiation or effecting the sale of insurance

(a) Explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

limits premiums rates deductibles payment plans or any other insurance contract or potential insurance contract terms

(b) Recommending andor advising or urging applicantspotential applicantspolicyholders applicants for insurance coverage potential applicants for insurance coverage or policyholders to buy particular insurance policies or to insure with particular companies or insurers

(c) Binding of insurance coverages

Note Authority cited Section 8 of AB 393 Chapter 321 States of 2000 Reference Insurance Code Section 1631 of the Insurance Code

Should section 21923 be enacted any perceived ambiguities associated with the giving of ldquounlawfulrdquo advice by fee-only planners would be eliminated While the author applauds all these efforts to increase compliance through enforcement and regulation the consumerrsquos total ignorance of California Insurance law and the reactive nature of insurance enforcement will bring few if any real-world changes for consumers There have to date been few complaints regarding the illegal practices of fee-only financial planners by consumers because a) a licensed life insurance agent is always eventually involved in the ldquosalerdquo of a specific product to the consumer and b) the client has already received a written affirmation from the fee-only planner that he is acting in a fiduciary capacity as their trusted advisor The client therefore places greater value on the fee advice given by a fee-only planner than the advice of a licensed life agent ldquosellingrdquo the same product the fee-only planner recommends simply because the licensed individual is an agent of the insurer

Of course the consumer is paying twice for the same advice once in the form of fees and a second time in the form of commissions to a licensed ldquoagentrdquo Providing there is no relationship between the fee-only planner and the insurance agent and no referral fee is payable by the agent to the planner this fact is never disclosed to the client It is the authorrsquos personal experience that many fee-only financial planners refer these clients to out-of-state insurance agencies who have declared themselves willing to provide substantial discounts from their commissions While the author views these discounts are ldquoonly fair in light of the circumstancesrdquo it does not excuse the illegal conduct and the fact that the client is not receiving any favorable contractual benefits on their insurance policy such as shorter exclusion periods shorter surrender penalties lower mortality and expense fees or lower percentage monetary penalties for early termination of the product

The already established fiduciary relationship between a fee-only financial planner and his her client creates a bond of trust that implies by its very nature that the planner is fully complying with all federal and state laws In fact many fee-only planners subscribe to written codes of ethics established by credentialing bodies and professional membership organizations such as the CFP Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) which demand their members comply with all federal and state licensing laws However the aforementioned

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

professional membership and regulatory bodies are conflicted in their response to the problem of illegal activity because both organizations as mentioned previously on page 5 amp 6 of this report are lobbying for a change in the law that will allow such fee-only planners particularly those holding the CFPreg Certificate to qualify for a waiver from licensing These professional membership and regulatory bodies refuse to investigate or discipline such planners unless the State first prosecutes them The State of California for reasons stated elsewhere in this report have been loathe to take action against these fee-only planners despite repeated complaint filings by life and disability analysts over the most recent ten year period whose income is being severely impacted by such illegal activities

From a consumerrsquos perspective there would be absolutely no reason to question the integrity of their fee-only financial planner In fact organizations such as the National Association of Personal Financial Advisors (NAPFA) have marketed their fee-only planner members as the ldquoonlyrdquo planners capable of providing clear untainted unbiased advice on all financial matters including insurance and have disseminated brochures since the 1980rsquos claiming that commissioned based advice is somehow tainted and a totally flawed delivery method that could harm consumers NAPFArsquos position has been supported and publicized to a great extent by the media including magazines such as Bloomberg and Money to newspapers such as the Los Angeles Times which requires ldquofee-onlyrdquo as a pre-requisite ldquomethod of compensationrdquo for any planner participating in itrsquos popular ldquoMoney Makeoverrdquo series of consumer assistance feature articles It has also been supported by non-profit organizations such as the Consumer Federation of America Negative consumer perceptions of insurance licensed individuals has to a great extent been unfairly tainted by such media hype and marketing tactics

The recent introduction of section 12921822 coupled with an acceptance of proposed section 21923 would absolutely provide the CDI with additional needed powers to regulate the business of insurance It will not in the authorrsquos opinion however increase compliance in any meaningful manner Continued consumer ignorance of State insurance laws and reactive rather than pro-active enforcement by the CDI will almost certainly maintain the current status quo

This author applauds the sentiment of the recently introduced statute but believes it has no real-world practical value This license requirement will continue to be ignored by most fee-only planners because of the incredible burden it places on them in terms of initial compliance and qualification In addition the statute to date remains un-enforced because the CDI lacks the manpower and funding within the civil enforcement division to even begin to attack this widespread problem Simply stated this recently introduced legislation demands aggressive investigation large fines and numerous prosecutions to achieve even partial compliance The CA Department of Insurance has instigated a consumer-complaint driven ldquoreactiverdquo role rather than a consumer-protective ldquoproactiverdquo enforcement campaign even after the introduction of CIC section 129218

One major reason for continued non-compliance is the requirement that applicants be registered as LX agents for five years preceding their examination and licensure as LArsquos

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Fee-only planners view this as being forced to move back into a house they have already sold) Secondary reasons include fee-only planners view the LA license as an over-qualification to perform the tasks they desire to perform there are no schools or colleges currently teaching the course work required to become LArsquos because a total lack of enforcement by the CDI of this statute has created a total lack of interest on the part of fee-only planners Also there are no teaching materials or publications available for purchase to prepare for the examination These problems and potential solutions are discussed in more detail in the section below

Finally it is fascinating and significant to note that while many fee-only planners firmly believe State and SEC investment adviser regulations are outdated irrelevant and sorely in need of a complete revision and overhaul if they permit planners to ldquoperform comprehensive financial planningrdquo few if any fee-only financial planners actually violate the Investment advisory statutes One major reason for this almost total compliance is because of the rigorous enforcement efforts of the Dept of Corporations the NASD and the SEC in regards to the Investment Adviser Act of 1940 and the severe penalties including imprisonment it imposes for offenders

In light of the foregoing this author has concluded that the only way consumers will be substantially protected from unlicensed insurance activities is if (a) meaningful reforms are enacted that make statutory compliance desirable and (b) cooperation is sought with other State agencies such as the Dept of Corporations and private professional regulatory organizations such as the CFP Board of Standards (discussed later) who regulate activities in related financial service categories to facilitate the sharing of information crucial in establishing which activities fee-only financial planners are engaging in

RECOGNIZING NEW DELIVERY METHODS IN THE BUSINESS OF INSURANCE

It is the authorrsquos belief that licensing compliance in the business of insurance will only become a reality when States recognize the recent rapid developments in the ldquomethods of deliveryrdquo of insurance advice nationwide particularly those associated with the emerging profession of financial planning More and more consumers have recognized the advantages of employing one trusted advisor for all their financial affairs and view insurance advice as part of an overall financial plan Californiarsquos consumers are cognizant that conflicts of interest exist in insurance planning because LX amp FX agents are only compensated by insurers and represent the insurerrsquos interests to the client not the clientrsquos interests to the insurer Such agency relationships impact the fee-only plannerrsquos ability to honor hisher fiduciary obligation to act in the clientrsquos best interests at all times

Fee-only planners desire to perform the tasks and functions of an LX amp FX licensee Few if any desire to perform the more complex tasks and analysis normally expected of a Life and Disability Analyst Fee-only planners are committed to eliminating the conflicts of interests associated with representing an insurer and many consumers in California desire to employ one fee-only planner to handle all their affairs including the insurance planning portion of their financial plan rather than multiple professionals The net effect of this is that many

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consumers seek out fee-only planners to reduce conflicts while ostensibly obtaining objective and untainted advice Unfortunately they are instead often given incompetent advice by unlicensed individuals In order then to benefit and protect consumers substantial but beneficial reform is necessary

Fee-only planners with established financial planning credentials equate obtaining the LA license with ldquomoving back into a house they are trying to sellrdquo They feel competent and qualified to assist consumers in insurance planning and may have held insurance licenses for years prior to allowing them to lapse State law however demands they be licensed for five years preceding their application for licensing as Analysts and during that time they would need to ldquotransactrdquo insurance as a licensed LX agent something they do not feel they can do

As the author sees it the State has two choices in this matter It can either crack down on fee-only planners and others offering unlicensed insurance advice for a fee (hardly feasible based on lack of funding staffing or voluminous consumer complaints) or seek ways to legalize regulate and supervise these plannerrsquos activities Currently financial planners are regulated at the state level under Section 25009(b) of Californiarsquos Corporations Code Which states

Section 25009 (b) (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part of another 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 publishes analyses or reports concerning securitieshelliphelliphelliphelliphelliphelliphelliprdquo

While consumers nationwide have embraced the concept of comprehensive financial planning California along with most other States has been slow to recognize that financial planning has developed far beyond the simple giving of ldquoinvestmentrdquo advice Financial planners in California are still regulated supervised and audited by the Dept of Corporations which while skilled in terms of overseeing regulated securities transactions is woefully under equipped to supervise the activities of a planner engaging in insurance investment tax retirement estate and asset protection planning The Series 65 Investment Advisor Examination is the only legal requirement for those who desire to use the term ldquofinancial plannerrdquo in California However as the Series 65 training and education requirements23 illustrate the current State educational requirements for ldquofinancial plannersrdquo are far removed from the level of competency actually required to practice ldquofinancial planningrdquo

RECOGNITION OF ldquoFINANCIAL PLANNINGrdquo AS A PROFESSION

The State of California is well known for its innovative and forward thinking and has a unique opportunity as the bell-weather State of this nation to lead the way for other States to follow It is time for Californiarsquos regulatory and licensing bodies such as the Dept of Insurance and Dept of Corporations to recognize ldquofinancial planningrdquo as an ldquoemerging

Confidential Page 14 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

allied professionrdquo that is having a significant impact on the provision of services traditionally regulated by their agencies Recognizing the emerging profession of financial planning and recommending to the legislature the necessity of developing regulations that will govern professionals who desire to practice the profession of financial planning is the only viable sensible and logical long-term solution for protecting Californiarsquos consumers from harm

As with any other emerging profession the State in developing any such regulations should recognize and seek the counsel of long established national and international organizations that have developed rules guidelines ethics and ascertainable standards of education examination criteria credentialing and continuing education requirements Consideration should also be given as to whether a new or existing State agency should regulate the activities of financial planners or whether these activities should be regulated independent of agencies in allied professions such as those agencies governing insurance and securities As an example lawyers accountants and bank employees etc are provided limited exemptions from registration under insurance and securities laws because the State has concluded that their existing professional State licensing requirements contained in the Business and Professions Code established standards of practice and a written codes of ethics and professional responsibility provide sufficient protection to consumers without requiring multiple State licensure

Regulations governing investment advisers are inadequate to address the multitude of tasks performed by comprehensive financial planners The question therefore arises as to whether a separate state license and new regulations should be developed within the Business amp Professions Code to govern comprehensive financial planners that is separate and distinct from investment advisory services in order to adequately protect Californiarsquos consumers Should the use of the commonly touted investment industry term ldquofinancial plannerrdquo be reserved for individuals who have been State certified as competent to perform comprehensive financial planning The greatest obstacle to the recognition of financial planning as an emerging profession requiring some form of licensure is by what standards should such a profession be measured Many fee-only financial planners have no professional accreditation whatsoever other than the investment adviser registration overseen by the CA Dept of Corporations Have ascertainable and acceptable standards been developed

FINANCIAL PLANNING AND THE CERTIFIED FINANCIAL PLANNERreg

CERTIFICANT

The most widely recognized professional financial planning designation worldwide is the CFPreg Certificate The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS INC24 (Hereafter CFP Board) has licensed its CFPreg and CERTIFIED FINANCIAL PLANNERreg trademarks to over 67000 individuals in 19 countries There are currently 4578 CERTIFIED FINANCIAL PLANNERreg Certificants licensed in California25 Most CFPreg Certificants hold multiple State or federal licenses (insurance securities Registered Investment Advisor etc) and are already supervised in their professional activities by

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

multiple federal and or state agencies Sadly not one auditor of any supervising federal or state agency possesses the knowledge base or skill sets to supervise the overall activities of a comprehensive fee-only financial planner It should be stated that while the CFP Board has established a code of ethics and uniform standards of practice for CFPreg Certificants that could be used as a yardstick by legislators the CFP Board does not currently supervise investigate or audit any CFPreg Certificantrsquos activities unless a formal complaint is filed against a Certificant with the Board

The CFP Board defines a ldquofinancial plannerrdquo as a person ldquowho is capable and qualified to offer objective integrated comprehensive financial advice to or for the benefit of individuals to help them achieve their financial objectivesrdquo A financial planning professional must have the ability to provide competent financial planning services to the client utilizing the ldquofinancial planning processrdquo26 which covers basic ldquofinancial planning subject areasrdquo 27

With specific regard to the business of insurance it is important to understand the benefits provided by the CFPreg Certificate course of education as well as its shortcomings The CFP Board has developed a course curriculum (Attached as Exhibit IV) in insurance planning as an integral part of the CFPreg Certificate examination requirement This educational requirement exceeds the training currently required by the California Department of Insurance on all levels There are however shortcomings to the CFP Boardrsquos program that cannot be overlooked There is no training in State insurance regulations or any Statersquos insurance code provisions governing the business of insurance Furthermore while there is a mandatory requirement that each CFPreg Certificant complete 30 hours of continuing education for each two year certification period there is currently no requirement that all of these hours be approved by the CDI for insurance continuing education credits

The CFP Board of Standards is willing to cooperate with the CDI to address and correct the shortcomings in its program Once these problems have been corrected there are two potential solutions that if implemented could encourage full compliance with State licensing laws certainly on the part of CFPreg Certificant fee-only planners not currently licensed

SOLUTION 1 PROVIDE A FULL EXEMPTION FROM INSURANCE EXAMINATION AND LICENSING TO CFPreg CERTIFICANTS WHO ARE LICENSED AS REGISTERED INVESTMENT ADVISORS

Currently section 1831(e) provides a limited exemption from insurance licensing for Registered Investment Advisors (RIArsquos) but only ldquowhen acting in that capacityrdquo (Discussed in detail earlier) This suggestion would expand the relevant code section and remove any limitation from RIArsquos performing the tasks of a LX or FX agent providing the following conditions are met

1 The person is and remains a licensed Registered Investment Advisor either with the State or by the SEC AND

Confidential Page 16 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

2 The person remains a CFPreg Certificant in good standing AND

3 The person in addition to any continuing education requirements of the CFP Board of Standards in other areas of financial planning completes no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

4 The person provide to the CA Dept of Insurance proof of his current licensing status as a Registered Investment Advisor and CFPreg Certificant together with a list of all approved continuing education courses completed for each two year period or whenever required to do so by the Dept of Insurance AND

5 Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

6 Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS EXEMPTION

As previously illustrated the Registered Investment Advisor license alone does not qualify a person to offer insurance advice for a fee The CFPreg Certificate alone even once enhanced to provide training in statutory law and the regulation of the business of insurance in California would be insufficient because the CFPreg Certificate is not an official State regulated license However a combination of the CFPtrade Certificate and the Registered Investment Advisor license coupled with the other suggestions made above will provide a sound educational basis for any person desiring to offer insurance advice for a fee while protecting the public from harm to a far greater degree than they are protected under current law In addition this proposed exemption would alleviate the need for fee-only CFPreg Certificants to become licensed LArsquos in order to be compensated by the consumer thereby eliminating the requirement that they license themselves as LXrsquos for 5 years before meeting licensing qualification requirements By NOT forcing fee-only planners to move into a house theyrsquove already moved out of BUT RATHER demanding competence in return for a waiver from LA licensing requirements the CA Dept of Insurance would protect the consumer while facilitating an opportunity for immediate compliance without expensive investigation of illegal activities prosecution and supervision of future activities Compliance would go up the cost of supervision investigation and prosecution would go down

It is important to note that any advice given would be limited under this proposed change to the typical advice offered by LX or FX licensees who generally provide explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures limits premiums rates deductibles payment plans and

Confidential Page 17 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance contract or potential insurance contract terms as well as recommending andor advising potential applicantspolicyholders on insurance coverage to buy particular insurance policies or to insure with particular companies or insurers The advice given should not be allowed to encroach on the more complex tasks a Life amp Disability Analyst provides

This exemption will

bull Permit Registered Investment Advisors with a CFPreg Certificate to offer insurance advice without the need for appointment by an insurer and allow them to be compensated by a third party other than the insurer for that advice (A Variant of this model already exists in Connecticut and New Hampshire A very POORLY structured derivative (that this author does NOT support) has just been signed into law in Idaho The Idaho statute gives a Registered Investment Advisor carte blanche to offer insurance advice for a fee without any training examination or continuing education requirement in insurance planning a clear violation of the public trust In addition CFPreg Certificants will shortly be given an exemption from registration as Insurance Counselors (LA equivalent license for Texas) in Texas The author finds this unacceptable because again no instruction will be mandatory in insurance regulation and insurance law)

bull Require the candidate to complete a comprehensive course of education in among other things all aspects of insurance planning and demand state licensing (as an investment adviser) before qualifying for the exemption

bull Require continuing education of 30 hours in insurance planning a significant improvement over the LA license which requires NO continuing education currently

bull Leaves intact the State Insurance Commissionerrsquos authority (under CICsect790 et Seq And CICsect129218 (supra)) to supervise audit fine punish and bar from the business of insurance in CA any person who violates the publicrsquos trust

COMPARISON OF THE ldquoCFPreg PLUS REGISTERED INVESTMENT ADVISORrdquo EXEMPTION TO THE LIFE AND DISABILITY ANALYST LICENSE REQUIREMENT

There will still be a need for the Life amp Disability Analyst license in California LArsquos provide a valuable service to the public by

bull Offering expert testimony in court regarding all insurance related matters

bull Providing complex expert comparative analysis and interpretation of the terms and conditions of various insurance contracts to consumers accountants and lawyers

Confidential Page 18 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

bull Explanation of the rights of the parties under an insurance contract a service otherwise reserved exclusively to members of the Bar

The proposed exemption would not obviate the need for LA licensees It will provide a means for fee-only Registered Investment Advisor financial planners who have earned the CFPreg Certificate a professional financial planning credential that has course work superior to the current minimum standard requirement by the CA Dept of Insurance (with the noted exceptions listed above which must be addressed before an exemption would be granted) to serve their clients basic insurance needs without appointment by an insurer and the inherent conflicts of interest this may represent

EFFECT OF THIS PROPOSED EXEMPTION ON CONSUMERS

This proposed exemption would have a substantially positive effect on consumers with no negative impact whatsoever They will be able to seek out a professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education It will further provide greatly enhanced protections for the public against wrongdoing by requiring a bond in the amount of $100000 (one hundred thousand dollars) and mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CA Department of Insurance (It should however be noted that most if not all CFPreg Certificants meet all the above criteria already in terms of EampO insurance etc and obtaining a $100000 bond would not place an undue burden on any fee-only CFPreg Certificant planner) Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their insurance matters

POTENTIAL PROBLEMS ASSOCIATED WITH THE GRANTING OF AN EXEMPTION FOR CFPreg CERTIFICANTS MEETING THE ABOVE CRITERIA

One possible problem would of course be that other financial service professionals with professional insurance or financial planning credentials would seek to block any such legislation unless their credential were to be included Some other designations worthy of exemption would be

The Chartered Life Underwriter (CLU) The Chartered Financial Consultant (ChFC)

The author based on the knowledge and skill sets required to hold such designations has no objections to the inclusion of these designations for purposes of the aforementioned suggested exemption providing these professionals meet ALL the other criteria

SOLUTION 2 PERMIT STATE LICENSING AS A LX OR FX WITHOUT INSURANCE COMPANY APPOINTMENT AND AUTHORIZE PLANNERS TO BILL CLIENTS DIRECTLY

Confidential Page 19 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Under California law a person who ldquofor a fee or compensation of any kind paid by or derived from any person or source other than an insurerrdquo(emphasis added) must register a Life and Disability Insurance Analyst under CIC Section 325 As previously illustrated in this discussion however Life and Disability Insurance Analysts are required to

bull Pass an antiquated examination that has not been substantially revised since 1983 bull Self-Study in some cases already repealed statutes because no examination

revisions have been undertaken since 1983 Furthermore no educational courses are available from any college school or professional educational institution because there is simply no demand for the license due to a complete lack of enforcement of LA laws by the CDI

bull Self Study to familiarize themselves with many topics including Long Term Care and other more recently introduced exotic and hybrid insurance products because candidates are not tested on these products due to lack of LA examination revision

Oddly once licensed Life and Disability Insurance Analysts are NOT required to complete any continuing education requirements of any kind There is no requirement other than one imposed by ldquopotential liabilityrdquo through civil action for a LA to ldquoremain currentrdquo as a LA licensee

In light of the foregoing a far more sensible alternative and second potential solution would be to allow all LX amp FX agents to be licensed with the CDI without the requirement for appointment to transact on behalf of an insurer LX or FX agents desiring to be compensated directly from the consumer (for purposes of this discussion the author will refer to such agents as FLX amp FFX agents) would subject themselves to the same CDI licensing and examination requirements as traditional LX amp FX agents FLX amp FFX agents would also be subject to the same continuing education requirements as traditional LX amp FX agents The function of FLX amp FFX licensed individuals would be to act ldquoquasirdquo in the capacity of a personal representative of the client with the authority to negotiate and effect all insurance coverages on their behalf at the best possible terms with any company they choose (As fiduciaries such FLX ampFFX licensees would be subject to regulations similar to the NASDrsquos ldquobest executionrdquo rules They would be required to perform extensive due diligence and seek the best coverages at the most reasonable prices on behalf of their clients)

Currently such activities allowed under CIC sect33 are restricted to ldquoa person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurerrdquo (Emphasis added) In essence then a similar but new and distinct section would be created expanding the role of an ldquoinsurance brokerrdquo as defined under CIC sect33 to that of a FLX amp FFX who would be authorized to solicit and negotiate all forms of insurance including property casualty life health disability long-term-care and other forms of insurance

Confidential Page 20 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

This new Code section would make additional demands on any person seeking to license himherself as a FLX amp FFX licensee to protect consumers from harm Among other things such licensees would be required to

bull Complete BOTH LX and FX courses of education and the appropriate licensing examinations (Based on the CFP Boardrsquos program of education in insurance planning fee-only comprehensive financial planners provide information regarding all aspects of a consumerrsquos risk management needs

bull Be a licensed Registered Investment Advisor with the State AND

bull Complete no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

bull Provide to the CA Dept of Insurance proof of current licensing status as a Registered Investment Advisor together with a list of all approved continuing education courses completed each two year period or whenever required to do so by the Dept of Insurance AND

bull Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

bull Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS NEW LICENSE

This proposed license would have a substantially positive effect on consumers with no negative impact whatsoever Consumers will be able to seek out a ldquolicensedrdquo professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education The examination requirement supports the CDIrsquos position as stated in the February 8 1998 letter written by Jeffrey Kenny (Supra) that only those individuals who pass CDIrsquos exams are to be issued licenses and that the CDI will remain ldquovia its examination and related or regulatory functions the authorizing agencyhelliphelliprdquo in the business of insurance It will further provide greatly enhanced protections for consumers against wrongdoing by requiring a California surety bond in the amount of $100000 (one hundred thousand dollars) in addition to mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CDI Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their basic insurance needs on a fee-only basis

Confidential Page 21 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

SUMMARY AND CONCLUSIONS

The California Dept of Insurance has essentially four choices

1 Maintain a Status Quo approach do nothing to address the illegal activities of fee-only financial planners remaining a reactive rather than proactive regulator of the business of insurance

2 Implement a program of rigorous investigation and enforcement of illegal activities in the business of insurance utilizing current and newly introduced sections of the California Insurance Code to stamp out the widespread and growing problem of illegal activities on the part of fee-only financial planners offering advice in insurance matters for a fee in California

3 Consider implementation of one or more of the solutions suggested in this discussion

4 Develop meaningful initiatives such as those suggested herein to combat andor provide solutions to illegal activities in the business of insurance

Maintaining the status quo and doing nothing to address the illegal activities of fee-only planners will eventually cause the CDI to lose control and regulatory authority over the business of providing insurance advice to consumers to other state agencies such as the Dept of Corporations an agency ill equipped and hardly qualified to supervise and monitor such activities More and more broker-dealer registered financial planners and life agents are transitioning to the more profitable fee-only model Without aggressive enforcement of the law many of these planners may eventually surrender their insurance licenses to avoid multiple state licensure layering of regulation supervision and audit The current lack of any enforcement by the CDI against prominent planners who have already been reported to CDIrsquos investigations division by Errold Moody CFPreg and others over the past ten years is an encouragement to other transitioning planners to ignore and violate State law Inaction equates to state condoned tolerance and silent approval in the eyes and minds of many fee-only financial planners

Rigorous investigation and enforcement while preferable is also the most difficult policy to enforce The CDI has neither the manpower nor the consumer driven complaints necessary to actively enforce insurance laws against fee-only planners violating state law Simply put these planners are ldquooff the radarrdquo and rarely generate complaints Since they are not licensed they do not fall under the authority of the CDI and unless they are brought to the attention of the CDI by virtue of consumer complaints these planners will continue to remain extremely difficult to find Additionally the CDI lacks proper funding and manpower to effectively enforce Insurance laws in California at this time Therefore any consideration for rigorous investigation and enforcement must be viewed as impractical given the current budget deficit and the apparent lack of will on the part of the CDI and local district attorneyrsquos offices to prosecute violators when they are reported

Confidential Page 22 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

By implementing one or more of the suggestions contained in this discussion the CDI will facilitate voluntary and willing compliance with state law while ensuring that their mandate to protect consumers from harm by insisting that CDI established examination licensing and continuing education requirements would be met Fee-only planners would be able to offer the advice they desire to offer on a fee basis with direct client billing the CDI would be in a far better position to supervise control audit and discipline these planners if and when the need arises More importantly consumers would be able to turn to the CDI for assistance without hearing the phrase ldquoIrsquom sorry that individual is not licensed and does not fall under our jurisdictionrdquo

In conclusion the CDI has the opportunity to solicit opinions and suggestions from state sponsored agencies and boards such as the CA Agent and Broker Advisory Commission to the Dept of Insurance Some members of the CDI Agent and Broker Advisory committee are fee-only CFPreg Certificants and have an understanding of the issues involved These professionals and other insurance professionals whose livelihoods also depend in part on ethical conduct in the business of insurance are in a position to provide valuable input to the CDI regarding these suggestions

It is hoped that this discussion will generate concern and renewed scrutiny of the illegal activities of fee-only planners in California and that this in turn will lead to a necessary beneficial and long overdue overhaul of Californiarsquos insurance licensing laws for the benefit of not only Californiarsquos consumers but eventually Consumers nationwide who reside in States with similar insurance advisory statutes

Respectfully submitted

Nigel B Taylor is a Certified Financial Plannerreg Certificant General Securities Principal and CA Life Agent associated with Royal Alliance Securities Inc He is a former President of the Award Winning Institute of Certified Financial Planners Los Angeles Society (1999) and Former Chairman of the Financial Planners Association ndash Los Angeles Chapter (2000) Mr Taylor has published numerous articles regarding proposed regulation compliance ethics and professionalism for financial planners and CFPreg Certificants He is based in Santa Monica California

1 CA Insurance Code Sections 32 amp 1622 2 Source Dept of Insurance Annual Report 2000 3 Source Dept of Insurance Annual Report 2000 4 CA Insurance Code Section 325 5 CA Insurance Code Sections 1849 6 Source CA Dept of Insurance March 2002 7 Source CA Dept of Corporations March 2002 8 25009 (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part

Confidential Page 23 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

of another business of advising others either directly or through publications or writings as to the value of securitieshelliphellip(Excerpt) 9 CA Insurance Code Section 325 10 CA Insurance Code Section 1668 The commissioner may deny an application for any license issued pursuant to this chapter if helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this state 11 CA Insurance Code Section 1844 Any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

12 CA Insurance Code 17255 (a) For purposes of Sections 325 1625 1626 17245 17581 1765 1800 14020 14021 and 15006 every licensee shall prominently affix type or cause to be printed on business cards written price quotations for insurance products and print advertisements distributed exclusively in this state for insurance products its license number in type the same size as any indicated telephone number address or fax number

CIC 17255 (c) Any person in violation of this section shall be subject to a fine levied by the commissioner in the amount of two hundred dollars ($200) for the first offense five hundred dollars ($500) for the second offense and one thousand dollars ($1000) for the third and subsequent offenses The penalty shall not exceed one thousand dollars ($1000) for any one offense These fines shall be deposited into the Insurance Fund

13 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the commissioner authorizing the person to act in that capacity 14 1858 In the construction of a statute or instrument the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein not to insert what has been omitted or to omit what has been inserted and where there are several provisions or particulars such a construction is if possible to be adopted as will give effect to all 15 Flannery v Prentice (2001) 110CalRptr2d 809 26Cal 4th 572 28P3d 860 16 People v Martinez (1995) 45CalRptr2d 905 11Cal4th 434 903P2d 1037 17 Caminetti v State Mut Life Ins Co (1942) 126P2d80926Cal 4th 572 28P3d 860 18 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the

Confidential Page 24 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

commissioner authorizing the person to act in that capacity The issuance of a certificate of authority to an insurer does not exempt an insurer from complying with this article

1633 Any person who acts offers to act or assumes to act in a capacity for which a license is required without a valid license so to act is guilty of a misdemeanor

16335 It is hereby declared to be the intent of the Legislature in enacting this chapter that the regulations prescribed herein be the exclusive regulations relating to the conduct of insurance business by persons licensed to act in any of the capacities defined hereunder any local regulations or ordinances notwithstanding 19 79001 This article applies to reciprocal and interinsurance exchanges Lloyds insurers fraternal benefit societies fraternal fire insurers grants and annuities societies insurers holding certificates of exemptions motor clubs nonprofit hospital associations life agents broker-agents surplus line brokers and special lines surplus line brokers as well as all other persons engaged in the business of insurance (color amp emphasis added)

20 79004 The commissioner shall have power to examine and investigate into the affairs of every person engaged in the business of insurance in the State in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 79003 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance Such investigation may be conducted pursuant to Article 2 (commencing at Section 11180) of Chapter 2 Part 1 Division 3 Title 2 of the Government Code

21 790035 (a) Any person who engages in any unfair method of competition or any unfair or deceptive act or practice defined in Section 79003 is liable to the state for a civil penalty to be fixed by the commissioner not to exceed five thousand dollars ($5000) for each act or if the act or practice was willful a civil penalty not to exceed ten thousand dollars ($10000) for each act The commissioner shall have the discretion to establish what constitutes an act However when the issuance amendment or servicing of a policy or endorsement is inadvertent all of those acts shall be a single act for the purpose of this section

22 129218 (a) The commissioner shall have the authority to issue a cease and desist order against any person acting as or holding himself herself or itself out as an insurance agent or broker without being so licensed and against any person holding out that person as transacting or transacting the business of insurance without having been issued a certificate of authority The commissioner may issue a cease and desist order without holding a hearing prior to issuance of the order The commissioner may impose a fine of up to five thousand dollars ($5000) for each day the order is violated

22 Supra 23 See Exhibit III of this memorandum

Confidential Page 25 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

24 CFP Board a 501(c)(3) certifying organization fosters professional standards in

personal financial planning so that the public values has access to and benefits from competent financial planning CFP Board owns the certification marks CFPtrade CERTIFIED FINANCIAL PLANNERtrade and federally registered CFP (with flame) logo which it awards to individuals who successfully complete initial and ongoing certification requirements CFP Board has currently authorized more than 39214 individuals to use these marks in the United States and 27343 individuals outside the United States For more about CFP Board visit wwwCFPnet 25 Source CFP Board of Standards Inc Colorado 26 Financial Planning Process denotes the process which typically includes but is not limited to the six elements of establishing and defining the client-planner relationship gathering client data including goals analyzing and evaluating the clientrsquos financial status developing and presenting financial planning recommendations and monitoring the financial planning recommendations (CFPtrade Board Code of Ethics ndash Definitions) 27 Financial planning subject areas denotes the basic subject fields covered in the financial planning process which typically include but are not limited to financial statement preparation and analysis (including cash flow analysis planning and budgeting) investment planning (Including portfolio design ie asset allocation and portfolio management) income tax planning education planning Risk Management (emphasis added) retirement planning and estate planning (CFPtrade Board Code of Ethics ndash Definitions)

Confidential Page 26 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

EXHIBIT I

Confidential Page 27 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life Agent License Information

LIFE AGENT (LX) Licensing Information

TABLE OF CONTENTS

Authorizing acts and with definitions Qualifications Filing Requirements

Individual -- Residents Organization -- Residents Individual -- Non-Residents Organization -- Non-Residents

License Term Renewal of License Additional Information

APPLICABLE FORMS

Individual Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Action Notice of Appointment (Form 447-54) Organization Endorsement (Form 411-8A) Non-Resident Insurance License Stipulation and Agreement (Form 447-68)

These forms are also included in the Individual and Business Entity applications

AUTHORIZING ACT

California State Insurance Code Chapter 5 Part 2 Division 1

A life agent (LX) is a person authorized by and on behalf of a life disability or life and disability insurer to transact life disability or life and disability insurance

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

Prelicensing ExperienceEducation

1) Require a minimum of 40 hours of approved prelicensing classroom study A new California resident applicant who had a current life license in another state and completed 40 hours of prelicensing education for life insurance in order to obtain that license or an applicant holding either a Life Underwriter Training Council Fellowship (LUTCF) or Chartered Life Underwriter (CLU) designation is exempt from the 40 hours of prelicensing education

2) Require 12 hours of approved prelicensing classroom study on ethics and the California Insurance Code Where an applicant seeks both the Fire and Casualty broker-agent license and the Life agent license the applicant shall only be required to complete one 12-hour course on ethics and the California Insurance Code

Continuing Education

1) During each of the first four 12-month periods following the date of original issue of license satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to a minimum of 25 hours

2) Any licensee who has complied with the above or was licensed as of 123191 shall satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to 30 hours of instruction during each two-year license period

3) Any agent that markets long-term care insurance must complete an 8-hour California specific long-term care continuing education course Check with your insurer regarding long-term care insurance requirements

4) Effective January 01 1998 any person who is 70 years of age or older and who has been licensed for 30 continuous years as a licensee in good standing in this state may be exempt from continuing education requirement Any licensee that markets individual long-term care contracts is still required to meet the specific education requirements for marketing such contracts

The agent who is limited by the terms of a written agreement with the insurer to transact only specific life insurance policies or annuities having an initial face amount of $10000 or less that are designated by the purchaser for the payment of funeral or burial expenses will be exempted from the prelicensing and continuing education requirements The commissioner may require the insurer appointing those life agents to certify as to the limitation of the agents representations

FILING REQUIREMENTS INDIVIDUAL - RESIDENTS

Application Application for Insurance License form 441-9

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to CaliforniaThis form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants If an examination is required fingerprint impressions will be taken at the California examination sites

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Prelicensing Certificate Of Completion Original certificate(s) of completion signed by both classroom instructorprovider director and applicant for life agent course andor Ethics and Code course

Examination Applicants who do not hold an active Life (LX) California resident license and whose eligibility for that license without examination has expired must pass the written examination prepared and administered by the Department

Fees - Individual Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice or an Organization Endorsement $21 per notice Examination $35 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 all applicants must appear at the designated exam site with a check in the amount of $74 made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal Fee $124 (2-year term)

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 1

Life Agent License Information

FILING REQUIREMENTS ORGANIZATION - RESIDENTS

Organization Application

Corporation partnership unincorporated association limited liability company or nonprofit corporation applicants must submit the Application for Organization License form 441-11

NOTE The organization must have at least one California resident LX endorsee to establish and maintain the license

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each endorsee who holds an active California non-resident LX license Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Fees - Organization Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS INDIVIDUAL - NON-RESIDENTS

Application Application for Insurance License form 441-9 must be completed by applicants who do not hold an active California LX license

NOTE Licensed non-resident agents whose state of residence does not have continuing education must meet the same requirements as a California resident in order to renew their license Licensed non-resident agents who comply with the continuing education requirements of their state of residence are exempt from California continuing education requirements If licensees transact long term care products they must meet California specific long term care education requirements

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California This form is also included in the Individual and Business Entity applications

Stipulation and Agreement Non-resident Insurance Licensee Stipulation and Agreement form 447-68

Certification Of License Status From Resident State

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Examination Not required except if the applicants state commonwealth or Canadian province of residence has no reciprocal agreement for waiving of examination

Fees - Individual Non-Resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS ORGANIZATION - NON-RESIDENTS

Organization Application

Corporation partnership unincorporated association or nonprofit corporation applicants must submit the Application for Business Entity License form 441-11

Note A California resident cannot be endorsed on a non-resident organization

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each natural person who holds an active California non-resident LX license This form is also included in the Individual and Business Entity applications Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Stipulation and Agreement Non-resident Insurance License Stipulation and Agreement as required by law form 447-68 signed by an officer or partner of the organization

Certification Of License Status From Resident State Must be in the organization name

Fees - Organization Non-resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 2

Life Agent License Information

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed to the mailing address of record approximately 90 days prior to the expiration date of the license Individuals will receive a renewal application showing total fees due for all license types held and the total number of continuing education hours completed at the time the renewal form is printed If the continuing education requirement has not been met the renewal will indicate how many hours are needed If renewal application is not received refer to the back of the permanent license for renewal instructions

All licensees that renew their licenses late will be required to file new company appointments organization endorsements or solicitor appointments Late is defined as any renewal for which the requirements to renew (this includes completing the continuing education hours) are not met until after the expiration date of the previous license term

ADDITIONAL INFORMATION

The Commissioner may grant authority to transact variable contracts to a person or an organization licensed as a Life Agent which is appointed by an admitted insurer which is required to register itself or to register a separate account or fund with the United States Securities and Exchange Commission or to register its variable policies or contracts with the Securities and Exchange Commission The person must submit acceptable proof of registration with NASD or SECO before authority to transact variable contracts can be granted

If currently licensed as a resident of another state upon becoming a California resident a clearance letter from the former state of residence is required

Limited liability company applicants are required to submit the following information to demonstrate compliance with Section 16475 of the California Insurance Code

1 A statement as to the number of licensees rendering professional services on behalf of the Limited Liability Company

2 The aggregate dollar amount of E amp O Liability Insurance Cash Bonds Bank Certificates of Deposit US Treasury obligations etc held to provide security for claims against the Limited Liability Company (The amount required over the minimum of $500000 is at least $100000 multiplied by the number of licensees rendering professional services on behalf of the company however the maximum amount is not required to exceed $5000000)

3 For purposes of satisfying the security requirements of California Insurance Code Section 16475 we will require one or more of the following

(A) A copy of the declaration page for each liability insurance policy used to satisfy the minimum security requirement

(B) Verification by the bank or escrow holder listing the type and current dollar value of the assets used to satisfy the minimum security requirements

Limited liability company licensees must file at least once each year an annual confirmation with the commissioner in the above format to demonstrate continuing compliance with the financial security requirements of Section 16475 of the California Insurance Code

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 644A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - January 16 2002 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 3

EXHIBIT II

Confidential Page 31 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life and Disability Insurance Analyst License Information

LIFE AND DISABILITY INSURANCE ANALYST (LA) License Information

APPLICABLE FORMS

Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Organization Endorsement (Form 441-8A) Request For Live Scan Service (form 442-39A)

This form is also included in the Individual and Business Entity applications

AUTHORIZING ACT California State Insurance Code Chapter 8 Part 2 Division 1

A Life and Disability Insurance Analyst is a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is required

Prelicensing ExperienceEducation Must have worked as a life licensee as defined under Chapter 5 Part 2 Division 1 of the Insurance Code for five years preceding the date of the examination or as an employee of such a licensee

Continuing Education

Not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

FILING REQUIREMENTS - INDIVIDUAL

Application Application for Insurance License form 441-9

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants You must call SYLVANIDENTIX at 1-(800) 315-4507 to schedule an appointment to have your fingerprint impressions taken prior to submitting your application Fingerprint impressions will not be accepted from any other source A copy of your Request For Live Scan Service (form 442-39A) must be submitted with your application verifying your prints were taken by SYLVANIDENTIX

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

FEES - Individual

License Filing $418 (2-year term) Examination $103 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 this fee must be paid at the designated site when the fingerprint impressions are taken You may pay by check made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal $418 (2-year term )

EXAMINATION

The applicant must pass the written examination prepared and administered by the Department

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 1

Life and Disability Insurance Analyst License Information

STUDY MATERIAL

Although the Department does not recommend any particular text method or course of study listed below is a study guide to assist in the preparation for the examination 1) The life and disability laws of this state are contained in the California Insurance Code Those sections on which an applicant might be tested are

General Provisions Sections 1 - 46 Division 1 Part 1 Chapter 1 Sections 100 - 123 Division 1 Part 1 Chapter 2 Article 1 Sections 150 - 151 Division 1 Part 1 Chapter 2 Article 3 Sections 250 - 252 Division 1 Part 1 Chapter 2 Article 4 Sections 280 - 287 Division 1 Part 1 Chapter 2 Article 5 Sections 300 - 305 Division 1 Part 1 Chapter 3 Article 1 Sections 330 - 339 Division 1 Part 1 Chapter 3 Article 2 Sections 350 - 361 Division 1 Part 1 Chapter 4 Article 1 Sections 380 - 393 Division 1 Part 1 Chapter 4 Article 3 Section 430 Division 1 Part 1 Chapter 4 Article 4 Sections 440 - 449 Division 1 Part 1 Chapter 4 Article 5 Section 460 Division 1 Part 1 Chapter 5 Sections 480 - 489 Division 1 Part 1 Chapter 6 Article 3 Sections 550 - 5575 Division 1 Part 2 Chapter 1 Article 1 Section 680 Division 1 Part 2 Chapter 1 Article 3 Sections 669 - 726 Division 1 Part 2 Chapter 1 Article 5 Sections 750 - 767 Division 1 Part 2 Chapter 1 Article 55 Sections 770 - 776 Division 1 Part 2 Chapter 1 Article 57 Sections 7771 - 7773 Division 1 Part 2 Chapter 1 Article 6 Sections 780 - 784 Division 1 Part 2 Chapter 1 Article 65 Sections 790 - 79010 Division 1 Part 2 Chapter 1 Article 75 Sections 815 - 816 Division 1 Part 2 Chapter 2 Article 5 Sections 1220 - 1221 Division 1 Part 2 Chapter 4 Article 2 Sections 1580 - 1599 Division 1 Part 2 Chapter 5 Sections 1621 - 17585 Division 1 Part 2 Chapter 5A Sections 1759 - 175910 Division 1 Part 2 Chapter 8 Sections 1831 - 1849 Division 2 Part 2 Chapters 1-13 Sections 10110 - 11533 Division 2 Part 61 Sections 12670 - 12691 Division 3 Chapters 1 and 2 Sections 12900 - 12977

2) The provisions terms and conditions of a life and disability insurance contract that might be tested are but not limited to the following Life Insurance Disability Insurance

Insuring Agreement Insurance Clause Reinstatement Schedule Incontestability Renewal Provisions Settlement Options Benefit Provisions Dividend Options Co-Insurance Ownership Provisions Waiting Periods Nonforfeiture Provisions Elimination Periods Grace Periods Deductibles Loan Provisions Waivers Suicide Exclusions Assignments of Transfers Restrictions Aviation Clause Pre-existing Conditions Beneficiaries Provisions Other Insurance

Additionally the applicants are expected to be thoroughly familiar with the types of contracts being issued in this state including but not necessarily limited to Life Disability

Individual Contracts Individual ContractsGroup Contracts Group ContractsIndustrial Contracts Blanket ContractsOrdinary Life Basic Hospital ExpenseLimited Payment Life Basic Medical-Surgical ExpenseModified and Graded Premium Basic Hospital and Medical-Surgical ExpenseEndowment Insurance Hospital Confinement IndemnityImmediate Annuities Major Medical ExpenseDeferred Annuities Comprehensive Major Medical ExpenseVariable Annuities Disability Income ProtectionLevel Term Life Accident OnlyIncreasing Term Life Specified DiseaseDecreasing Term Life Specified AccidentRe-entry Term Life Medicare SupplementUniversal Life 3) A thorough and complete knowledge of life and disability insurance may include

a Application and consequences of various policies b Applications and consequences of federal and estate taxes c Interrelationship with other investment vehicles d Interrelationship with other regulatory agencies including but not limited to SEC RIA etc e Interrelationship with contract business probate and investment laws in California f Insurance companys financial and organization analysis g Rate calculations and risk transfer

FILING REQUIREMENTS - ORGANIZATION

Organization Application

Corporation partnership nonprofit corporation or unincorporated association applicants must submit the Application for Business Entity License form 441-11

Natural Person Named On Organization

Application for insurance license form 441-9 and Organization Endorsement form 411-8A must be completed by each natural person who does not hold an active California LX license (individual filing requirements must be met)

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 2

Life and Disability Insurance Analyst License Information

Organization Endorsement form 441-8A (this form is also included in the Business Entity application) must be completed for each natural person who holds an active California LX license

FEES - ORGANIZATION

Fees are not required for the organization license Each natural person named on the organization must pay individual fees

License filing $418 (2-year term) Renewal Fee $418 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed approximately 60 days prior to the expiration date of the license and will show total fees due for all license types held If this application is not received refer to the back of the permanent license for renewal instructions

ADDITIONAL INFORMATION

The following persons are exempt from the requirements of this license

a Active members of the State Bar of California

b Any person who has passed all of the qualifying examinations necessary to become an Associate of the Society of Actuaries

c An officer or employee of any bank or trust company who receives no compensation from sources other than the bank or trust company for activities connected with his employment which would otherwise subject him to licensing requirements

d Any person employed by an employer who on behalf of his or her employer or any employee of his or her employer transacts life or disability insurance with but not on behalf of an insurer or advises his or her employer or any employee of his or her employer in any manner concerning life or disability insurance if

1 the employer receives no compensation by reason of such transactions or advice and 2 such person receives no compensation from any source other than his or her employer for such transactions or advice

e An investment advisor as defined in Section 25009 of the Corporations Code when acting in that capacity

NOTE An employee or officer of any insurer is not eligible for a license as a Life and Disability Insurance Analyst

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 765A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - December 18 2000 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 3

EXHIBIT III

Confidential Page 35 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Series 65 Exam

The Uniform Investment Adviser Law Examination and the available study outline were developed by the North American Securities Administrators Association Inc (NASAA) The examination called the Series 65 exam is designed to qualify candidates as investment adviser representatives The exam covers topics that have been determined to be necessary to understand in order to provide investment advice to clients The study outline is designed to provide an overview of the exams general content and format

The study outline is divided into corresponding sections to aid in preparing for the examination

The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline Applicants are allowed 180 minutes to complete the examination At least 89 (685) of the questions must be answered correctly for an individual to pass the Series 65 exam

The examination is conducted as a closed book test Upon completion of the examination the score for each section and the overall test score will immediately be made available to the candidate

The examination is administered by the National Association of Securities Dealers Inc (NASD) To schedule a candidate for the examination an individuals firm should file a Form U-4 or the individual should file a Form U-10 and pay the $11000 examination fee to the NASD at the following address

NASD Regulation Inc Attention Exams Dept 9509 Key West Avenue Rockville MD 20850 301590-6500

Once registered NASD will open a 120-day window within which an individual may schedule the exam A link to the NASD Forms can be found at httpwwwnasdrcom3400asp More information on exam sites can be found at httpwwwnasdrcom2630asp

The questions in the examination the examination study outline and the method by which the examination is administered have been designed by Chauncey Group International for NASAA and approved by NASAA and the Competency Exam Project Group In addition each examination question is statistically analyzed to insure reliability

Any attempt to compromise the examination may serve to destroy its validity and usefulness Therefore NASAA intends to bring appropriate action against persons who attempt to compromise the examination in whole or in part In addition such conduct may subject a candidate to further action by state administrators

Successful completion of the Uniform Investment Adviser Law Examination does not relieve a candidate of the personal responsibility to know and to abide by the specific requirements of the securities laws and regulations of the states in which the candidate transacts business Furthermore although successful completion of the examination may satisfy a portion of the requirements of a particular state it does not convey the right to transact business prior to being granted a license or registration by that state

NASAA believes that the Uniform Investment Adviser Law Examination will significantly benefit the industry and state regulators alike by such uniformity The investing public will be afforded a greater degree of protection through enhanced uniform qualification standards

NASAA Uniform Investment Adviser Law Exam (Series 65)

Exam Specifications

CONTENT AREA

OF ITEMS

I Economics and Analysis

20

A B Understand basic economic concepts

1 Inflationdeflation a Definitions b Causes of inflationdeflation

2 Interest rates and yield curves a Graphs b Definitions c Interest rate = cost of money

3 Basic economic indicators a GDP b Employment indicators c Trade deficit d Balance of payments e CPI

A

determine investment merits A Income statement

a Revenues b Cost of goods sold c Pre-tax margins d Cash flow

B Balance sheet a Assets b Liabilities c Working capital d Owners equity e Footnotes

A

C Demonstrate understanding of quantitative methods to evaluate investments

A Time value of money B Expected return C Net present value D Internal rate of return E Inflation-adjusted return (real return) F After-tax returnyield G Risk-adjusted return H Total return I Holding period return J Yield-to-maturity K Yield-to-call L Current yield M Risk measurements (eg Beta standard deviation duration) N Valuation ratios (eg PE price-to-book) O Benchmark portfolios P Annualized return

D E Identify risks (ie definitions impact on the market companies

and personal investments) D Business E Market F Interest rate G Inflation H Regulatory (eg tax law changes) I Liquidity

J Opportunity cost

II Investment Vehicles

26

A B Evaluate cash and cash equivalents

A Types and characteristics of cash and cash equivalents a Certificates of deposit b Money market funds c Treasury bills

B Benefitsrisks of owning cash and cash equivalents

B C Evaluate fixed income securities

B Types and characteristics of fixed income securities a US government and agency securities b Mortgage-backed securities c Corporate bonds (ie investment grade and high yield) d Convertible bonds e Municipal bonds f Zero-coupon bonds

C Benefitsrisks of owning fixed income securities

C D Evaluate equity securities

C Types and characteristics of equity securities a Common stock (eg voting rights etc) b Preferred stock c Convertible preferred stock

D Methods used to determine the value of equity securities (eg technical and fundamental analyses dividend discount)

E Benefitsrisks of owning equity securities

D E Evaluate investment company securities

D Types and characteristics of investment companies a Open-end investment companies

(mutual funds)

b Closed-end investment companies c Classes of shareholders expense ratios sales load

breakpoints 12b-1 fees E Benefitsrisks of owning investment company securities

E Recognize derivative securities and their benefitsrisks

F G Understand unique aspects of international investing

F Emerging vs developed markets G American Depository Receipts (ADRs) H Currency influences (concept of risk)

G H Understand real estate partnerships and investment trusts

(REITs) and variable annuities G Definitions H Benefitsrisks

III Investment Recommendations and Strategies

39

A B Determine and analyze the financial profile of the client to

develop a suitable investment policy and strategy A Type of client

a Individual b Sole proprietorship c General partnership d Limited partnership (including family limited

partnership) e Limited liability company f C corporation g S corporation h Trust i Estate

B Financial goals C Current financial status (eg cash flow balance sheet) D Capital needs (eg current retirement death disability)

E Current investments and strategies F Time horizon G Non-financial investment considerations (eg values

attitudes experience demographic characteristics) H Risk tolerance I Tax situation

B C Understand portfolio management strategies styles and

techniques (fixed income and equities) B Portfolio management styles and strategies

a Strategic and tactical asset allocation (eg style asset class rebalancing)

b Active vs passive c Growth vs value d Market capitalization (micro small mid large) e Buyhold f Indexing g Diversification

C Funding techniques a Dollar-cost averaging b Income reinvestment (eg dividend interest cap gain)

C D Recognize fundamental taxation issues

C Individual income tax (eg capital gains tax basis retirement distribution alternative minimum tax)

D Corporate trust and estate income tax E Estate and gift tax

D E Recognize types of retirement plans and related issues

D Retirement plans a Individual Retirement Arrangements (IRA) b 403(b) plans c Qualified retirement plans (eg pension and profit

sharing 401(k)) d Nonqualified retirement plans

E Important ERISA issues a Fiduciary responsibility (eg 404(c)) b Investment policy statement

c Prohibited transactions

E F Define the fundamental terms and concepts of trading securities

E Terminology (eg bids offers quotes) F Role of broker-dealers specialists market-makers G Types of orders (eg market limit stop short sale) H Types of accounts (eg cash margin option) I Commissions markups spread

F G Calculate performance

F Calculate performance a Total return (ie yield plus growth) b Inflation-adjusted return c After-tax returnyield d Current yield

IV Ethics and Legal Guidelines

45

A B Understand relevant aspects of securities acts and other rules and

regulations in order to comply as an investment adviser representative

A Investment Company Act of 1940 B Investment Advisers Act of 1940 C Securities Act of 1933 and Securities Exchange Act of 1934

(as applicable to investment adviser issues) D SEC Release No IA-1092 (applicability of the Investment

Advisers Act to financial planners and others) E State securities laws (ie Blue Sky) F NASAA rules prohibiting dishonest and unethical business

practices G Limitations on permissible practice (ie technical licensing

requirements)

B C Demonstrate ability to apply ethical practices

B Fiduciary responsibility C Conflict of interest D Prudent Investor standards E Limitations on advice and activities (ie when to consult other

professionals)

EXHIBIT IV

Confidential Page 44 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

CFP Required subject matter for ldquoInsurance Planning and Risk Managementrdquo

CFPreg Candidates must complete comprehensive training in the following subject areas at a college or university whose program has been inspected and approved by the CFP Board This course represents approximately 20 of the educational requirement for CFP Candidates Other courses include ldquoFinancial Planning Fundamentalsrdquo ldquoInvestment Planningrdquo ldquoTax Planningrdquo ldquoRetirement Planning amp Qualified Plansrdquo and ldquoEstate Planningrdquo

Principles of insurance

A Definit ions and application of

principles

1) Risk

2) Peril

3) Hazard

4) Law of large numbers

5) Adverse selection

B Response to risk

1) Retain

2) Transfer

3) Control

4) Reduce

5) Avoid

C Mortality vs morbidity

Analysis and evaluation of risk

exposures

A Personal Insurance l ines

1) Death

2) Disability

3) Poor health

4) Unemployment

5) Outliving onersquos capital

B Property Insurance l ines

1) Real

2) Personal

3) Auto

C Liability Issues

1) Negligence

2) Libel

3) Slander

4) Malpractice

D Business-related risks

E Calculation of benefits

23 Legal aspects of insurance

A Indemnity

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Insurable interest

C Contract requirements

D Contract characterist ics

Property and casualty insurance

(individual and business)

A Real property

B Automobile and recreational

vehicles

C Business

D Business activity

E Personal property

F Umbrella liability

General business liability

A Professional l iabili ty

B Errors and omissions

D Product liability

Health insurance (individual)

A Hospital-surgical

B Major medical

C Traditional indemnity

D Preferred Provider Organization

(PPO)

E Health Maintenance Organization

(HMO)

F Medicare supplemental insurance

G Other

Disability income insurance

(individual)

A Occupational definit ions and

application

1) Total

2) Partial

3) Residual

C Directors and officers

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Benefit period

C Elimination period

D Benefit amount

E Riders

F Taxation of benefits

Long-term care insurance (individual

and joint)

A Basic provisions

B Eligibility

C Benefit amount and period

D Elimination period

E Inflation protection

F Nursing home and in-home care

G Comparing and selecting policies

H Tax implications and qualification

I Appropriateness of coverage

Life insurance

A Fundamentals

B Types

C Contractual provisions

D Dividend options

E Non-forfeiture and other options

F Settlement options

G Policy replacement

H Tax issues and strategies

I Policy ownership issues and

strategies including split-dollar

Viatical settlements

A Legal principles

B Requirements

C Tax implications

D Planning

E Ethical concepts and planning

Insurance needs analysis and

rationale

A Life insurance amount required

1) Liquidity and survivor income needs

2) Human life value

3) Capital retention

B Disabili ty insurance

C Long-term care insurance

D Health insurance

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

E Property insurance E Reinsurance

F Liabili ty insurance F Investments

Taxation of l ife disability and long- G Underwriting

term care insurance H Federal and state law

A Income

B Gift

C Estate

D Generation-Skipping Transfer

Tax (GSTT)

E Ownership issues

F Beneficiary issues

G Withdrawals

Insurance policy selection

A Purpose of coverage

B Length of t ime required

C Risk tolerance

D Cash flow constraints

Insurance company selection and due

diligence

A Financials

B Ratios

C Ratings

D Mutual vs stock

Source CFP Board of Standards Inc Denver CO

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

CURRENT ISSUE

PAST ISSUES

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ADVISOR SERVICES Broker-Dealers

CustodianFee-Only

Technology

ADVICE 401(k) plans

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ComplianceFraud

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Practice Management

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Social Media

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Women in Planning

INVESTING Alternative Investments

Analysis

Commodities

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Mutual Funds

Free Site RegistrationgtgtLogin Logout

SEARCH GO December 10 2011

HOME CE CENTER WEBCASTS CONFERENCES EVENTS SUBSCRIBE

November 23 2011

SEC OFFICIAL SCRUTINIZED FOR lsquoCRASH-PROOF RETIREMENTrsquo INTERVIEW WITH ADVISOR

(Bloomberg News) The US Securities and Exchange Commissionrsquos internal watchdog has come under scrutiny for comments he made in a 75-minute videotaped interview about the agency and the stock market to a man who markets a ldquocrash-proof retirementrdquo plan through the Internet and a paid radio program

SEC Inspector General H David Kotz has been contacted about the matter by the agencyrsquos general counselrsquos office which also has briefed the SECrsquos commissioners over concerns the interview could be construed as investment advice or an endorsement of financial services

Phillip Cannella III chief executive officer of First Senior Financial Group in King of Prussia Pennsylvania edited the interview he conducted at SEC headquarters in late July into more than a dozen video segments He posted them on YouTube and his website wwwcrashproofretirementcom and plays them on the radio as well as during his seminars about insurance products for retirees

The SEC doesnrsquot ban its employees from interviews with people connected to commercial ventures Kotz said he cleared the matter in advance with the SECrsquos internal ethics counsel He told SEC officials he would ask an outside group the Council of Inspectors General on Integrity and Efficiency to look into whether he said or did anything improper in the interview according to two people briefed on the situation

The Federal Bureau of Investigation which oversees the panel within the inspector generalrsquos group that deals with integrity matters doesnrsquot comment on its inquiries said William Carter an FBI spokesman

lsquoAppropriate Caveatsrsquo

Kotz said in an e-mailed statement to Bloomberg News that he provided ldquoall the appropriate caveats and disclaimersrdquo to Cannella and ldquospecifically stated in the radio interview that I was not in a position to nor was I providing investment advicerdquo

SEC Chairman Mary Schapiro said in a statement that she appreciated that Kotz requested an independent review

ldquoDavid Kotz is an experienced professional with expertise in the ethics rules who I

believe would not intentionally create an appearance issuerdquo Schapiro said

The SEC didnrsquot say if it was taking further action on the matter The agencyrsquos ethics counsel Shira Pavis Minton didnrsquot respond to a request for comment

In the interview segments posted on the website Kotz discusses issues ranging from the Bernard Madoff fraud to the difficulties the SEC faces policing Wall Street A press release issued by Cannellarsquos company headlined Kotzrsquos suggestion that retirees consider cutting their investments in stocks

lsquoTurbulent Timesrsquo

ldquoSo much money is in the stock market where peoplersquos lives are so affected by it that sometimes it may make sense to take things out in turbulent times to ensure that yoursquore not living and dying so to speak by the Dow Jones going up and downrdquo Kotz told Cannella as the two sat in the agencyrsquos Washington offices in front of the SEC seal ldquoParticularly with whatrsquos occurred over the last several yearsrdquo

Kotz also discusses the SECrsquos past shortcomings and says the agency has improved being a ldquofundamentally different place now than when I first started at the SEC and before we issued our Madoff reportrdquo

FINANCIAL ADVISOR BLOGS

Evan Simonoffs Blog

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Tips on how to create stronger bonds with clients capped off IMCAs Winter Specialty Conference in Vail Colowith speaker Jamie Ziegler founder of AUMPartners telling attendees ldquoTrust is the single most important factor in building lasting relationshipsrdquo Read more

Business Growth Through Referrals

BOOKSTORE

httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 1 of 2

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

Real EstateREITs

US Equity

RESEARCH BD Ranking

RIA Ranking

SMA Ranking

MORE SERVICES BD Profiles 2011

BD Recruitment Center

RIA Services

White Papers

Cannella said in a phone interview that he was contacted by an SEC attorney several weeks ago asking that he put a disclaimer on the videos to make clear that neither the agency nor Kotz endorse sponsor or promote his firm Cannella said he quickly complied Kotz said he supported efforts by the SECrsquos general counselrsquos office ldquoto ensure that my interview is not being used to endorse any productrdquo

lsquoNot a Journalistrsquo

Cannella said he was pleased to be able to interview a high-level government official like Kotz -- a man he said he greatly respects While it costs him $12000 a week to air the radio show on two Philadelphia area stations Cannella said he treats it like a consumer advocacy program not an infomercial

ldquoI canrsquot believe myselfrdquo Cannella said ldquoIrsquom not a journalist and I got over a 75-minute interview with Kotz inside the SEC buildingrdquo

Besides the radio program Cannella said he holds ldquoeducational eventsrdquo in restaurants where he teaches people in their 50s and older about ldquosafe investment alternatives in the insurance industryrdquo His website has clips of prospective clients being asked about their reaction to watching the Kotz interview

One woman who wasnrsquot identified in the video said that Cannellarsquos interview with the inspector general shows that the host is ldquostanding up for the little people and very admirable and thatrsquos one of the reasons that Irsquom very anxious to proceed with Philrdquo

Probes

In another clip an unidentified man said ldquoIt was incredible to find out that the SEC feels like it canrsquot police the securities industry because it doesnrsquot have the funding or the manpowerrdquo

The fracas adds a new chapter to Kotzrsquos contentious four-year tenure at the SEC In recent months current and former officials have spoken out about what they say are his overly aggressive probes and their negative impact on the agencyrsquos ability to police the markets Earlier this month the Justice Department declined to open an investigation into Kotzrsquos allegations that former SEC General Counsel David Becker violated ethics laws

Kotz and his supporters have dismissed the complaints saying his oversight has done much to help the SEC burnish its image after it was widely attacked for missing massive frauds like Madoffrsquos and the alleged Ponzi scheme run by R Allen Stanford

Commissions

In his interview with Cannella Kotz said victims of investment schemes ldquodeserve a strong vibrant effective aggressive SEC that goes after those people gets their money back as possible and puts them in jailrdquo

Because he doesnrsquot sell securities Cannella isnrsquot regulated by the SEC He said he is licensed to sell insurance in over 40 states His company puts together individual plans for clients and then earns commission on products they buy from an insurance company He described the investments as ldquoguaranteed tax-deferred contractual agreements with income options from a statutory corporationrdquo

The investments are ldquooutside of the securities industryrdquo and ldquomany of them have outperformed the markets since their inception with no market risk no market fees no upfront commissions or sales costsrdquo he added

The trade magazine Senior Market Advisor in January 2008 reported that Cannella said he wrote about $25 million in premiums in 2007 for fixed index annuities Cannella said he didnrsquot want to put a specific name on the investments he sells because he thinks the media has misreported on the products

ldquoIrsquom not well-liked among securities guys because I am speaking truth and logic to a deceptive industryrdquo Cannella said ldquoYou canrsquot beat the sword of truthrdquo

Comments

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Techniques for gaining more business through client referrals were among the topics broached at the IMCA 2011 Winter Specialty Conference in Vail Colo Read more

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MARKETECONOMIC COMMENTARY

Raise Taxes On Rich To Reward True Job Creators In this opinion piece a venture capitalist makes a case for raising taxes on the rich to benefit the true job creators the middle class Read more

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ON THE MOVE

Atlanta Capital Group Continues Expansion

Birmingham Ala office will be third for Atlanta Capital Group Read more

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 2 of 2

United States Government Accountability Office

Report to Congressional AddresseesGAO

January 2011 CONSUMER FINANCE

Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

GAO-11-235

January 2011

CONSUMER FINANCE Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

Accountability bull Integrity bull Reliability

Highlights of GAO-11-235 a report to congressional addressees

Why GAO Did This Study

Consumers are increasingly turning for help to financial plannersmdash individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products and managing tax and estate planning The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners This report examines (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of this regulation and (3) the advantages and disadvantages of alternative regulatory approaches To address these objectives GAO reviewed federal and state statutes and regulations analyzed complaint and enforcement activity and interviewed federal and state government entities and organizations representing financial planners various other arms of the financial services industry and consumers

What GAO Recommends

GAO recommends that (1) NAIC assess consumersrsquo understanding of the standards of care associated with the sale of insurance products (2) SEC assess investorsrsquo understanding of financial plannersrsquo titles and designations and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers NAIC said it would consider GAOrsquos recommendation and SEC provided no comments

View GAO-11-235 or key components For more information contact Alicia Puente Cackley at (202) 512-8678 or cackleyagaogov

What GAO Found

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level but various laws and regulations apply to most of the services they provide Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners

The regulatory structure applicable to financial planners covers the great majority of their services but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain First consumers may be unclear about when a financial planner is required to serve the clientrsquos best interest particularly when the same financial planner provides multiple services associated with different standards of care SEC is studying these issues with regard to securities transactions but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products Second financial planners can adopt numerous titles and designations which vary greatly in the expertise or training that they signify but consumers may not understand or be able to distinguish among them SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed Finally the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole A regulatory system should have data to identify risks and problem areas and given that financial planning is a growing industry that has raised certain consumer protection issues regulators could benefit from better information on the extent of problems specifically involving financial planning services

A number of stakeholders have proposed different approaches to the regulation of financial planners including (1) creation of a federally chartered board overseeing financial planners as a distinct profession (2) augmenting oversight of investment advisers with a self-regulatory organization (3) extending the fiduciary standard of care to more financial services professionals and (4) specifying standards for financial planners and the designations that they use While the views of stakeholder interests vary a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities Given available information an additional layer of regulation specific to financial planners does not appear to be warranted at this time

United States Government Accountability Office

Contents

Letter 1

Background 2 Various Federal and State Laws and Regulations Apply to Financial

Planners and Their Activities 3 Regulatory Structure for Financial Planners Covers Most Activities

but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited 11

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed 28

Conclusions 33 Recommendations 34 Agency Comments 35

Appendix I Scope and Methodology

Appendix II Comments from the National Association of

Insurance Commissioners

Appendix III Comments from the North American Securities

Administrators Association

Appendix IV GAO Contact and Staff Acknowledgments

Figures

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act 5

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners 12

Figure 3 Differences in the Standards of Care Required of Financial Planners 17

Page i GAO-11-235 Consumer Finance

37

41

42

46

Abbreviations

Advisers Act Investment Advisers Act of 1940 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer

Protection Act FINRA Financial Industry Regulatory Authority Form ADV Uniform Application for Investment Adviser

Registration FTC Federal Trade Commission NAIC National Association of Insurance Commissioners NASAA North American Securities Administrators Association SEC Securities and Exchange Commission

This is a work of the US government and is not subject to copyright protection in the United States The published product may be reproduced and distributed in its entirety without further permission from GAO However because this work may contain copyrighted images or other material permission from the copyright holder may be necessary if you wish to reproduce this material separately

Page ii GAO-11-235 Consumer Finance

United States Government Accountability Office

Washington DC 20548

January 18 2011

Congressional Addressees

Consumers are increasingly turning for help to professionals who describe themselves as financial planners for assistance with a broad range of services such as selecting the right balance of stocks and bonds for an investment portfolio choosing among insurance products and tax and estate planning Although there is no statutory or single definition of financial planning it can be broadly defined as a systematic process that individuals use to achieve their financial goals Between 2000 and 2008 the number of financial planners more than doubled and may continue to climb as more individuals are asked to take responsibility for their retirement savings and must choose among a growing array of investment options

Some financial planning organizations have raised concerns that no single law governs providers of financial planning services broadly describing this situation as a regulatory gap Concerns also exist that financial planners may have an inherent conflict of interest in recommending products they may stand to benefit from selling In addition some consumer advocates believe consumers may be confused by the numerous titles and designations that financial planners can use This report responds to a mandate included in Section 919C of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that directed GAO to conduct a study on the oversight and regulation of financial planners Our objectives are to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

To address these objectives we reviewed federal and selected state statutes and regulations applicable to financial planners We also reviewed regulations issued by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) and model laws developed by the National Association of Insurance Commissioners (NAIC) and by the North American Securities Administrators Association (NASAA) In addition we reviewed applicable securities and insurance laws and regulations of five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texas We also interviewed representatives of and

Page 1 GAO-11-235 Consumer Finance

gathered documentation from SEC FINRA the Federal Trade Commission (FTC) NAIC and organizations representing the interests of consumers financial planners and various arms of the financial services industry In addition we gathered information on complaints and enforcement activity as available from SEC FINRA FTC and selected state regulators and organizations A more extensive discussion of our scope and methodology appears in appendix I

We conducted this performance audit from June 2010 to January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Background Financial planning typically involves a variety of services including preparing financial plans for clients based on their financial circumstances and objectives and making recommendations for specific actions clients may take In many cases financial planners also help implement these recommendations by for example providing insurance products securities or other investments Individuals who provide financial planning services may call themselves a variety of different titles such as financial planner financial consultant financial adviser trust advisor or wealth manager In addition many financial planners have privately conferred professional designations or certifications such as Certified Financial Plannerreg Chartered Financial Consultantreg or Personal Financial Specialist

The number of financial planners in the United States rose from approximately 94000 in 2000 to 208400 in 2008 according to the Bureau of Labor Statistics The bureau projects the number will rise to 271200 by 2018 because of the need for advisers to assist the millions of workers expected to retire in the next 10 years1 According to the bureau 29 percent of financial planners are self-employed and the remaining 71

1While the Bureau of Labor Statistics reports these statistics using the term ldquofinancial adviserrdquo bureau officials said that this term could be used interchangeably with financial planner The bureau broadly defined a ldquopersonal financial adviserrdquo as an individual who provides financial planning services and that private bankers or wealth managers would also be categorized as financial advisers

Page 2 GAO-11-235 Consumer Finance

percent are employees of firms some of them large entities with offices nationwide that provide a variety of financial services The median annual wage for financial planners was $68200 in May 2009

According to an analysis of the 2007 Survey of Consumer Finances the most recent year for which survey results are available in 2007 about 22 percent of US households used a financial planner for investment and saving decisions and about 12 percent of US households used a financial planner for making credit and borrowing decisions Those households most likely to use a financial planner were those with higher incomes For example 37 percent of households in the top income quartile used a financial planner to make investment and saving decisions compared to 10 percent of households in the bottom quartile2

Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities

Financial planners are primarily regulated by federal and state investment adviser laws because planners typically provide advice about securities as part of their business In addition financial planners that sell securities or insurance products are subject to applicable laws governing broker-dealers and insurance agents Certain laws and regulations can also apply to the use of the titles designations and marketing materials that financial planners use

Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level However the activities of financial planners are primarily regulated under federal and state laws and regulations governing investment advisersmdashthat is individuals or firms that provide investment advice about securities for compensation According to SEC staff financial planning normally includes making general or specific recommendations about securities insurance savings and anticipated retirement3 SEC has issued guidance that broadly interprets the Investment Advisers Act of 1940 (Advisers Act) to apply to most financial planners because the advisory services they offer clients typically include

2Our percentage estimates based on the 2007 Survey of Consumer Finances have 95 percent confidence intervals of +- 25 percentage points or less For example we are 95 percent confident that between 82 and 118 percent of households in the bottom quartile used financial planners for investment decisions See appendix I for additional information

3Investment Adviser Act Release No 1092 52 Fed Reg 38400 38401 (Oct 16 1987) (IA Rel No 1092)

Page 3 GAO-11-235 Consumer Finance

providing advice about securities for compensation4 Similarly NASAA representatives told us that states take a similar approach on the application of investment adviser laws to financial planners and as a result generally register and oversee financial planners as investment advisers As investment advisers financial planners are subject to a fiduciary standard of care when they provide advisory services so that the planner ldquo[is] held to the highest standards of conduct and must act in the best interest of [the adviserrsquos] clientsrdquo5

SEC and state securities departments share responsibility for the oversight of investment advisers in accordance with the Advisers Act6 Under that act SEC generally oversees investment adviser firms that manage $25 million or more in client assets and the states that require registration oversee those firms that manage less7 However as a result of section 410 of the Dodd-Frank Act as of July 2011 the states generally will have registration and oversight responsibilities for investment adviser firms that manage less than $100 million in client assets instead of firms that manage less than $25 million in assets as under current law8 This will result in the states gaining responsibility for firms with assets under management between $25 million and $100 million As shown in figure 1 as of October 2010 of the approximately 16000 investment adviser firms providing

4The Advisers Act defines an investment adviser as any person (ie individual or firm) who is in the business of providing advice or issuing reports or analyses regarding securities for compensation 15 USC sect 80b-2(a)(11) IA Rel No 1092 In addition to applicable securities law investment advice related to a retirement savings plan such as a 401(k) plan may also be subject to the Employee Retirement Income Security Act The requirements under that act are outside the scope of this study A forthcoming GAO report GAO-11-119 will provide more information on investment advice in 401(k) plans

5In SEC v Capital Gains Research Bureau Inc 375 US 180 189-192 (1963) the US Supreme Court recognized that the Advisers Act imposes a fiduciary duty on investment advisers This standard imposes an affirmative duty to act solely in the best interests of the client The investment adviser also must eliminate or disclose all conflicts of interest

615 USC sect 80b-3a The term investment adviser can refer to a person or firm Investment adviser firms generally register with SEC or state securities departments as registered investment advisers According to NASAA certain natural persons that are employed by firms generally register with the state securities departments as investment adviser representatives

7Id Under 17 CFR sect 275203A-1 SEC registration has been optional for certain

investment advisers having assets under management between $25 and $30 million Firms also may have a different basis for registering with SEC (other than the amount of client assets the firm has under management) such as whether the principal office and place of business are within a state that has no registration requirement

8Pub L No 111-203 sect 410 124 Stat 1376 1576-77 (2010)

Page 4 GAO-11-235 Consumer Finance

financial planning services the states were overseeing about 11100 firms and SEC was overseeing about 4900 such firms9 However in July 2011 about 2400 of investment adviser firms that provided financial planning services (15 percent of the 16000 firms) may shift from SEC to state oversight10

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act

SECrsquos supervision of investment adviser firms includes evaluating their compliance with federal securities laws by conducting examinations of firmsmdashincluding reviewing disclosures made to customersmdashand investigating and imposing sanctions for violations of securities laws According to SEC staff in its examinations the agency takes specific steps to review the financial planning services of investment advisers For example SEC may review a sample of financial plans that the firm prepared for its customers to check whether the firmrsquos advice and investment recommendations are consistent with customersrsquo goals the contract with the firm and the firmrsquos disclosures

9In registering with SEC or a state investment adviser firms are required to report whether they provide financial planning services in Part 1A of the Uniform Application for Investment Adviser Registration Item 5 G(1) SEC does not provide a definition of financial planning services for firms to use when completing the registration form The total number of investment adviser firms overseenmdashincluding both those that do and do not provide financial planning servicesmdashis 15016 for the states and 11873 for SEC For data on investment adviser firms firms that were registered with both SEC and the states were counted with SEC-registered investment adviser firms

10See 75 Fed Reg 77052 (Dec 10 2010) (SEC proposed rule which if finalized would give advisers until August 20 2011 to report the market value of their assets under management to the SEC as the first step in the process)

Page 5 GAO-11-235 Consumer Finance

However the frequency with which SEC conducts these examinations varies largely because of resource constraints faced by the agency11 SEC staff told us that the agency examined only about 10 percent of the investment advisers it supervises in 2009 In addition they noted that generally an investment adviser is examined on average every 12 to 15 years although firms considered to be of higher risk are examined more frequently In 2007 we noted that harmful practices could go undetected because investment adviser firms rated lower-risk are unlikely to undergo routine examinations within a reasonable period of time if at all12

According to NASAA state oversight of investment adviser firms generally includes activities similar to those undertaken by SEC including taking specific steps to review a firmrsquos financial planning services According to NASAA states generally register not just investment adviser firms but also investment adviser representativesmdashthat is individuals who provide investment advice and work for a state- or federally registered investment adviser firm13

Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities

In addition to providing advisory services such as developing a financial plan financial planners generally help clients implement the plan by making specific recommendations and by selling securities insurance products and other investments SEC data show that as of October 2010 19 percent of investment adviser firms that provided financial planning

11GAO Securities and Exchange Commission Steps Being Taken to Make Examination

Program More Risk-Based and Transparent GAO-07-1053 (Washington DC Aug 14 2007) As we noted since the detection of mutual fund trading abuses in late 2003 in light of limited resources SEC has shifted its approach to examinations of investment advisers from one that focused on routinely examining all registered firms regardless of risk to one that focuses on more frequently examining those firms and industry practices at higher risk for compliance issues

12GAO-07-1053 SEC reported in February 2010 that it is now placing a greater emphasis on fraud detection in addition to identifying potential violations of securities laws and rules strengthening procedures and internal controls to maximize limited resources recruiting examiners with specialized skills and increasing expertise through enhanced training

13According to NASAA New York Minnesota and Wyoming do not register investment adviser representatives although New York and Minnesota do have certain examination and other requirements that must be met

Page 6 GAO-11-235 Consumer Finance

services also provided brokerage services and 27 percent provided insurance14

Financial planners that provide brokerage services such as buying or selling stocks bonds or mutual fund shares are subject to broker-dealer regulation at the federal and state levels At the federal level SEC oversees US broker-dealers and SECrsquos oversight is supplemented by self-regulatory organizations (SRO)15 The primary SRO for broker-dealers is FINRA State securities offices work in conjunction with SEC and FINRA to regulate securities firms Salespersons working for broker-dealers are subject to state registration requirements including examinations About half of broker-dealers were examined in 2009 by SEC and SROs Under broker-dealer regulation financial planners are held to a suitability standard of care when making a recommendation to a client to buy or sell a security meaning that they must recommend those securities that they reasonably believe are suitable for the customer16

Financial planners that sell insurance products such as life insurance or annuities must be licensed by the states to sell these products and are subject to state insurance regulation In contrast to securities entities (other than national banks) that are subject to dual federal and state oversight the states are generally responsible for regulating the business of insurance When acting as insurance agents financial planners are

14The brokerage and insurance services provided by these investment adviser firms are not necessarily a part of their financial planning services In addition many financial planners may sell securities- or insurance-related products through affiliated brokers or agents

15The primary law for regulating broker-dealers is the Securities Exchange Act of 1934 codified at 15 USC sectsect 78a-78oo Brokers effect transactions for the account of others while dealers buy and sell securities for their own accounts 15 USC sect 78c The term registered representative is generally used to refer to certain employees of a broker-dealer firm who are engaged in providing securities recommendations Broker-dealers must be members of a qualifying self-regulatory organization (either a national exchange or a registered securities association) 15 USC sect 78o(b)(8)

16Under NASD Conduct Rule 2310 a FINRA member making an investment recommendation to a customer must have grounds for believing that the recommendation is suitable for that customerrsquos financial situation and needs In November 2010 SEC approved FINRArsquos proposed new consolidated rules governing the suitability obligations of its members 75 Fed Reg 71479 (Nov 23 2010) This rule proposed FINRA Rule 2111 requires salespersons to have a reasonable basis for believing based on adequate due diligence that a recommendation of a transaction or strategy is suitable for at least some investors that the recommendation is suitable for a specific customer based on that customerrsquos profile and that a series of recommended transactions is not excessive and unsuitable for the customer

Page 7 GAO-11-235 Consumer Finance

subject to state standard of care requirements which can vary by product and by state As of October 2010 32 states had adopted a previous version of the NAIC Suitability in Annuities Transactions Model Regulation according to NAIC17 In general this regulation requires insurance agents to appropriately address consumersrsquo insurance needs and financial objectives at the time of an annuity transaction18 Thirty-four states had also adopted the Life Insurance Disclosure Model Regulation in a uniform and substantially similar manner as of July 2010 according to NAIC This regulation does not include a suitability requirement although it does require insurers to provide customers with information that will improve their ability to select the most appropriate life insurance plan for their needs and improve their understanding of the policyrsquos basic features

Financial planners that sell variable insurance products such as variable life insurance or variable annuities are subject to both state insurance regulation and broker-dealer regulation because these products are regulated as both securities and insurance products When selling variable insurance financial planners are subject to FINRA sales practice standards requiring that such sales be subject to suitability standards19 In addition other FINRA rules and guidance such as those governing standards for communication with the public apply to the sale of variable insurance products20 In addition as previously discussed 32 states also generally require insurance agents and companies to appropriately address a consumerrsquos insurance needs and financial objectives at the time of an annuity transaction However in the past we have reported that the effectiveness of market conduct regulationmdashthat is examination of the sales practices and behavior of insurersmdashmay be limited by a lack of

17NAIC amended this model regulation in March 2010 according to NAIC one state has adopted the updated model and additional states are expected to do so

18According to NAIC in 4 of these 32 states the regulation applies only when the consumers are senior citizens

19NASD Notice to Members 96-86 outlines that variable contracts for insurance products are subject to suitability requirements

20NASD Interpretive Material 2210-2 outlines guidance concerning communications with the public about variable life insurance and variable annuities FINRA has proposed that this guidance be replaced by a separate new FINRA Rule 2211 See FINRA Rule Filing No SR-FINRA-2009-070

Page 8 GAO-11-235 Consumer Finance

reciprocity and uniformity which may lead to uneven consumer protection across states21

Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations

At the federal level SEC and FINRA have regulations on advertising and standards of communication that apply to the strategies investment adviser firms and broker-dealers use to market their financial planning services For example SEC-registered investment advisers must follow SEC regulations on advertising and other communications which prohibit false or misleading advertisements and these regulations apply to investment advisersrsquo marketing of financial planning services22 FINRA regulations on standards for communication with the public similarly prohibit false exaggerated unwarranted or misleading statements or claims by broker-dealers and broker-dealer advertisements are subject to additional approval filing and recordkeeping requirements and review procedures23 According to many company officials we spoke with their companies responded to these requirements by putting procedures in place to determine which designations and titles their registered representatives may use in their marketing materials such as business cards

SEC and state securities regulators also regulate information that investment advisers are required to disclose to their clients In the Uniform Application for Investment Adviser Registration (Form ADV) regulators have typically required investment adviser firms to provide new and prospective clients with background information such as the basis of the advisory fees types of services provided (such as financial planning services) and strategies for addressing conflicts of interest that may arise

21GAO Insurance Reciprocity and Uniformity NAIC and State Regulators Have Made

Progress in Producer Licensing Product Approval and Market Conduct Regulation but

Challenges Remain GAO-09-372 (Washington DC Apr 6 2009) Reciprocity refers to the extent to which state regulators accept other statesrsquo regulatory actions Uniformity refers to the extent to which states have implemented either the same or substantially similar regulatory standards and procedures

2217 CFR sect 275206(4)-1

23NASD Rule 2210

Page 9 GAO-11-235 Consumer Finance

from their business activities24 Recent changes to Form ADV are designed to improve the disclosures that firms provide to clients For example firms must now provide clients with information about the advisory personnel on whom they rely for investment advice including the requirements and applicability of any professional designations or certifications advisers may choose to include in their background information

Most states regulate the use of the title ldquofinancial plannerrdquo and state securities and insurance laws can apply to the misuse of this title and other titles For example according to NASAA at least 29 states specifically include financial planners in their definition of investment adviser25 According to NAIC in many states regulators can use unfair trade practice laws to prohibit insurance agents from holding themselves out as financial planners when in fact they are only engaged in the sale of life or annuity insurance products However as noted earlier the effectiveness of the regulation of insurersrsquo market conduct varies across states In particular in 2010 we noted inconsistencies in the state regulation of life settlements a potentially high-risk transaction in which financial planners may participate26

In addition we were told some states had adopted regulations limiting the use of ldquosenior-specific designationsrdquomdashthat is designations that imply expertise or special training in advising senior citizen or elderly investors According to NAIC as of December 2010 25 states had adopted in a uniform and substantially similar manner the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities which limits the use of senior-specific designations by insurance agents According to NASAA as of December 2010 31 states had adoptedmdashand at least 9 other states were

24SEC and the states use Form ADV to register investment adviser firms and collect information from them Part 2 of Form ADV provides information about the investment adviser and its business for use of the clients and is publicly available on the Investment Adviser Public Depository Web site The SEC adopted amendments to Form ADV that were effective October 12 2010 requiring Part 2 of Form ADV be written in a plain English narrative format See Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (to be codified at 17 CFR pt 275 and 279)

25The District of Columbia and Puerto Rico also include financial planners in their definitions of investment adviser according to NASAA

26GAO Life Insurance Settlements Regulatory Inconsistencies May Pose a Number of

Challenges GAO-10-775 (Washington DC July 9 2010)

Page 10 GAO-11-235 Consumer Finance

planning to adoptmdashthe NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations which prohibits the misleading use of senior-specific designations by investment adviser representatives and other financial professionals

Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited

The regulatory system for financial planners covers most activities in which they engage However enforcement of regulation may be inconsistent and some questions exist about consumersrsquo understanding of the roles standards of care and titles and designations that a financial planner may have The ability of regulators to identify potential problems is limited because they do not specifically track complaints inspections and enforcement actions specific to financial planning services

Existing Regulation Covers Most Financial Planning Services

Although there is no single stand-alone regulatory body with oversight of financial planners the regulatory structure for financial planners covers most activities in which they engage As discussed earlier and summarized in figure 2 the primary activities a financial planner performs are subject to existing regulation at the federal or state level primarily through regulation pertaining to investment advisers broker-dealers and insurance agents As such SEC FINRA and NASAA staff a majority of state securities regulators financial industry representatives consumer groups and academic and subject matter experts with whom we spoke said that in general they believe the regulatory structure for financial planners is comprehensive although as discussed below the attention paid to enforcing existing regulation has varied

Page 11 GAO-11-235 Consumer Finance

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners

Financial planner

Capacity Investment adviser Broker-dealer Insurance agent

Applicable federal and state laws

Federal bull Investment Advisers Act of 1940 and rules from SEC

State bull State securities laws

Federal bull Securities and Exchange Act of 1934 and rules of SEC and FINRA

State bull State securities laws

State bull State insurance laws

Financial planning service covered by regulation

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for specific securities products bull Purchase or sale of securities products

bull Recommendations for insurance products

bull Sale of insurance products

bull Sale of variable insurance (variable annuities variable life insurance) bull

Federal and state regulators enforcing laws

Federal bull SEC

State bull State securities agencies

Federal bull SEC and FINRA

State bull State securities agencies

State bull State insurance agencies

Customer

Source GAO

Note This figure highlights three major areas of regulatory oversight but is not comprehensive and does not include other regulatory regimes or practice standards that may be applicable to financial planners In addition not all investment advisers broker-dealers or insurance agents are financial planners

As noted earlier the activities a financial planner normally engages in generally include advice related to securitiesmdashand such activities make financial planners subject to regulation under the Advisers Act One industry association and an academic expert noted that it would be very difficult to provide financial planning services without offering investment

Page 12 GAO-11-235 Consumer Finance

advice or considering securities SEC staff told us that financial planners holding even broad discussions of securitiesmdashfor example what proportion of a portfolio should be invested in stocksmdashwould be required to register as investment advisers or investment adviser representatives In theory a financial planner could offer only services that do not fall under existing regulatory regimesmdashfor example advice on household budgetingmdashbut such an example is likely hypothetical and such a business model may be hard to sustain SEC and NASAA staff a majority of the state securities regulators we spoke with and many representatives of the financial services industry told us that they were not aware of any individuals serving as financial planners who were not regulated as investment advisers or regulated under another regulatory regime Some regulators and industry representatives also said that to the extent that financial planners offered services that did not fall under such regulation the new Bureau of Consumer Financial Protection potentially could have jurisdiction over such services27

However not everyone agreed that regulation of financial planners was comprehensive One group the Financial Planning Coalition has argued that a regulatory gap exists because no single law governs the delivery of the broad array of financial advice to the public28 According to the coalition the provision of integrated financial advicemdashwhich would cover topics such as selecting and managing investments income taxes saving for college home ownership retirement insurance and estate planningmdash is unregulated Instead the coalition says that there is patchwork regulation of financial planning advice and it views having two sets of lawsmdashone regulating the provision of investment advice and another regulating the sale of productsmdashas problematic

27Section 1011 of the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate ldquothe offering and provision of consumer financial products or services under the Federal consumer financial lawsrdquo A financial product or service is defined in section 1002(15)(A)(viii) of the act to include financial advisory services to consumers on individual financial matters with the exception of advisory services related to securities provided by a person regulated by SEC or a state securities commission to the extent that such person acts in a regulated capacity Accordingly it appears that the bureau may have jurisdiction over financial planners to the extent that they may offer services that would not be under the jurisdiction of SEC or a state securities commission

28The members of this coalition include the Certified Financial Planner Board of Standards Inc the Financial Planning Association and the National Association of Personal Financial Advisors

Page 13 GAO-11-235 Consumer Finance

In addition although the regulatory structure itself for financial planners may generally be comprehensive attention paid to enforcing existing statute and regulation has varied For example as noted earlier due to resource constraints the examination of SEC-supervised investment advisers is infrequent Further as also noted earlier market conduct regulation of insurersmdashwhich would include the examination of the sales practices and behavior of financial planners selling insurance productsmdash has been inconsistent Some representatives of industry associations told us that they believed that a better alternative to additional regulation of financial planners would be increased enforcement of existing law and regulation particularly related to fraud and unfair trade practices

Certain professionalsmdashincluding attorneys certified public accountants broker-dealers and teachersmdashwho provide financial planning advice are exempt from regulation under the Advisers Act if such advice is ldquosolely incidentalrdquo to their other business activities29 According to an SEC staff interpretation this exemption would not apply to individuals who held themselves out to the public as providing financial planning services and would apply only to individuals who provided specific investment advice on anything other than ldquorare isolated and non-periodic instancesrdquo30 Banks and bank employees are also excluded from the Advisers Act and are subject to separate banking regulation31 The American Bankers Association told us that the financial planning activities of bank employees such as trust advisors or wealth managers were typically utilized by clients with more than $5 million in investable assets The association noted that these activities were subject to a fiduciary standard and the applicable supervision of federal and state banking regulators

Most regulators and academic experts and many financial services industry representatives we spoke with told us that there is some overlap in the regulation of individuals who serve as financial planners because

2915 USC sect 80b-2(a)(11) IA Rel No 1092(II)(B) at 38403 Under 15 USC sect 80bshy2(a)(11)(C) brokers and dealers also cannot receive any special compensation for their services in order to be exempt from registration as an investment adviser

30Id

31Id The Advisers Act excludes bank and bank holding companies from the definition of

investment adviser Further a bank and a bank holding company is an investment adviser under the act to the extent that the bank or bank holding company serves or acts as an adviser to a registered investment company If such services are performed in a separate department or division of a bank the department or division and not the bank itself is the investment adviser

Page 14 GAO-11-235 Consumer Finance

such individuals might be subject to oversight by different regulatory bodies for the different services they provide For example a financial planner who recommends and sells variable annuities as part of a financial plan is regulated as a registered representative of a broker-dealer as well as an insurance agent under applicable federal and state laws However some state regulators we spoke with told us that such overlap may be appropriate since the regulatory regimes cover different functional areas

Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products

As seen in figure 3 financial planners are subject to different standards of care in their capacities as investment advisers broker-dealers and insurance agents

bull Fiduciary Standard of Care As noted earlier investment advisers are subject to a fiduciary standard of caremdashthat is they must act in their clientrsquos best interest ensure that recommended investments are suitable for the client and disclose to the client any material conflicts of interest32

According to SEC and NASAA representatives the fiduciary standard applies even when investment advisers provide advice or recommendations about products other than securities such as insurance in conjunction with advice about securities

bull Suitability Standard of Care When Recommending Security Products FINRA regulation requires broker-dealers to adhere to a suitability standard when rendering investment recommendationsmdashthat is they must recommend only those securities that they reasonably believe are suitable for the customer33 Unlike the fiduciary standard suitability rules do not necessarily require that the clientrsquos best interest be served According to FINRA staff up-front general disclosure of a broker-dealerrsquos business activities and relationships that may cause conflicts of interest is not

32The SEC has in effect established rules of conduct for investment advisers including requirements for disclosing conflicts of interest obtaining the best execution on behalf of clients allocating investments among clients fairly ensuring that investments are suitable for clients and ensuring that there is a reasonable basis for recommendations SEC also requires investment advisers to maintain records pertaining to client accounts and business operations

33A broker-dealer must have an adequate and reasonable basis for any recommendation and must make recommendations based on a customerrsquos financial situation needs and other securities holdings

Page 15 GAO-11-235 Consumer Finance

required34 However according to SEC broker-dealers are subject to many FINRA rules that require disclosure of conflicts in certain situations although SEC staff also note that those rules may not cover every possible conflict of interest and disclosure may occur after conflicted advice has already been given35

bull Suitability Standard of Care When Recommending Insurance Products Standards of care for the recommendation and sale of insurance products vary by product and by state For example as seen earlier NAICrsquos model regulations on the suitability standard for annuity transactions adopted by some states but not others require consideration of the insurance needs and financial objectives of the customer while NAICrsquos model regulation for life insurance does not include a suitability requirement per se

34Letter from Marc Menchel Executive Vice President and General Counsel FINRA to Elizabeth M Murphy Secretary SEC 4 (Aug 25 2010) available at httpwwwfinraorgwebgroupsindustryipregguidedocumentsindustryp121983p df

35The standards of conduct for broker-dealers may also be based on antifraud provisions of the securities law and agency principles Broker-dealers also have a duty of fairness in their contracts with a customer which requires them to disclose material information that the customer would consider important as an investor In addition broker-dealers that handle discretionary accounts are generally thought to owe fiduciary obligations to their customers

Page 16 GAO-11-235 Consumer Finance

Figure 3 Differences in the Standards of Care Required of Financial Planners

Financial planner

Capacity

Investment adviser Broker-dealer Insurance agent

Fiduciary Suitability Varies by product and by state insurance law

Standard of care

bull Person has an affirmative duty to render services solely in the best interests of clients

bull Requires advisers to disclose material conflicts of interest to clients

bull Rules require standard of care that includes among other things rendering

investment recommendations that are suitable for customers

bull Requires insurance agents to follow suitability standards when state has adopted such standards for products

Financial planning service covered by standard of care

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for the purchase or sale of specific securities products

bull Recommendations for the purchase of insurance products

bull Recommendations for the purchase of variable insurance (variable annuities variable life insurance)

Customer

Source GAO

Note This figure is illustrative and is not comprehensive financial planners may serve in capacities other than those shown here and not all investment advisers broker-dealers and insurance agents serve as financial planners

Conflicts of interest can exist when for example a financial services professional earns a commission on a product sold to a client Under the fiduciary standard applicable to investment advisers financial planners must mitigate any potential conflicts of interest and disclose any that remain But under a suitability standard applicable to broker-dealers conflicts of interest may exist and generally may not need to be disclosed

Page 17 GAO-11-235 Consumer Finance

up-front36 For example as confirmed by FINRA financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission as long as the product is suitable and the broker-dealer complies with other requirements Because the same individual or firm can offer a variety of services to a clientmdasha practice sometimes referred to as ldquohat switchingrdquomdashthese services could be subject to different standards of care As such representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care if any applies to a financial professional As shown above the standards of caremdashand the extent to which conflicts of interest must be disclosedmdashcan vary depending on the capacity in which the individual serves37 A 2007 report by the Financial Planning Association stated that ldquoit would be difficult if not impossible for an individual investor to discern when the adviser was acting in a fiduciary capacity or in a non-fiduciary capacityrdquo38 A 2008 SEC study conducted by the RAND Corporation consisting of a national household survey and six focus group discussions with investors found that consumers generally did not understand not only the distinction between a suitability and fiduciary standard of care but also the differences between broker-dealers and investment advisers39 Similarly a 2010 national study of investors found that most were confused about which financial professionals are required to operate under a fiduciary standard that requires professionals to put their clientrsquos interest ahead of their own40

36FINRA officials have stated that they believe that the regulation of broker-dealersmdashwhile lacking an express fiduciary dutymdashprescribes in great detail the conduct and supervision of broker-dealers who provide investment advice to retail customers

37Blackrsquos Law Dictionary (9th ed 2009) defines the term ldquoconflict of interestrdquo as a ldquoreal or seeming incompatibility between onersquos private interests and onersquos public or fiduciary dutiesrdquo

38Final Report on Financial Planner Standards of Conduct FPA Fiduciary Task Force

June 2007

39Angela A Hung et al RAND Institute for Civil Justice Investor and Industry

Perspectives on Investment Advisers and Broker-Dealers (2008)

40Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010 The survey was conducted among a sample of 2012 adults living in the continental United States including 1319 who identified themselves as investors The survey was sponsored by AARP the Consumer Federation of America NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors

Page 18 GAO-11-235 Consumer Finance

Representatives of financial services firms that provide financial planning told us they believe that clients are sufficiently informed about the differing roles and accompanying standards of care that a firm representative may have They noted that when they provide both advisory and transactional services to the same customer each servicemdashsuch as planning brokerage or insurance salesmdashis accompanied by a separate contract or agreement with the customer These agreements disclose that the firmrsquos representatives have different obligations to the customer depending on their role In addition once a financial plan has been provided some companies told us that they have customers sign an additional agreement stating that the financial planning relationship with the firm has ended

Recent revisions by SEC to Form ADV disclosure requirements were designed to address among other things consumer understanding of potential conflicts of interest by investment advisers and their representatives Effective October 12 2010 SEC revised Form ADV Part 2 which financial service firms must provide to new and prospective clients41 The new form which must be written in plain English is intended to help consumers better understand the activities and affiliations of their investment adviser It requires additional disclosu res about a firmrsquos conflicts of interest compensation business activities and disciplinary information that is material to an evaluation of the adviser rsquos integrity Similarly in October 2010 FINRA issued a regulatory notice requesting comments on a concept proposal regarding possible new disclosure requirements that would among other things detail for consumers in plain English the conflicts of interest that broker-dealers may have associated with their services42

Section 913 of the Dodd-Frank Act requires SEC to study the substantive differences between the applicable standards of care for broker-dealers and investment advisers the effectiveness of the existing legal or regulatory standards of care for brokers dealers and investment advisers and consumersrsquo ability to understand the different standards of care SEC

41Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (requires investment advisers registered with SEC to provide new and prospective clients with a brochure and brochure supplements clearly setting forth a meaningful current disclosure of the business practices conflicts of interest and background of the investment adviser and its advisory personnel and requires the brochures to be filed with SEC electronically which will make them available to the public through its Web site)

42FINRA Regulatory Notice 10-54

Page 19 GAO-11-235 Consumer Finance

will also consider the potential impact on retail customers of imposing the same fiduciary standard that now applies to investment advisers on broker-dealers when they provide personalized investment advice Under the act SEC may promulgate rules to address these issues and is specifically authorized to establish a uniform fiduciary duty for broker-dealers and investment advisers that provide personalized investment advice about securities to customers As a result further clarification of these standards may be forthcoming FINRA officials told us that they support a fiduciary standard of care for broker-dealers when they provide personalized investment advice to retail customers

Consumer confusion on standards of care may also be a source of concern with regard to the sale of some insurance products A 2010 national survey of investors found that 60 percent mistakenly believed that insurance agents had a fiduciary duty to their clients43 Some insurance products such as annuities are complex and can be difficult to understand and annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators as well as SEC and FINRA for many years44 According to NAIC many states have requirements that insurance salespersons sell annuities only if the product is suitable for the customer However NAIC notes that some states do not have a suitability requirement for annuities Consumer groups and others have stated that high sales commissions on certain insurance products including annuities may provide salespersons with a substantial financial incentive to sell these products which may or may not be in the consumerrsquos best interest As a result of section 989J of the Dodd-Frank Act one type of annuitymdashthe indexed annuitymdashis to be regulated by states as an insurance product rather than regulated by SEC as a security under certain conditions45

SECrsquos pending study related to the applicable standards of care for broker-dealers and investment advisers will not look at issues of insurance that

43Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010

44See for example Securities and Exchange Commission Rule 151A and Annuities Issues and Legislation CRS Report for Congress 7-7500 (July 29 2010)

45State regulation applies so long as a state has adopted NAICrsquos Suitability in Annuity Transactions model regulation or if an insurance company adopts and implements practices on a nationwide basis that meet or exceed the minimum requirements established by NAICrsquos model regulation Indexed annuities are products that guarantee a purchaserrsquos principal and a certain rate of return and offer a chance for additional returns linked to a securities index or indices

Page 20 GAO-11-235 Consumer Finance

fall outside of SECrsquos jurisdiction NAIC has not undertaken a similar study regarding consumer understanding of the standard of care for insurance agents As we reported in the past financial markets function best when consumers understand how financial service providers and products work and know how to choose among them46 Given the evidence of consumer confusion about differing standards of care and given the increased risks that certain insurance products can pose there could be benefits to an NAIC review of consumersrsquo understanding of standards of care for high-risk insurance products

Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public

Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public including financial planner financial consultant and financial adviser among many others However evidence suggests that the different titles financial professionals use can be confusing to consumers The 2008 RAND study found that even experienced investors were confused about the titles used by broker-dealers and investment advisers including financial planner and financial adviser Similarly in consumer focus groups of investors conducted by SEC in 2005 as part of a rulemaking process participants were generally unclear about the distinctions among titles including broker investment adviser and financial planner47 In addition a representative of one consumer advocacy group has expressed concern that some financial professionals may use as a marketing tool titles suggesting that they provide financial planning services when in fact they are only selling products One industry group the Financial Planning Coalition also has noted that some individuals may hold themselves out as financial planners without meeting minimum training or ethical requirements Federal and state regulators told us they generally focused their oversight and enforcement actions on financial plannersrsquo activities rather than the titles they use Moreover NASAA has said that no matter what title financial planners use most are required to register as investment adviser representatives and must satisfy certain competency requirements

46GAO Financial Regulation A Framework for Crafting and Assessing Proposals to

Modernize the Outdated US Financial Regulatory System GAO-09-216 (Washington DC Jan 8 2009)

47Results of Investor Focus Group Interviews About Proposed Brokerage Account

Disclosures Report to the Securities and Exchange Commission by Siegel amp Gale LLC and Gelb Consulting Group Inc Mar 10 2005

Page 21 GAO-11-235 Consumer Finance

including passing an examination or obtaining a recognized professional designation48

Financial plannersrsquo professional designations are typically conferred by a professional or trade organization These designations may indicate that a planner has passed an examination met certain educational requirements or had related professional experience Some of these designations require extensive classroom training and examination requirements and include codes of ethics with the ability to remove the designation in the event of violations State securities regulators view five specific designations as meeting or exceeding the registration requirements for investment adviser representatives according to NASAA and allow these professional designations to satisfy necessary competency requirements for prospective investment adviser representatives49 For example one of these five designations requires a bachelorrsquos degree from an accredited college or university 3 years of full-time personal financial planning experience a certification examination and 30 hours of continuing education every 2 years

The criteria used by organizations that grant professional designations for financial professionals vary greatly FINRA has stated that while some designations require formal certification procedures including examinations and continuing professional education credits others may merely signify that membership dues have been paid The Financial Planning Coalition and The American College a nonprofit educational institution that confers several financial designations similarly told us that privately conferred designations range from those with rigorous competency practice and ethical standards and enforcement to those that can be obtained with minimal effort and no ongoing evaluation

48According to NASAA all but three statesmdashNew York Minnesota and Wyomingmdashregister investment adviser representatives and require that they pass either the Series 65 (Uniform Investment Adviser Law Examination) or the Series 66 (Uniform Combined State Law Examination) or obtain a recognized professional designation While New York and Minnesota do not register individual investment adviser representatives their state laws require that the representatives meet other requirements such as passing certain examinations or obtaining a professional designation accepted by the state

49The five designations recognized as such are Certified Financial Plannerreg Chartered Financial Consultantreg Personal Financial Specialist Chartered Financial Analyst and Chartered Investment Counselor

Page 22 GAO-11-235 Consumer Finance

As noted earlier designations that imply expertise or special training in advising senior citizen or elderly investors have received particular attention from regulators A joint report of SEC FINRA and NASAA described cases in which financial professionals targeted seniors by using senior-specific designations that implied that they had a particular expertise for senior investors when in fact they did not as noted earlier NASAA and NAIC have developed a model rule to address the issue50 The report also noted these professionals targeted seniors through the use of so-called free-lunch seminars where free meals are offered in exchange for attendance of a financial education seminar However the focus of the seminars was actually on the sale of products rather than the provision of financial advice

Given the large number of designations financial planners may use concerns exist that consumers may have difficulty distinguishing among them To alleviate customer confusion FINRA has developed a Web site for consumers that provides the required qualifications and other information about the designations used by securities professionals The site lists more than 100 professional designations 5 of which include the term ldquofinancial plannerrdquo and 24 of which contain comparable terms such as financial consultant or counselor51 The American College told us that it had identified 270 financial services designations Officials from NASAA NAIC and a consumer advocacy organization told us that consumers might have difficulty distinguishing among the various designations Officials from The American College told us that the number of designations itself was not necessarily a cause for concern but rather consumersrsquo broadly held misperception that all designations or credentials are equal

To help address these concerns FINRA plans to expand its Web site on professional designations to include several dozen additional designations related to insurance However FINRA officials noted that consumersrsquo use of this tool has been limited For example in 2009 the site received only 55765 visits A recent national study of the financial capability of American adults sponsored by FINRA found that only 15 percent of adults

50Protecting Senior Investors Report of Examinations of Securities Firms Providing

ldquoFree Lunchrdquo Sales Seminars by the Office of Compliance Inspections and Examination Securities and Exchange Commission North American Securities Administrators Association and the Financial Industry Regulatory Authority September 2007

51See httpappsfinraorgDataDirectory1prodesignationsaspx

Page 23 GAO-11-235 Consumer Finance

who had used a financial professional in the last 5 years claimed to have checked the background registration or license of a financial professional52 In addition SEC staff acknowledged that there have been concerns about confusing designations and SECrsquos October 2010 changes to investment adviser disclosure requirements mandate that investment adviser representatives who list professional designations and certifications in their background information also provide the qualifications needed for these designations so that the consumer can understand the value of the designation for the services being provided

Section 917 of the Dodd-Frank Act includes a requirement that SEC conduct a study identifying the existing level of financial literacy among retail investors including the most useful and understandable relevant information that they need to make informed financial decisions before engaging a financial intermediary While the section does not specifically mention the issue of financial plannersrsquo titles and designations the confusion we found to exist could potentially be addressed or mitigated if SEC incorporated this issue into its overall review of financial literacy among investors SEC staff told us that at this time its review would not likely address this issue although it would address such things as the need for conducting background checks on financial professionals Financial markets function best when consumers have information sufficient to understand and assess financial service providers and products53

Including financial plannersrsquo use of titles and designations in SECrsquos financial literacy review could provide useful information on the implications of consumersrsquo confusion on this issue

Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners

Available data do not show a large number of consumer complaints and enforcement actions involving financial planners but the exact extent to which financial planners may be a source of problems is unknown We were able to find limited information on consumer complaints from various agencies For example representatives of FTC and the Better Business Bureau said that they had received relatively few complaints related to financial planners FTC staff told us that a search in its Consumer Sentinel Network database for the phrase ldquofinancial plannerrdquo

52Applied Research amp Consulting LLC Financial Capability in the United States Initial

Report of the Research Findings from the 2009 National Survey prepared for the FINRA Investor Education Foundation (New York December 2009)

53GAO-09-216

Page 24 GAO-11-235 Consumer Finance

found 141 complaints in the 5-year period from 2005 through 2010 but that only a handful of these appeared to actually involve activity connected to the financial planning profession54 The staff added that additional searches on other titles possibly used by financial planners such as financial consultant and personal financial adviser did not yield significant additional complaints In addition a representative of the Better Business Bureau told us that it had received relatively few complaints related to financial planners although the representative noted that additional complaints might exist in broader categories such as ldquofinancial servicesrdquo

Consumer complaint data may not be an accurate gauge of the extent of problems Complaints may represent only a small portion of potential problems and complaints related to ldquofinancial plannersrdquo may not always be recorded as such As we have previously reported consumers also may not always know where they can report complaints55 At the same time some complaints that are made may not always be valid

SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm The agency does record and track whether federally and state-registered investment adviser firms provide financial planning services but its data tracking systems for complaints examination results and enforcement actions are not programmed to readily determine and track whether the complaint result or action was specifically related to a financial planner or financial planning service For example SEC staff told us the number of complaints about financial planners would be undercounted in their data system that receives and tracks public inquiries known as the Investor Response Information System because this code would likely be used only if it could not be identified whether the person (or firm) was an investment adviser or broker-dealer In addition the data system that SEC uses to record examination results known as the Super Tracking and Reporting System

54The Consumer Sentinel Network database is a secure online database of millions of consumer complaints available only to law enforcement In addition to storing complaints received by FTC the Consumer Sentinel Network also includes complaints filed with the Internet Crime Complaint Center Better Business Bureaus Canadarsquos PhoneBusters the US Postal Inspection Service the Identity Theft Assistance Center and the National Fraud Information Center among others

55GAO Telecommunications FCC Needs to Improve Oversight of Wireless Phone Service GAO-10-34 (Washington DC November 2009) p 18

Page 25 GAO-11-235 Consumer Finance

does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers

However SEC staff told us that a review of its Investor Response Information System identified 51 complaints or inquiries that had been recorded using their code for issues related to ldquofinancial plannersrdquo between November 2009 and October 2010 SEC staff told us that the complaints most often involved allegations of unsuitable investments or fraud such as misappropriation of funds56 A review of a separate SEC database called Tips Complaints and Referralsmdashan interim system that was implemented in March 2010mdashfound 124 allegations of problems possibly related to financial planners from March 2010 to October 201057

SEC staff told us that they did not have comprehensive data on the extent of enforcement activities related to financial planners per se In addition NASAA said that states generally do not track enforcement data specific to financial planners At our request SEC and NASAA provided us with examples of enforcement actions related to individuals who held themselves out as financial planners Using a keyword search SEC identified 10 such formal enforcement actions between August 2009 and August 2010 According to SEC documents these cases involved allegations of such activities as defrauding clients through marketing schemes receiving kickbacks without making proper disclosures and misappropriation of client funds Although NASAA also did not have comprehensive data on enforcement activities involving financial planners representatives provided us with examples of 36 actions brought by 30 states from 1986 to 2010 These cases involved allegations of such things as the sale of unsuitable products fraudulent misrepresentation of qualifications failure to register as an investment adviser and misuse of client funds for personal expenses

56Of these 51 complaints or inquiries 29 involved allegations of fraud 9 involved allegations of unsuitable investments and the remaining 13 represented questions on a variety of topics

57Of these 124 allegations 13 were coded as ldquofraudulent or unregistered offer or sale of securities including Ponzi schemes high yield investment programs or other investment programsrdquo 12 as ldquomanipulation of a securityrsquos price or volumerdquo 6 as ldquotheft or misappropriation of funds or securitiesrdquo 5 as ldquofalse or misleading statements about a companyrdquo 3 as ldquoproblems with my brokerage or advisory accountrdquo and 2 as ldquoinsider tradingrdquo An additional 14 were coded as ldquoother fraudulent conductrdquo and 69 were coded simply as ldquootherrdquo

Page 26 GAO-11-235 Consumer Finance

Because of limitations in how data are gathered and tracked SEC and state securities regulators are not currently able to readily determine the extent to which financial planning services may be causing consumers harm NASAA officials told us that as with SEC state securities regulators did not typically or routinely track potential problems specific to financial planners SEC and NASAA representatives told us that they had been meeting periodically in recent months to prepare for the transition from federal to state oversight of certain additional investment adviser firms as mandated under the Dodd-Frank Act but they said that oversight of financial planners in particular had not been part of these discussions SEC staff have noted that additional tracking could consume staff time and other resources They also said that because there are no laws that directly require registration recordkeeping and other responsibilities of ldquofinancial plannersrdquo per se tracking such findings relating to those entities would require expenditure of resources on something that SEC does not have direct responsibility to oversee Yet as we have reported in the past while we recognize the need to balance the cost of data collection efforts against the usefulness of the data a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking58 Given the significant growth in the financial planning industry ongoing concerns about potential conflicts of interest and consumer confusion about standards of care regulators may benefit from identifying ways to get better information on the extent of problems specifically involving financial planners and financial planning services

58GAO Managing for Results Using GPRA to Help Congressional Decisionmaking and

Strengthen Oversight GAOT-00-95 (Washington DC March 2000) p 13 GAO Executive

Guide Effectively Implementing the Government Performance and Results Act GAOGGD-96-118 (Washington DC June 1996) p 27

Page 27 GAO-11-235 Consumer Finance

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed

Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners

Creation of a Board to Oversee Financial Planners

Over the past few years a number of stakeholdersmdashincluding consumer groups FINRA and trade associations representing financial planners securities firms and insurance firmsmdashhave proposed different approaches to the regulation of financial planners Following are four of the most prominent approaches each of which has both advantages and disadvantages

In 2009 the Financial Planning Coalitionmdashcomprised of the Certified Financial Planner Board of Standards Financial Planning Association and the National Association of Personal Financial Advisorsmdashproposed that Congress establish a professional standards-setting oversight board for financial planners According to the coalition its proposed legislation would establish federal regulation of financial planners by allowing SEC to recognize a financial planner oversight board that would set professional standards for and oversee the activities of individual financial planners although not financial planning firms For example the board would have the authority to establish baseline competency standards in the areas of education examination and continuing education and would be required to establish ethical standards designed to prevent fraudulent and manipulative acts and practices It would also have the authority to require registration or licensing of financial planners and to perform investigative and disciplinary actions Under the proposal states would retain antifraud authority over financial planners as well as full oversight for financial plannersrsquo investment advisory activity However states would not be allowed to impose additional licensing or registration requirements for financial planners or set separate standards of conduct Supporters of a new oversight board have noted that its structure and governance would be analogous to the Public Company Accounting Oversight Board a private nonprofit organization subject to SEC oversight that in turn oversees the audits of public companies that are subject to securities laws

Page 28 GAO-11-235 Consumer Finance

Augmenting Oversight of Investment Advisers with an SRO

According to the Financial Planning Coalition a potential advantage of this approach is that it would treat financial planning as a distinct profession and would regulate across the full spectrum of activities in which financial planners may engage including activities related to investments taxes education retirement planning estate planning insurance and household budgeting Proponents argue that a financial planning oversight board would also help ensure high standards and consistent regulation for all financial planners by establishing common standards for competency professional practices and ethics

However many securities regulators and financial services trade associations with whom we spoke said that they believe such a board would overlap with and in many ways duplicate existing state and federal regulations which already cover virtually all of the products and services that a financial planner provides Some added that the board would entail unnecessary additional financial costs and administrative burdens for the government and regulated entities In addition some opponents of this approach question whether ldquofinancial planningrdquo should be thought of as a distinct profession that requires its own regulatory structure noting that financial planning is not easily defined and can span multiple professions including accounting insurance investment advice and law One consumer group also noted that the regulation of individuals and professions is typically a state rather than a federal responsibility Finally we note that the analogy to the Public Company Accounting Oversight Board may not be apt That board was created in response to a crisis involving high-profile bankruptcies and investor losses caused in part by inadequacies among public accounting firms In the case of financial planners there is limited evidence of an analogous crisis or as noted earlier of severe harm to consumers

A number of proposals over the years have considered having FINRA or a newly created SRO supplement SEC oversight of investment advisers These proposals date back to at least 1963 when an SEC study recommended that all registered investment advisers be required to be a

Page 29 GAO-11-235 Consumer Finance

member of an SRO59 In 1986 the National Association of Securities Dealers a predecessor to FINRA explored the feasibility of examining the investment advisory activities of members who were also registered as investment advisers The House of Representatives passed a bill in 1993 that would have amended the Advisers Act to authorize the creation of an ldquoinspection onlyrdquo SRO for investment advisers although the bill did not become law60 In 2003 SEC requested comments on whether one or more SROs should be established for investment advisers citing among other reasons concerns that the agencyrsquos own resources were inadequate to address the growing numbers of advisers61 However SEC did not take further action Section 914 of the Dodd-Frank Act required SEC to issue a study in January 2011 on the extent to which one or more SROs for investment advisers would improve the frequency of examinations of investment advisers62

According to FINRA the primary advantage of augmenting investment adviser oversight with an SRO is that doing so would allow for more frequent examinations given the limited resources of states and SEC The Financial Services Institute an advocacy organization for independent broker-dealers and financial advisers has stated that an industry-funded SRO with the resources necessary to appropriately supervise and examine all investment advisers would close the gap that exists between the regulation of broker-dealers and investment advisers FINRA said that it finds this gap troubling given the overlap between the two groups (approximately 88 percent of all registered advisory representatives are also broker-dealer representatives) FINRA adds that any SRO should operate subject to strong SEC oversight and that releasing SEC of some of its responsibilities for investment advisers would free up SEC resources for other regulatory activities

59See Securities and Exchange Commission News Digest Issue No 63-4-3 8 (1963) which describes SECrsquos report to Congress regarding the adequacy of the rules of national securities exchanges and national securities associations pursuant to Pub L No 87-196 75 Stat 465 (1961) wherein SEC points out that the framework of industry self-regulation permitted many broker-dealer firms and registered investment advisers to remain outside of any official self-regulatory group According to the SEC News Digest the report suggested that membership in an SRO should be a prerequisite to registration with SEC as a broker-dealer or investment adviser

60HR 578 103rd Cong (1993)

61Investment Advisers Act Release No 2107 68 Fed Reg 7038 (Feb 11 2003)

62SEC is required to report the results of its study within 180 days of enactment of the Dodd-Frank Act

Page 30 GAO-11-235 Consumer Finance

Extending Coverage of the Fiduciary Standard

However NASAA some state securities regulators and one academic with whom we spoke opposed adding an SRO component to the regulatory authority of investment advisers NASAA said it believed that investment adviser regulation is a governmental function that should not be outsourced to a private third-party organization that lacks the objectivity independence expertise and experience of a government regulator Further NASAA said it is concerned with the lack of transparency associated with regulation by SROs because unlike government regulators they are not subject to open records laws through which the investing public can obtain information Two public interest groups including the Consumer Federation of America have asserted that one SROmdashFINRAmdash has an ldquoindustry mindsetrdquo that has not always put consumer protection at the forefront In addition the Investment Adviser Association and two other organizations we interviewed have noted that funding an SRO and complying with its rules can impose additional costs on a firm63

Proposals have been made to extend coverage of the fiduciary standard of care to all those who provide financial planning services Some consumer groups and others have stated that a fiduciary standard should apply to anyone who provides personalized investment advice about securities to retail customers including insurance agents who recommend securities The Financial Planning Coalition has proposed that the fiduciary standard apply to all those who hold themselves out as financial planners Proponents of extending the fiduciary standard of care which also include consumer groups and NASAA generally maintain that consumers should be able to expect that financial professionals they work with will act in their best interests They say that a fiduciary standard is more protective of consumersrsquo interests than a suitability standard which requires only that a product be suitable for a consumer rather than in the consumerrsquos best interest In addition the Financial Planning Coalition notes that extending a fiduciary standard would somewhat reduce consumer confusion about financial planners that are covered by the fiduciary standard in some capacities (such as providing investment advice) but not in others (such as selling a product)

However some participants in the insurance and broker-dealer industries have argued that a fiduciary standard of care is vague and undefined They say that replacing a suitability standard with a fiduciary standard could

63The Investment Adviser Association is a not-for-profit association that represents the interests of SEC-registered investment adviser firms

Page 31 GAO-11-235 Consumer Finance

Clarifying Financial Plannersrsquo Credentials and Standards

actually weaken consumer protections since the suitability of a product is easier to define and enforce Opponents also have argued that complying with a fiduciary standard would increase compliance costs that in turn would be passed along to consumers or otherwise lead to fewer consumer choices

The American College has proposed clarifying the credentials and standards of financial professionals including financial planners In particular it has proposed creating a working group of existing academic and practice experts to establish voluntary credentialing standards for financial professionals As noted previously consumers may be unable to distinguish among the various financial planning designations that exist and may not understand the requirements that underpin them Clarifying the credentials and standards of financial professionals could conceivably take the form of prohibiting the use of certain designations as has been done for senior-specific designations in some states or establishing minimum education testing or work experience requirements needed to obtain a designation The American College has stated that greater oversight of such credentials and standards could provide a ldquoseal of approvalrdquo that would generally raise the quality and competence of financial professionals including financial planners help consumers distinguish among the various credentials and help screen out less qualified or reputable players

However the ultimate effectiveness of such an approach is not clear since the extent to which consumers take designations into account when selecting or working with financial planners is unknown as is the extent of the harm caused by misleading designations In addition implementation and ongoing monitoring of financial plannersrsquo credentials and standards could be challenging Further the issue of unclear designations has already been addressed to some extentmdashfor example as noted earlier some states regulate the use of certain senior-specific designations and allow five professional designations to satisfy necessary competency requirements for prospective investment adviser representatives State securities regulators also have the authority to pursue the misleading use of credentials through their existing antifraud authority

Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners

In general a majority of the regulatory agencies consumer groups academics trade associations and individual financial services companies with which we spoke did not favor substantial structural change in the regulation of financial planners In particular few supported an additional oversight body which was generally seen as duplicative of existing regulation Some stakeholders in the securities and insurance industries

Page 32 GAO-11-235 Consumer Finance

Conclusions

noted that given the dynamic financial regulatory environment under way as a result of the Dodd-Frank Actmdashsuch as creation of a new Bureau of Consumer Financial Protectionmdashmore time should pass before additional regulatory changes related to financial planning services were considered Several industry associations also noted that opportunities existed for greater enforcement of existing law and regulation as discussed earlier

Existing statutes and regulations appear to cover the great majority of financial planning services and individual financial planners nearly always fall under one or more regulatory regimes depending on their activities While no single law governs the broad array of activities in which financial planners may engage given available information it does not appear that an additional layer of regulation specific to financial planners is warranted at this time At the same time as we have previously reported more robust enforcement of existing laws could strengthen oversight efforts In addition there are some actions that can be taken that may help address consumer protection issues associated with the oversight of financial planners

First as we have reported financial markets function best when consumers understand how financial providers and products work and know how to choose among them Yet consumers may be unclear about standards of care that apply to financial professionals particularly when the same individual or firm offers multiple services that have differing standards of care As such consumers may not always know whether and when a financial planner is required to serve their best interest While SEC is currently addressing the issue of whether the fiduciary standard of care should be extended to broker-dealers when they provide personalized investment advice about securities the agency is not addressing whether this extension should also apply to insurance agents who generally fall outside of SECrsquos jurisdiction Sales practices involving some high-risk insurance products such as annuities have drawn attention from federal and state regulators A review by NAIC of consumersrsquo understanding of the standards of care with regard to the sale of insurance products could provide information on the extent of consumer confusion in the area and actions needed to address the issue

Second we have seen that financial planners can adopt a variety of titles and designations The different designations can imply different types of qualifications but consumers may not understand or distinguish among these designations and thus may be unable to properly assess the qualifications and expertise of financial planners SECrsquos recent changes in this areamdashrequiring investment advisers to disclose additional information

Page 33 GAO-11-235 Consumer Finance

on professional designations and certifications they listmdashshould prove beneficial Another opportunity lies in SECrsquos mandated review of financial literacy among investors Incorporating issues of consumer confusion about financial plannersrsquo titles and designations into that review could assist the agency in assessing whether any further changes are needed in disclosure requirements or other related areas

Finally SEC has limited information about the nature and extent of problems specifically related to financial planners because it does not track complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole However a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking SEC staff have noted that additional tracking could require additional resources but other opportunities may also exist to gather additional information on financial planners Because financial planning is a growing industry and has raised certain consumer protection issues regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services

Recommendations We recommend that the National Association of Insurance Commissioners in concert with state insurance regulators take steps to assess consumersrsquo understanding of the standards of care with regard to the sale of insurance products such as annuities and take actions as appropriate to address problems revealed in this assessment

We also recommend that the Chairman of the Securities and Exchange Commission direct the Office of Investor Education and Advocacy Office of Compliance Inspections and Examinations Division of Enforcement and other offices as appropriate to

bull Incorporate into SECrsquos ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumersrsquo investment decisions and

bull Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services and take actions to address any problems that are identified

Page 34 GAO-11-235 Consumer Finance

Agency Comments We provided a draft of this report for review and comment to FINRA NAIC NASAA and SEC These organizations provided technical comments which we incorporated as appropriate In addition NAIC provided a written response which is reprinted in appendix II NAIC said it generally agreed with the contents of the draft report and would give consideration to our recommendation regarding consumersrsquo understanding of the standards of care with regard to the sale of insurance products

NASAA also provided a written response which is reprinted in appendix III In its response NASAA said it agreed that a specific layer of regulation for financial planners was unnecessary and provided additional information on some aspects of state oversight of investment advisers NASAA also said that it welcomed the opportunity to continue to collaborate with SEC to identify methods to better understand and address problems specifically involving financial planners as we recommended In addition NASAA expanded upon the reasons for its opposition to proposals that would augment oversight of investment advisers with an SRO

We are sending copies of this report to interested congressional committees the Chief Executive Officer of FINRA Chief Executive Officer of NAIC Executive Director of NASAA and the Chairman of SEC In addition the report will be available at no charge on GAOrsquos Web site at httpwwwgaogov

If you or your staffs have any questions about this report please contact me at (202) 512-8678 or cackleyagaogov Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report GAO staff who made major contributions to this report are listed in appendix IV

Alicia Puente Cackley Director Financial Markets

and Community Investment

Page 35 GAO-11-235 Consumer Finance

List of Congressional Addressees

The Honorable Bob Corker The Honorable Tim Johnson The Honorable Herbert Kohl The Honorable Richard C Shelby United States Senate

The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives

Page 36 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

Appendix I Scope and Methodology

Our reporting objectives were to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

For background information we obtained estimates for 2000 and 2008 and projections for 2018 from the Bureau of Labor Statistics on the number of individuals who reported themselves as ldquopersonal financial advisersrdquo a term that the agency said was interchangeable with ldquofinancial plannerrdquo The bureau derived these estimates from the Occupational Employment Statistics survey and the Current Population Survey1

According to the bureau the Occupational Employment Statisticsrsquo estimates for financial planners have a relative standard error of 19 percent and the median wage estimate for May 2009 has a relative standard error of 15 percent Because the overall employment estimates used are developed from multiple surveys it was not feasible for the bureau to provide the relative standard errors for these financial planner employment statistics To estimate the number of households that used financial planners we analyzed 2007 data from the Board of Governors of the Federal Reserversquos Survey of Consumer Finances This survey is conducted every three years to provide detailed information on the finances of US households2 Because the survey is a probability sample based on random selections the sample is only one of a large number of samples that might have been drawn Since each sample could have provided different estimates we express our confidence in the precision of our particular samplersquos results as a 95 percent confidence interval (eg plus or minus 25 percentage points) This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn In this report for this survey all percentage

1As explained by the Bureau of Labor Statistics the Occupational Employment Statistics program produces employment and wage estimates for over 800 occupations These are estimates of the number of people employed in certain occupations and estimates of the wages paid to them Since self-employed persons are not included in the estimates the bureau also considers information from the Current Population Survey a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics to derive its occupation estimates

2Additional information on the sample design and data collected by the Survey of Consumer Finances is available at httpwwwfederalreservegovpubsossoss2abouthtml

Page 37 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

estimates have 95 percent confidence intervals that are within plus or minus 25 percentage points from the estimate itself

To identify how financial planners are regulated and overseen at the federal and state levels we identified and reviewed on the federal level federal laws regulations and guidance applicable to financial planners the activities in which they engage and their marketing materials titles and designations We also reviewed relevant SEC interpretive releases such as IA Rel No 1092 Applicability of the Investment Advisers Act to

Financial Planners Pension Consultants and Other Persons Who

Provide Investment Advisory Services as a Component of Other

Financial Services We also discussed the laws and regulations relevant to financial planners in meetings with staff of the Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) Department of Labor and Internal Revenue Service We also interviewed two legal experts and reviewed a legal compendium on the regulation of financial planners At the state level we interviewed representatives from the North American Securities Administrators Association (NASAA) and the National Association of Insurance Commissioners (NAIC) and reviewed model regulations developed by these agencies In addition we selected five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texasmdashfor a more detailed review We chose these states because they had a large number of registered investment advisers and varying approaches to the regulation of financial planners and represented geographic diversity For each of these states we reviewed selected laws and regulations related to financial planners which included those related to senior-specific designations and insurance transactions and we interviewed staff at each statersquos securities and insurance agencies

To identify what is known about the effectiveness of the regulation of financial planners and what regulatory gaps or overlap may exist we reviewed relevant federal and state laws regulations and guidance In addition we spoke with representatives of the federal and state agencies cited above as well as FINRA and organizations that represent or train financial planners including the Financial Planning Coalition The American College and the CFA Institute organizations that represent the financial services industry including the Financial Services Institute Financial Services Roundtable Securities Industry and Financial Markets Association Investment Advisers Association American Society of Pension amp Professional Actuaries National Association of Insurance and Financial Advisors American Council of Life Insurers Association for Advanced Life Underwriting American Institute of Certified Public Accountants American Bankers Association and organizations

Page 38 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

representing consumer interests including the Consumer Federation of America and AARP We also spoke with selected academic experts knowledgeable about these issues In addition we reviewed relevant studies and other documentary evidence including a 2008 study of the RAND Corporation that was commissioned by SEC ldquoInvestor and Industry Perspectives on Investment Advisers and Broker-Dealersrdquo ldquoResults of Investor Focus Group Interviews About Proposed Brokerage Account Disclosuresrdquo sponsored by SEC results of the FPA Fiduciary Task Force ldquoFinal Report on Financial Planner Standards of Conductrdquo ldquoUS Investors amp The Fiduciary Standard A National Opinion Surveyrdquo sponsored by AARP the Consumer Federation of America the NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors and the 2009 National Financial Capability Study commissioned by FINRA We determined that the reliability of these studies was sufficient for our purposes In addition we reviewed relevant information on the titles and designations used by financial planners including FINRArsquos Web site that provides the required qualifications and other information about the designations used by securities professionals

We also obtained and reviewed available data on complaints and selected enforcement actions related to financial planners from the Federal Trade Commission Better Business Bureau and SEC We collected from the Federal Trade Commission complaint data from its Consumer Sentinel Network database using a keyword search of the term ldquofinancial plannerrdquo for complaints filed from 2005 to 2010 From the Better Business Bureau we collected the number of complaints about the financial planning industry received in 2009 From SEC we collected complaints from the agencyrsquos Investor Response Information System that had been coded as relating to ldquofinancial plannersrdquo from November 2009 to October 2010 We also reviewed data from SECrsquos Tips Complaints and Referrals database that resulted from a keyword search for the terms ldquofinancial plannerrdquo ldquofinancial adviserrdquo ldquofinancial advisorrdquo ldquofinancial consultantrdquo and ldquofinancial counselorrdquo from March 2010 to October 2010 In addition at our request SEC and NASAA provided us anecdotally with examples of enforcement actions related to individuals who held themselves out as financial planners SEC identified 10 formal enforcement actions between August 2009 and August 2010 and NASAA provided us selected examples of state enforcement actions involving financial planners from 1986 to 2010 from 30 states We gathered information on SEC- and state-registered investment advisers from SECrsquos Investment Adviser Registration Database FINRA did not provide us with data on complaints examination results or

Page 39 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

enforcement actions specific to financial planners FINRA officials told us they do not track these data specific to financial planners

To identify alternative approaches for the regulation of financial planners and their advantages and disadvantages we conducted a search for legislative and regulatory proposals related to financial planners which have been made by Members of Congress consumer groups and representatives of the financial planning securities and insurance industries We identified and reviewed position papers studies public comment letters congressional testimonies and other documentary sources that address the advantages and disadvantages of these approaches In addition we solicited views on these approaches from representatives of the wide range of organizations listed above including organizations that represent financial planners financial services companies and consumers as well as state and federal government agencies and associations and selected academic experts

We conducted this performance audit from June 2010 through January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Page 40 GAO-11-235 Consumer Finance

Appendix II Comments from the National

Association of Insurance Commissioners

Appendix II Comments from the National Association of Insurance Commissioners

Page 41 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Appendix III Comments from the North American Securities Administrators Association

Page 42 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 43 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 44 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 45 GAO-11-235 Consumer Finance

Appendix IV

A

GAO Contact and Staff

cknowledgments

Appendix IV GAO Contact and Staff Acknowledgments

Alicia Puente Cackley (202) 512-8678 or cackleyagaogov GAO Contact

In addition to the contact named above Jason Bromberg (Assistant Staff Director) Sonja J Bensen Jessica Bull Emily Chalmers Patrick Dynes

Acknowledgments Ronald Ito Sarah Kaczmarek Marc Molino Linda Rego and Andrew Stavisky made key contributions to this report

(250550) Page 46 GAO-11-235 Consumer Finance

The Government Accountability Office the audit evaluation and GAOrsquos Mission investigative arm of Congress exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people GAO examines the use of public funds evaluates federal programs and policies and provides analyses recommendations and other assistance to help Congress make informed oversight policy and funding decisions GAOrsquos commitment to good government is reflected in its core values of accountability integrity and reliability

The fastest and easiest way to obtain copies of GAO documents at no cost Obtaining Copies of is through GAOrsquos Web site (wwwgaogov) Each weekday afternoon GAO GAO Reports and posts on its Web site newly released reports testimony and

correspondence To have GAO e-mail you a list of newly posted products Testimony go to wwwgaogov and select ldquoE-mail Updatesrdquo

Order by Phone The price of each GAO publication reflects GAOrsquos actual cost of production and distribution and depends on the number of pages in the publication and whether the publication is printed in color or black and white Pricing and ordering information is posted on GAOrsquos Web site httpwwwgaogovorderinghtm

Place orders by calling (202) 512-6000 toll free (866) 801-7077 or TDD (202) 512-2537

Orders may be paid for using American Express Discover Card MasterCard Visa check or money order Call for additional information

ContactTo Report Fraud Web site wwwgaogovfraudnetfraudnethtm Waste and Abuse in E-mail fraudnetgaogov

Federal Programs Automated answering system (800) 424-5454 or (202) 512-7470

Ralph Dawn Managing Director dawnrgaogov (202) 512-4400 Congressional US Government Accountability Office 441 G Street NW Room 7125 Relations Washington DC 20548

Chuck Young Managing Director youngc1gaogov (202) 512-4800 Public Affairs US Government Accountability Office 441 G Street NW Room 7149 Washington DC 20548

Please Print on Recycled Paper

  • GAO Doc d11235pdf
    • Letter
    • Background
    • Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities
      • Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws
      • Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities
      • Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations
        • Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited
          • Existing Regulation Covers Most Financial Planning Services
          • Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products
          • Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public
          • Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners
            • Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed
              • Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners
                • Creation of a Board to Oversee Financial Planners
                • Augmenting Oversight of Investment Advisers with an SRO
                • Extending Coverage of the Fiduciary Standard
                • Clarifying Financial Plannersrsquo Credentials and Standards
                  • Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners
                    • Conclusions
                    • Recommendations
                    • Agency Comments
                      • Appendix I Scope and Methodology
                      • Appendix II Comments from the National Association of Insurance Commissioners
                      • Appendix III Comments from the North American Securities Administrators Association
                      • Appendix IV GAO Contact and Staff Acknowledgments
                        • GAO Contact
                        • Staff Acknowledgments
                        • Obtaining Copies of GAO Reports and Testimony
                          • Order by Phone

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 ESP 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 ETI 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 FRA 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 GRE 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 HEB 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 HRV (Za stvaranje Adobe PDF dokumenata najpogodnijih za visokokvalitetni ispis prije tiskanja koristite ove postavke Stvoreni PDF dokumenti mogu se otvoriti Acrobat i Adobe Reader 50 i kasnijim verzijama) HUN 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 ITA 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 JPN ltFEFF9ad854c18cea306a30d730ea30d730ec30b951fa529b7528002000410064006f0062006500200050004400460020658766f8306e4f5c6210306b4f7f75283057307e305930023053306e8a2d5b9a30674f5c62103055308c305f0020005000440046002030d530a130a430eb306f3001004100630072006f0062006100740020304a30883073002000410064006f00620065002000520065006100640065007200200035002e003000204ee5964d3067958b304f30533068304c3067304d307e305930023053306e8a2d5b9a306b306f30d530a930f330c8306e57cb30818fbc307f304c5fc59808306730593002gt KOR ltFEFFc7740020c124c815c7440020c0acc6a9d558c5ec0020ace0d488c9c80020c2dcd5d80020c778c1c4c5d00020ac00c7a50020c801d569d55c002000410064006f0062006500200050004400460020bb38c11cb97c0020c791c131d569b2c8b2e4002e0020c774b807ac8c0020c791c131b41c00200050004400460020bb38c11cb2940020004100630072006f0062006100740020bc0f002000410064006f00620065002000520065006100640065007200200035002e00300020c774c0c1c5d0c11c0020c5f40020c2180020c788c2b5b2c8b2e4002egt LTH 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 LVI 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 NLD (Gebruik deze instellingen om Adobe PDF-documenten te maken die zijn geoptimaliseerd voor prepress-afdrukken van hoge kwaliteit De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 50 en hoger) NOR ltFEFF004200720075006b00200064006900730073006500200069006e006e007300740069006c006c0069006e00670065006e0065002000740069006c002000e50020006f0070007000720065007400740065002000410064006f006200650020005000440046002d0064006f006b0075006d0065006e00740065007200200073006f006d00200065007200200062006500730074002000650067006e0065007400200066006f00720020006600f80072007400720079006b006b0073007500740073006b00720069006600740020006100760020006800f800790020006b00760061006c0069007400650074002e0020005000440046002d0064006f006b0075006d0065006e00740065006e00650020006b0061006e002000e50070006e00650073002000690020004100630072006f00620061007400200065006c006c00650072002000410064006f00620065002000520065006100640065007200200035002e003000200065006c006c00650072002000730065006e006500720065002egt POL 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 PTB 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 RUM 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 RUS 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 SKY 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 SLV 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 SUO 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 SVE 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 TUR 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 UKR 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 ENU (Use these settings to create Adobe PDF documents best suited for high-quality prepress printing Created PDF documents can be opened with Acrobat and Adobe Reader 50 and later) gtgt Namespace [ (Adobe) (Common) (10) ] OtherNamespaces [ ltlt AsReaderSpreads false CropImagesToFrames true ErrorControl WarnAndContinue FlattenerIgnoreSpreadOverrides false IncludeGuidesGrids false IncludeNonPrinting false IncludeSlug false Namespace [ (Adobe) (InDesign) (40) ] OmitPlacedBitmaps false OmitPlacedEPS false OmitPlacedPDF false SimulateOverprint Legacy gtgt ltlt AddBleedMarks false AddColorBars false AddCropMarks false AddPageInfo false AddRegMarks false ConvertColors ConvertToCMYK DestinationProfileName () DestinationProfileSelector DocumentCMYK Downsample16BitImages true FlattenerPreset ltlt PresetSelector MediumResolution gtgt FormElements false GenerateStructure false IncludeBookmarks false IncludeHyperlinks false IncludeInteractive false IncludeLayers false IncludeProfiles false MultimediaHandling UseObjectSettings Namespace [ (Adobe) (CreativeSuite) (20) ] PDFXOutputIntentProfileSelector DocumentCMYK PreserveEditing true UntaggedCMYKHandling LeaveUntagged UntaggedRGBHandling UseDocumentProfile UseDocumentBleed false gtgt ]gtgt setdistillerparamsltlt HWResolution [2400 2400] PageSize [612000 792000]gtgt setpagedevice

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Page 2: Input on the Report to Congress on How To Modernize and Improve

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amp9)lt4ampRLeRSLampO6QampGamp)+amp6lt4-amp4amp6ampamp()amplt66lt44)amp3)4)3amp4ampG+4lt=)ampLamp Olt77)lt4-amp04(amp9)lt4ampLMRLQampamp(4amplt(6)+amp63amp0(amp+)+))amp(47)=amp+amp ()+)=ampamp)amp6amp)[)+amp(6==amp)amp$b)ltampamp()amp+844amp)amp+(amp4amp9)lt4ampR^JJeOQamp amp()ampGamp++64amp3)amp63amp7$amp+8)amp(6amp6amp)+84lt)amp)++7)3amp0(4=)amp 6lt4-amp4amp6ampamp()amplt66lt44)amp3)4)3amp4ampG+4lt=)ampLampOlt77)lt4-amp04(amp9)lt4ampLMRLQamp 0)+)amp)++7)3amp04(amp()amp3$)amplt6+)amp63ampT4==amp+)66=ampamp)amp)[)lt)3ampamp6amp)+amp 0(amp4amp$lt(amp6amp)[)+Samp amp OQampC+amp()amp$+)ampamp(4amp)lt4Bamp()amp==04-amp6=Iamp

OLQampGamp)+amp+)+))amp(6amp$lt(amp)+amp4amp6ampi)[)+iamp04(4amp()amp7)64-ampamp(4amp )lt4amp4amp$lt(amp)+amp+)+))amp(6amp()amp+amp()amp4amp6ampi46lt46=amp=6)+Biampi46lt46=amp 6384)+Biampi46lt46=amplt$)=+Biampi46lt46=amplt$=6iamp+amp6ampi48)7)amp6384)+Biamp i48)7)amplt$)=+iamp+ampi48)7)amplt$=6BiampY9)4+ampG384+BZampY9)4+amp $=6BZampYh6)ampD=6)+BZampYh6)ampD=64-amp9)lt46=4BZampYh=3)+ampD=6)+BZampYh=3)+amp $)=+BZampYh=3)+amp9)lt46=4BZamp+Bamp6ampamp()amp+)-4-amp4=)amp4ampltb$lt4amp04(amp()amp )+7ampY(6+)+)3BZampY)+44)3BZamp+ampY9)lt46=4Zamp+Bamp$)amp6amp()+amp4=)Bamp+)46=amp 3)4-64Bamp6lt63)74ltamplt+)3)46=amp+amp+)46=amplt)+44lt64amp76+Tamp(6amp0$=3amp=)63amp 6amp+)66=)amp)+ampampltlt=$3)amp(6amp()amp+amp()amp))amp$lt(amp)[)+4)Bamp+amp(6amp$lt(amp )+amp)+amp63amp+amp+)3)+amp

i46lt46=amp=64-amp)+84lt)Biampi46lt46=amp6384+amp)+84lt)Biampi46lt46=amplt$)=4-amp )+84lt)Biampi46lt46=amplt$=4-amp)+84lt)iamp+ampi48)7)amp6384+amp)+84lt)Biamp i48)7)amplt$)=4-amp)+84lt)iamp+ampi48)7)amplt$=4-amp)+84lt)iampY+$amp)+84lt)Zamp Y)=3)+BZampY)6)BZamp+ampY)4+Zamp6384+amp)+84lt)Bamplt$=4-amp)+84lt)ampBamp+amplt$)=4-amp )+84lt)amp+amp6amplt7464amp()+)Bamp+amp76T)amp$646==amp)X$486=)amp +)+))64amp04(amp+))ltampamp$lt(amp)+gamp$4)amp+ampX$6=44lt64Samp

ORQampiD)+iamp4lt=$3)amp6amp434843$6=Bamplt++64Bamp6+)+(4Bamp=474)3amp=464=4amp lt76Bampb4amp8)$+)Bamp6amp6lt464Bampb4ampltTamplt76Bamp6amp+$amp+amp $4lt++6)3amp6lt464Samp

OltQamp1()amp==04-amp)+amp6+)ampamp=46=)amp$3)+amp()amp+844ampamp(4amp)lt4Iamp

OLQampGamp)+Bamp0()amp)-6-)3amp4amp()amp$+lt(6)amp+amp6=)ampamp6-4=)amp)+6=amp+)+amp +amp(4amp+amp()+amp0amp6ltlt$Bamp63amp()amp6-)amp63amp)7=))ampamp$lt(amp)+Samp

ORQampGamp)+Bamp63amp()amp6-)amp63amp)7=))ampamp$lt(amp)+Bamp=4lt))3amp$3)+Bamp )[)7)3amp+7amp=4lt)4-amp$3)+Bamp+ampamp$b)ltampamp=4lt)4-amp$3)+ampamp+)6ampamp6amp )[+)amp)[lt=$4amp+7amp6amp3)444amplt64)3amp4Bamp()amp7734amph[lt(6-)ampGltBamp()amp 8)7)ampG384)+ampGltampampLeNJBamp()amp6=4+46amp7734ampH60Bamp()amp++6)amp 9)lt$+44)ampH60ampampLeMjBamp()amp)6=amph6)ampH60Bamp+amp6amp6)amp+amp)3)+6=amp=60amp+amp()amp =4lt)4-amp63amp+)-$=64ampamp6Tamp+amp684-amp63amp=6amp6lt464Samp amp 9)lt4ampRLeRSPampWamp)lt)4ampampH4lt))amp

1()amp==04-amp6lt4844)amp6+)ampamp)[)7amp+7amp=4lt)$+)amp$3)+amp$+6lt)amp3)amp9)lt4amp LMPLBamp)lt6$)amp()amp6+)amp34+)lt=amp+)=6)3ampamp=4lt464Bamp)-464Bamp+amp))lt4-amp()amp 6=)ampamp4$+6lt)Iamp

O6Q h[=664Bamp34lt$4Bamp+amp4)++)64ampBamp63amp)+4-ampamp44amp+amp +)lt77)364ampBamp4$+6lt)amplt8)+6-)Bamp)[$+)Bamp=474Bamp+)74$7Bamp +6)Bamp3)3$lt4=)Bamp67)amp=6Bamp+amp6amp()+amp4$+6lt)amplt+6ltBamp+amp )46=amp4$+6lt)amplt+6ltBamp)+7Samp

OQ )lt77)34-amp63844-Bamp+amp$+-4-amp6=4lt6amp+amp4$+6lt)amplt8)+6-)Bamp )46=amp6=4lt6amp+amp4$+6lt)amplt8)+6-)Bamp+amp=4lt(=3)+ampamp$amp6+4lt$=6+amp 4$+6lt)amp=4lt4)amp+ampamp4$+)amp04(amp6+4lt$=6+amplt764)amp+amp4$+)+Samp

OltQ A434-ampamp4$+6lt)amplt8)+6-)Samp amp

)IampG$(+4Iamp9)lt4ampjampampGAampPePBamp(6)+ampPRLBamp96)ampampRJJJSamp))+)lt)Iamp $+6lt)amp3)amp9)lt4ampLMPLSamp

67F3270)+F1+lt-3F32lt3237875)+F1+lt-3678927(+2+)+3D+B+7(+82+8lt378O+32)+89lt+2A8373=3875A598752=8)3)35398lt23A57BU77(lt777BV8+2A(+80)()7(95++8+lt777B08+73275+5+2 lt777B-^3+A+20)+58lt2gt758(3892+803A+28B)7589lt+2A837=37B)38+lt23+88378)3U)35398V77(lt77+2808+7325A832832+Xlt+288)9B+- 46$+B8+2+5+lt2+8+7A+82+83=+)2+82(+5797B)++2=77(lt77+2325A+287BU77(lt777BV8+2A(+8Ogt)+2O23P+25++28O+(98+)+2 _3O5+8(2lt373lt23A57B7A+8=+75A(+78+(92+8))+937389()+2=83957+(+88+2+B823787A+8=+75A8+22+lt2+8+7A+83)+2=- ^3+A+203A+28B)7589lt+2A837)+c23P+21++2+A+83+A+8=9()3O+5+82+50758B7(753(9=+737(7O+lt23A5+53+B83288)37B)+gtlt+83O98+(3789=+2889+2)+)758397+)(759789lt+2A8+52+B8+2+52+lt2+8+7A+87578927(+B+78-68)39583O+32(+9gt(37A+gt+53+B8328

)]78927(+(3=lt7+8537389lt+2A8+09503A+28++32+X=7+)+5A+287B328+8lt2((+83)+2B+78- F327[889+8(377)3lt++8880)())+O3A+7B9B+395X-F922+7gt0)+F1+lt3F32lt323787+2lt2+8)+689++2gt05+2+7+8O+++7)++2=77(Ult77+2V7577(Ult777BV75B732+87gt75A59322=)33+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67 )+MJ8-F+792gt0)7+75+X(++57Bgt(3=lt+Xlt2359(80)()(7+8gt=8+5lt+283773O++A7B)+gt2+8+(92+8lt2(92gt)+7)+gt2+5A+28+575 =2P++58)A7B3)+9lt85+3)+83(P=2P+)737+3)+53785+V0)8395+5=35+32+B937=P+8738+78+)83+A+2- 6=P+88+78+321+lt3F32lt32378+X=7+28389lt+2A8+09575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt77A+8=+75A832gt2=)+7)+gtlt(+++27+5Ogt59(2gt5A8+28O+++7jM0NNNRj0NNN32lt77A3A7BjbNN0NNN-NN388+80)+7892+gt=P+8+A+7=32+8+78+39575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt737R59(2gt78927(+B+7)3(=833+2)+U8=++A+V3 +Xlt+277(02+2+=+775+8+lt777B8+2A(+8)++277B7A+2B+3 jb0NNN-NN3787B+jbNN0NNN75+X779gt278(37053+873T +2+=+7G777B0W8+G777B0XG777B08Pamp7B+=+775)+lt2+lt23737+32)0(8)375O95B+7B8+=+788lt237gt77(lt72+Z92+8 8B7(7+Xlt+28+0737+3)()8(922+7gt(377+5)7)+8+2+8l32db3278927(+(+787B(922(99=-33lt+2837398+)++U77(lt77+2V3+2)+8+8+2A(+838+78Ogt322++752+((3=lt+37)59(2gt7A+8=+75A8+2875+7BB+7U77(75+5+2lt777BV)3989lt+2A837Ogt)+F1+lt3F32lt323788=ltgtO+(98+)+gt(=7333+25A(+78+(92+88877+7553+8 73+7(392B++)((3759(0O92)+20(9gt2+258)38+)33lt39355372+B937089lt+2A8377595)+882+8lt378Ogt75Ogt32)+2(378- )+2B+879=O+23(3=lt7837B)239B)2+B93287bN8+8)8=+72+B2583X+57575+X779+875+lt2359(88++=3O+35B+5B7878927(+B+78)3)35398+Xlt+28777(02+2+=+775+8+lt777B75)39++=3378O8+58+7B+()7Z9+89B)U)+779gtC7A+28gtVI=37B3)+28L3U7A+8V7X+575WZ9gt675+X779+875+lt2359(8-67)+(8+3+Z9gt75+Xlt2359(80)()2+732+B9+588+(92+80(=82+3+7=5+)89()lt2359(8 3+2)+9lt85+3)+83(P=2P+)737+3)+53785+-B+782+9B)3lt7lt238lt+(873(327+27532)+lt238lt+(3O+B32Z95373)+2 8+(92+8lt32337A3237779gt-cgt537B830)+97(+78+5B+7A3587gt 59(2gtOgt37)+U2+(3==+753738+V75)+2+87359(2gtOgt3289lt+2A83772+(3==+757B)+lt92()8+3775+X779gt32778927(+B+7073

<777BV>Hh99amp()amp6=amp)+amp6384<)amp4quotampY)<$+44)ZS67>mailto3+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67

+5)46$2=-67F327+80lt295+7+Xlt+287525(7O+88+2+5B7877(lt777B()278975+2D+(37aalM3)+FA(35+-^3+A+20353830)+5=B+5lt2gt7++58389+7(A(39275)+Z9+837gt88P+580)8)++X+73)+5=B+875)lt78)38+B++X(++58lNRebgt+287=7gt(8+80)3=7gtgt+28lt238+(9+)+(8+0lt2(92gt87(+)+2+8 75537++=+73(3785+2h S)++Z9gt75+X779+8)JJgt+283lt+7+8=gtO+3gt7ltlt23lt2+32=7gt8+732(+78lt2(92gt)+2B+95+7(+33A+2lbgt+2358=7gtB+788++P 390)+((397A9+8O+32+8922+75+2()2B+882++()+77A+8=+7-C7)+(3789=+2+X8)+(372()+2+2+735=B+8-67)8(8+0822+)gt+2P+89()(8+37(377B+7(gt75)+(383B3732lt3325A(+23=737R59(2gt77(lt77+2Q78927(+B+78lt23)OA+BA+7)+Ult+2(+A+5V(P35=B+8-)+D+327+gti+7+2[83(+753(582(327+gt82+3)+3lt238+(9+89()(8+8O+(98+)+8+7+7(+8)+gt(7+Xlt+(3()+A+23=89((+889lt238+(937789())B)ltlt+2(2=+2+lt2gt75)+2O95B+82+O++28lt+737=32+8+2398(2=+8-5537gt0gt+282+3+7O+33O72+8(883737)+(372(75)+2+927397583)+(+7)7389+50O98373(3=lt7+5B78)+UB+7V0)3=gt(3779+8+7Blt2359(97O+5- W+(A+gt0)+8+3(+283)+(392(+)+(2=+8lt+2lt+2+5Ogt97+)(lt77+28)239B)7(3775)+(P389lt+2A837753A+28B)389()23B9+lt77+28 Ogt)+1+lt3F32lt32378751+lt3678927(++A+8=38(3789=+283)+2375+A(+8O+(98+)+2+2+73++(A+5=782A+2+=+5+8AO+750)++B8gt8+=+7892+)+(3759((3779+8O+(98+)+(+778)+2=37+gtO(P)393=9()988- (378O+7BP+778+875Ogt46$38+=)+5+397+)(lt2((+87)875982gt-amp382+(+7gt046$889+52+B93782+Z927Bc23P+21++2889lt+2A8+8+83+Z9gt75+X779+8=5+Ogt)+22+B8+2+52+lt2+8+7A+8-82+890=7gt3)++88+)(2+lt2+8+7A+82++A7BO23P+25++280523ltlt7B)+2 8+(92+8(+78+83+X(98A+gt3+275+Xlt2359(83985+346$[889lt+2A832gt829(92+-C73297+gt0)+33lt)3+87F327[8875(P32+B9373UV 77(lt77+280+A+8F327[8(3789=+28)+=+2(gt3)+8+97+)(75A598- 5537gt0F6FD+(37MJKM-a+8)+839)+(922+77+(+88gt3(+7892+758lt+83977+(+882gt5+0)(3789+8U5A(+7)+O987+88378927(+V073)+2(37+7398889+=37B77(lt77+280)()O839+gt7++583O+552+88+5075(395O++5+2+A+3=P+)+2+B9379732=(2388bN8+8-)8O27B8 =+3 amp

1()amp$4)ampamp4$+6lt)amp4ampamp63)X$6)=amp3)4)3Iamp c+32+Y1()ampA$4)ampVamp$+6lt)Z(7O+++(A+gt75+(+7gt2+B9+5 7375+0=9828O+5+Z9+gt5+7+57=7gtD+8- +5+2((395(2++9732=5+737832U83(37V0U7+B337V0U278(37V7505537gt0U7+(+88gt3(+7892+Q2+B8237V3275A598)353737+753 U8+V78927(+8B+783)+7892+20O92)+207+753lt23A5+5A(+327+B3+5++75Q32389lt+2A8+75ltlt23A+)+(3783(+78+578927(+B+7 )=99(+7O+(98+37+X87B2+378)lt75+2+7(lt(gt-IWX=lt+87(95+83(PO23P+28077(lt77+2807A+8=+75A8+2875FG[8L7+X(983723= 2+B8237395O+gt+280)3=gt5A8+378lt+(83(372(75)3 lt+28378)395)35+388+8- 6758(98837ltlt+25+5D+lt+=O+2Mb0JKKe0)+F327G2359(+2E(+787B S32P7Bi239lt2+(3==+75+55+77BU83(37V7)+337B=77+2 A5amp+PC+252lt20+$0(0+2(0QRS(307+)02$+90102 320amp527+102)02$+amp+)-2$-+1062$)02$+T$-12+9 320amp+92amp+25UQESlt1amp1$0(0+$(30lt110+0++25050660amp6 )24+9320amp52+320amp5920amp)0+T$+020$+)0+55)-2amp1$++ +$-2+amp0)23-amp8 )8+32+57)+F327+B892+- F327832+(+7gt+4)3amp$amp64=)3amp3+7(D+(37MJKM-aR$+(+88gt3E(+78+ gt10655lt+amp40$20+00()62(5amp0+$-20-+302HCM+$-2+amp0H30 A0amp+RVWR970amp-$01020320amp520503$5amp+9+0+920660amp+ 10$506+$-2+amp0P XY)5++$93$amp-$$+$92+02)20+$69+36602+6)++$2 20amp((0+3+$+9+$-2+amp0amp4020$90)$-20$95($9)20(-($920$9 303-amp750$9)(0+)5+$92+102+$-2+amp0amp+2amp92)0+5+$-2+amp0 amp+2amp902($8 XZ0amp((0+3++3[234$+92-2+))5amp+$[)0+5))5amp+$[ )5amp15302$))5amp+$62+$-2+amp0amp40209)0+5))5amp+$62+$-2+amp0 amp402092)5amp15302$7-)2amp-52+$-2+amp0)5amp0$2+$-20lt1 )2amp-52amp()+0$2+$-202$8 X+3+6+$-2+amp0amp4020$8

D9()7B9B+395O+97+Z9A3(75(395O+7(32lt32+5734+5+2(-6 lt+7+8+2+8+739B)039532(+)38+lt23A57B+B5A(+7)+O987+883 78927(+32++389O=3D+32+5+2=75+5(+787B0+X=73775 (37797B+59(37)78(+27O+875255+A+3lt+5Ogt)+D+324+5+2+B932- )+2+87553737B37Blt23O+=)78927(+=2P+7BB+7(+8(+78+57 =9lt+8+83+27B29875+8+lt777B8+2A(+80I298amp8L)()(3789+8 )+979lt2((+30327)++2A+0)+9798)27B3+B++8)737Rgt+28-67+28+298=80=7gt3)+=3(+57$+A5)8=+07583=+297 Ogt32B73782+5gt7+532(+7892+573)+28+83lt+7gt83(78927(+B+78 75+7(392B+)+=398+O(PR53328+7B+()7Z9+87325+23B78+732(+78 298)+B)+27B8B7(777(732=37)+2O+98+538+ 779+832+78927(+lt2359(8-)8lt2((+82=lt775(3779+85+8lt+)+ 72359(3732+B937878+889()8F327-+5+2()8+287(37875lt+7+832A3378(3952+59(+32+=7+)+8+lt2((+8- 9)lt4$amp)=3)+)6)amp=64-amp3)4-64I )+2+8)395O+O23575(3=lt2+)+78A+lt23)O37378lt+(398+5+275+8+lt777B5+8B73780))+72359(3732+B93788=23)38+7F327-87F3270D+1+lt2=+7[83678927(+395lt2+lt2+83ltlt23A+5 5+8B7378753955+A+3ltA+7Blt23(+8837(95++X=7373+59(37 ++=+7802+A+7B)+)+2)++X=737lt23(+888lt23(32+5323lt+7O33P0)+)+2D+ltlt23A+5(37797B+59(3782+Z92+53=77322+7+7gt89()5+8B7370)+)+27gt5A(+BA+78537+837)+(lt(gt359(2gt075) lt3(+875lt23(+592+82+7lt(+3((+lt(3=lt7803258(lt7+)35+2837gt89()(+2(37875)+77+(+882gtlt23(+592+8322+A3(37752+lt327B358(lt72gtlt23(+592+83)+9)32+8-)8=75+(395O+=lt38+5)+5+2- C46lt46=ampD=6)+ampampC46lt46=ampD=64-Iamp 678927(+B+782+lt2+A+7+523=97B8lt+(398+5+275+8+lt777B5+8B73787325+23O2(+)+ltlt+27(+3+Xlt+28+08P+gt)+gt9273 )+37gt3)+2+AO+3)+=0)377(lt77+2-75)803(3928+0O27B8=+9(2(+3=gtlt2+A398(3==+7837)+7+(+88gt3()7B+7)+C732=67A+8=+75A8+28(-ID9lt2L)+2+32+6lt23lt38+))++2=77(lt77+27577(lt777BO+2+82(+5755+7+5975+2+5+203O+7(32lt32+5738+ 75)7gtlt+2837)3)35839877(lt77+2323+2877(lt777B8+2A(+8I833O+5+7+5LO+2+Z92+532+B8+2877A+8=+75A8+275lt23A5+ 89()5A(+859(2gt22+8lt+(A+3)+)+2)+gt833+27gt5A(+83)+A9+

37A+87B72+B9+58+(92+8-7+X+78A+895gt8lt+232=+52+5gtOgt)+i3A+27=+7((397Ogt(+37)+3lt(377(lt77+287577(lt777B I2+lt32()+5L750)+65373B2++))+2(37(983780)+gt=P+A+2gt89+3O8+2A3780)+7(+)+7(983732(37+X9lt92lt38+8087()=+73)82+lt32- 6O+)ltltgt3+Xlt75377gt3)+8+3lt(875lt23A5+5537732=3775 2+R++X=lt+8757+(53+89lt372+Z9+8-

+8lt+(9gtD9O=+50

gt32o883(+8 aJN-MdN-JJMd

$B+cgt320F4GH

Illegal Practices OfFee-Only Financial PlannersIn The Business Of Insurance

(Problems amp Solutions)

Prepared ByNigel Brian Taylor CFPreg

Santa Monica CA(Copyright copy2002 - 2009 Nigel Brian Taylor CFPreg All Rights Reserved)

Tel 310 260 1126 Website wwwiamafiduciarycom

Illegal Activities in the Business Of Insurance By Fee-Only Financial Planners (Problems And Solutions)

Prepared by Nigel Brian Taylor CFPreg

Santa Monica CA CA Insurance License Nr 0716446

INTRODUCTION

Overwhelming media focus on ldquomethods of compensationrdquo for financial services in the recent past rather than competence and regulatory compliance has fueled an ever increasing consumer-driven demand for FEE-ONLY advice in insurance planning Media and marketing hype has influenced the consumerrsquos perception and led many to conclude that ldquofee-only plannersrdquo are the only planners capable of giving objective unbiased advice relating to insurance matters because they receive no compensation from third parties are not affiliated with represent or take compensation from insurers and therefore have no conflicts of interest and loyalty that could impair their ability to provide objective and unbiased information Unfortunately however many fee-only financial planners in California and 38 other States with similar regulations are operating outside the law in order to provide this ldquoobjective and untaintedrdquo advice This discussion will highlight these illegal insurance activities and provide potential solutions (initially for California although the suggested solutions could be used as a model for other States) to increase compliance with current California insurance law It will also discuss developing trends in the business of offering insurance advice in California particularly in relation with the provision of insurance advice as a component of a ldquoComprehensive Financial Planrdquo All Statutes herein are California statutes unless otherwise indicated

INSURANCE LICENSING

The three most widely held insurance licenses issued to individuals who provide general advice to families and consumers on general insurance matters in California are The Life Agent License(LX) the Fire and Casualty Broker-Agent (FX) and to a negligible degree the Life and Disability Analyst License(LA) A full list of other licenses is available at wwwinsurancecagov

Life Agent (LX)

The licensing requirements for a Life Agent license are set forth in Chapter 5 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit I A Life Agent (LX) is defined as a person authorized by and on behalf of a life or disability or life and disability insurer to transact life disability or life and disability insurance1

Generally a life agent advises consumers as to the benefits and disadvantages of life health disability and long term care insurance etc and transact business on behalf of one or more insurance companies offering products to consumers A Life Agent must be compensated

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by the insurer on the sale of product in the form of commissions and cannot accept fees for service from the consumer There are approximately 154664 resident and non-resident LX agents serving Californians2

Fire amp Casualty Broker-Agent (FX)

A fire and casualty licensee is a person authorized to act as an insurance agent broker or solicitor and a fire and casualty broker-agent license is a license so to act The FX licenseersquos authority to act is determined by which documents are initially submitted

bull A $10000 Bond of Insurance Broker form 417-5 authorizes the licensee to act as an insurance broker An insurance broker is a person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurer

bull An Action Notice of Appointment form 447-54 authorizes the licensee to act as an insurance agent An insurance agent is a person authorized by and on behalf of an insurer to transact all classes of insurance except life insurance

bull An Action Notice of Solicitor form 417-31 authorizes the licensee to act as an insurance solicitor An insurance solicitor is a natural person employed to aid an insurance agent or insurance broker in transacting insurance other than life

There are approximately 88300 resident and non-resident FX agents serving Californians3

Life amp Disability Analyst (LA)

The licensing requirements for a Life and Disability Analyst license are set forth in Chapter 8 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit II A Life and Disability Insurance Analyst is defined as a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto4

Generally a LA is trained to a significantly higher level than a LX and can advise a consumer not only as to the advantages and disadvantages of all forms of insurance but can also provide competent unbiased comparative analysis of various policies for a fee as well as interpret the rights of consumers under any insurance contract The LA must among other things

bull Have been licensed as a Life Agent (LX) for a period of at least 5 years preceding a LA application5 and

bull Must complete a comprehensive course of education covering significantly more topics than the LX and

bull Pass a rigorous examination before obtaining the LA license

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It should be noted that the LA license currently authorizes a person to provide advice for a fee on all insurance related matters but does not currently require any training or examination in Long-Term Care insurance or require a minimum number of hours of continuing education credit in each licensing period In the past ten years the number of CA Life And Disability Analysts has remained stable at approximately 44 (forty four) for the entire Statersquos population6

ldquoFINANCIAL PLANNERSrdquo OFFERING INSURANCE ADVICE

There are over 34000 (thirty four thousand) Registered Investment Advisors and Investment Advisor Representatives in California7 An Investment Advisor in California is authorized under sect25009(b) California Corporations Code8 to utilize the title of ldquofinancial plannerrdquo (without any statutory requirement to substantiate his her competence to perform the tasks of a financial planner) and perform comprehensive financial planning services on a fee-only basis The examination and qualification requirements for the Series 65 (Uniform Investment Adviser Law Examination) are attached hereto as Exhibit III NO knowledge of insurance products or the business of insurance is required in order to register as an Investment Advisor ldquoFinancial Planningrdquo and ldquoFinancial Plannersrdquo are having an ever increasing and significant impact on the provision of insurance services in California It is important that State Agencies and boards such as the CA Dept of Insurance (CDI) Agent and Broker Advisory Committee (ABAC) provide input to regulators and legislators alike regarding allied ldquoprofessionsrdquo impacting the business of insurance to ensure that consumers are properly protected A copy of this discussion will therefore be forwarded to both the CDI and the ABAC for their consideration

Many fee-only planners offer ldquocomprehensiverdquo financial planning services that by definition include risk management analysis and recommendations as part of the planning process These recommendations include calculations regarding the amounts and types of life insurance recommendations with regard to the benefits and disadvantages of various individual and or group health insurance plans disability and long term care plans etc In some cases advice is provided on a fee basis regarding homeowners auto and other types of property casualty and general liability coverage

To avoid real and ldquoperceivedrdquo conflicts of interest many fee-only financial planners choose not to maintain affiliations or representation agreements with any insurer and therefore are unable to license themselves as LXrsquos or FXrsquos Some let their LX or FX licenses lapse when they transition to fee-only planning In both these cases California law is clear Any person accepting fees for insurance related matters from any third party other than an insurer unless otherwise exempt must be licensed as a LA9 In an attempt to circumvent the law other planners obtain a LX and or FX license to create the appearance of legal compliance but never have any intention of actually ldquotransacting businessrdquo or utilizing the license for the purpose for which it was originally issued or intended This practice is prohibited under CA law10 because it is the fee-only plannerrsquos true intention to charge the consumer for

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance advice rather than to be compensated by an ldquoinsurerrdquo as CA Insurance Code Sections 32 amp 1622 (supra) require

Many fee-only planners quote an often-abused section of Californias Insurance code Section 1831(e) which provides a limited exemption from insurance licensing for Registered Investment Advisers to justify their unlawful behavior The following is an excerpt from a letter originally addressed to Errold Moody CFPtrade (A California Life amp Disability Analyst who has concerned himself with the illegal activities of fee-only financial planners in insurance matters for over 10 years in California) on July 27 1995 by Patricia Staggs the then Assistant General Counsel and Chief Compliance Bureau of the Legal Division Compliance Bureau of the California Department of Insurance who wrote regarding the Investment Adviser exemption

That exemption appears at Insurance Code Section 1831(e) and provides an exemption to the chapter regarding life and disability analysts for an investment adviser as defined in section 25009 of the Corporations Code when acting in that capacity (Emphasis added) Section 25009 of the Corporations Code provides as follows

Investment adviser means any 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 regular business publishes analyzes or reports concerning securities Investment Adviser does not include (a) a bank trust company or savings and loan association (b) an attorney law accountant engineer or teacher whose performance of these services is solely incidental to the practice of his profession (c) a broker-dealer whose performance of the services is solely incidental to the conduct of his business as a broker-dealer and who receives no special compensation for them or (d) a publisher of any bona fide newspaper news magazine or business or financial publication of general regular and paid circulation and the agents and servants thereof but this clause (d) does not exclude any person who engages in any other activity which would constitute him as an investment adviser within meaning of this section

A life and disability insurance analyst is defined in insurance code 325 as follows

Life and disability insurance analyst means a person who for a fee or compensation paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as a beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The Departments view to that exemption set forth in insurance code 1831(e) is that an investment adviser need not submit to regulation by the Department of Insurance so long as the activities engaged in by the investment adviser fall within the defined activities of an investment advisor as set forth in Corporations Code section 25009 It is noteworthy that the definition of an investment adviser contains no reference to insurance related activities

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(Emphasis Added) Therefore any activities included within the definition of life and disability analyst such as advising as the life insurance products are clearly outside the capacity of an investment adviser and would subject the person to the provisions of law relating to life and disability insurance analysts

Very Truly Yours Patricia Staggs

Since as early as 1995 the CDI has taken the documented position that the Investment Advisor exemption applies ONLY when a Registered Investment Advisor acts ldquoin that capacityrdquo and as defined in section 25009 of the Corporations code It is the authorrsquos conclusion based on conversations with CDI staff counsel Jody Miller therefore that the only time a Registered Investment Advisor in the State of California may lawfully provide ldquoinsurancerdquo related advice to a consumer for a fee would be for example if he were advising a client as to the allocation of sub accounts containing regulated securities within an already existing variable life insurance or variable annuity policy

This exemption does NOT however permit a Registered Investment Advisor to discuss the merits or disadvantages of any type of insurance including Life Health Disability Long Term Care Property Casualty Homeowners General Liability Auto insurance etc that do not contain any elements related to the provision of investment advisory services Under current law then any Registered Investment Advisor who provides such advice and is compensated directly by the consumer without having first obtained a LA license is guilty of a misdemeanor11

The position of the CDI was illuminated in a letter addressed to representatives of the financial services sector who attended a series of meetings held with the Dept of Insurance in late 1997 In as letter dated February 3 1998 Assistant Ombudsman and Legislative Liaison Jeffrey Kenny wrote

February 3 1998

On July 30 1997 a discussion concerning the life and disability insurance analyst license was held between the California Department of Insurance (CDI) and members of the financial planning industry As you participated in this dialog I am writing to communicate CDIs policy on this matter

The focal point for this issue is consumer protection not the interests of the individual factions With all parties based in customer service it is sad that this detail has been lost in much of the discussion As defined by insurance code Section 325 a life and disability insurance analyst is

a person who for a fee or compensation of any kind paid by or derived from any person or source other than the insurer advises purports to advise or offers to advise any person

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insured under named as beneficiary of or have any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The fact that there are only 46 life and disability analyst in California is not a valid argument for repealing this code In fact the limited number of licensees and population in noncompliance begs for increased education and enforcement While the easy solution for those in noncompliance may be to repeal this law consumers who pay for fee advise on insurance matters deserve an analyst educated in insurance per CDI standards The current licensing requirements ensure that relationship Any legislative effort to repeal this law will likely be opposed on the basis that such action is harmful to consumers by consumer groups insurers agents and brokers and the California Department of Insurance

At the July 30 1997 meeting representatives from the financial planning industry raised two additional suggestions concerning CDIs examination requirement The first seeks to allow issuance of a Life and Disability Analyst license to Certified Financial Planners and Certified Public Accountants following the successful completion of their own professional examinations Again this is an idea that requires legislation and will certainly face opposition CDIs position remains at only those individuals who pass CDIs exam are to be issued a life and disability analyst license CDI is the agency charged with enforcing this license and will remain via its examination and related or regulatory functions the authorizing agency for this license

The final suggestion request a waiver of the requirement than an examinee must have five (5) years experience as a life licensee or employment experience under said licensee to sit for CDIs examination Again this is an idea that requires legislation CDI will reserve judgment until the full breadth of this proposal has been introduced to the state legislature

Despite some groups interest in changing current law there is an existing law which is and has always been quite clear While a financial planner may be illegally engaging in insurance analyst activities and may not be aware of their violation it is my hope that this the explanation of policy will provide them with the impetus to come into compliance or cease the illegal activity immediately Per insurance code Section 1844 any person who acts offers to acts assumes to act as a life and disability insurance analyst when not licensed by the commissioner per this article is guilty of a misdemeanor Consistent with current practice information obtained on individuals in noncompliance will be aggressively pursued

Sincerely

Jeffrey Kenny Assistant Ombudsman and Legislative Liaison

However successful criminal prosecutions for a violation of CIC sect1844 are apparently rare because the CDI must turn these matters over to local district attorneyrsquos offices Statewide Their failure to enforce the law is probably attributable to a lack of funding to prosecute

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non-violent misdemeanor counts of this nature where no victim can be produced Unfortunately and to the detriment of Californiarsquos consumers this lack of enforcement has had the effect of creating a Cavalier attitude towards compliance with State law that essentially seems to tolerate this unlawful activity permitting fee-only planners to operate almost with impunity

There are a number of fee-only financial planners who claim in their firms disclosure form that they have no affiliations or representation agreements with any insurance carriers and that they do not represent or offer for sale any kind of insurance products However in reality they maintain LX or FX licenses and have contracts with life insurance carriers who do not require a minimum annual production level without any intention of ldquotransactingrdquo on behalf of an insurer (a violation of CA Insurance code section 1668 sub (c) amp (g) supra) while making no disclosures anywhere on their disclosure statements or advertising materials as to their active insurance licenses which is in and of itself a violation of Section 17255 of the Insurance Code12

Other fee-only financial planners claim that any insurance advice given by them to their clients as part of a comprehensive financial plan is given ldquofree of chargerdquo They claim that a fee is charged for all the other elements (investment tax retirement amp estate planning) but not for the risk management portion of the plan They point to the fact that they never ldquoact in any of the capacities defined in Article 1 (commencing with Section 1621)rdquo because they do not appoint themselves with or represent an insurance company or any particular insurance product and do not actually ldquotransactrdquo insurance business (Thereby avoiding in their minds a licensing requirement under CIC Sections 32 amp 1622) Furthermore they claim they do not charge the consumer a fee for the advice they provide regardless of the complexity of that advice (Charging a fee would trigger a licensing requirement under section 325 Insurance Code) The result if the courts upheld this logic would be that the Dept of Insurance would lose all control and authority for the provision of insurance advice to consumers by fee-only financial planners in California to the California Dept of Corporations Worse still the only recourse damaged consumers would then have against fee-only financial planners in the business of insurance would be the California Dept of Corporations a state agency woefully equipped to enforce state insurance laws

One problem that requires statutory revision is the lack of a suitable definition for ldquotransactingrdquo in the business of insurance While the Dept of Insurance has considerable leeway in determining what constitutes ldquotransactingrdquo the code itself provides little or no useful information or guidance for fee-only planners who often feel based on the wording of the current definition that they acting inside the law when performing certain services Transaction is defined under sect35 of the Insurance code as

35 Transact as applied to insurance includes any of the following a) Solicitation b) Negotiations preliminary to execution c) Execution of a contract of insurance d) Transaction of matters subsequent to execution of the contract and arising out of it

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While the requirements under sub(s) b c amp d is self-explanatory ldquoSolicitationrdquo (sub A) Is not defined and the legislature has to date been loathe to define it leaving the interpretation to the CDI and creating a ldquofact at issuerdquo that requires administrative or judicial interpretation and determination in cases where fee-only planners dispute their activities as ldquotransactingrdquo This is not the first time the issue of defining ldquosolicitationrdquo has been brought to the attention of the Department of Insurance In a discussion paper dated September 25 1998 the Producer Licensing Working Group recommended defining ldquosolicitationrdquo in the following manner

Solicitation Any oral or written statement or image (1) made by any person either directly or by another person acting pursuant to the first persons authorization direction or control (2) which statement is made with the intention or likely effect of provoking directly or indirectly a recipients interest in potentially purchasing an insurance product

This author believes a clarification of what constitutes Solicitation under the Insurance Code will assist Registered Investment Advisors fee-only financial planners and others in assessing which license if any would be appropriate given their particular facts and circumstances If the legislature decides not to act the Dept of Insurance should issue authoritative guidelines or advisory opinions similar to those of other regulatory agencies such the SEC NASD and IRS in an effort to bolster compliance This is extremely important given recent trends and developments in the delivery methods and current practices of individuals providing insurance services in California

The issue of ldquotransactingrdquo and what constitutes ldquosolicitationrdquo aside and with regard to the practice of giving advice in insurance for free CIC Section 1631 does not mention compensation as a criteria for triggering a licensing requirement13 Even setting aside the current CDI determination of what constitutes ldquotransactingrdquo which is ambiguous Californiarsquos Insurance code for purposes of interpretation is also governed by Section 1858 of the California code of Civil Procedure (CCCP)14 There is voluminous precedent under CCCP section 1858 supporting the authorrsquos opinion that the interpretation of a statute that produces an absurd or anomalous result will not prevail when used as a defense In interpreting a statute Supreme Court avoids any construction that would produce absurd consequences15 In construing statute state Supreme Court will not parse each literal phrase of statute if doing so contravenes obvious underlying intent or leads to absurd or anomalous result16

Since it is already well settled in law that ldquoThe business of Insurance is a business affected with a public interestrdquo17 this author believes the circumvention of State Insurance licensing laws by fee-only financial planners in any manner irrespective of compensation or level of competence presents a clear and present danger to Californiarsquos consumers and is contrary to the public interest The intent and desire of the Legislature to require State licensure for insurance professionals is clearly set forth in CA Insurance Code Sections 1631 1633 amp 1633518 and is unambiguous in the authorrsquos opinion

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UNLICENSED INSURANCE ADVICE CURRENT REMEDIES

CA Insurance Code Section 1668 applies in the case of fee only planners who maintain a license but do not intend to actively transact business as LXrsquos The sole remedy for such conduct is that under this section ldquo the commissioner may deny an application for any license issued pursuant to this chapter if

helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this staterdquo

CA Insurance Code Section 1668 is problematic in that it is difficult if not impossible to enforce unless insurers are ldquorequiredrdquo to terminate all LXrsquos amp FXrsquos not actively ldquotransactingrdquo insurance business and unless the Dept of Insurance requires proof be provided to the department by the insurer that a LX or FX is in fact actively transacting business The code could require insurers to review commissions paid to appointed agents on an annual basis and terminate the appointments of all agents who do not ldquotransactrdquo over a period of 12 months unless valid cause can be shown Exceptions could be made for salaried employee of insurers and persons engaged in the regulation of insurance business in whatever form

CA Insurance Code Section 1844 is applicable to fee only planners who provide insurance advice for a fee or ldquofor freerdquo and provides that any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

Again this is difficult if not impossible to enforce because the Dept of Insurance must rely on local district attorneyrsquos offices most of which have no funds to prosecute non-violent misdemeanor counts particularly when most DArsquos offices consider this a matter for the Insurance Commissioner in the first place Therefore rather than seek prosecution under this section the Dept of Insurance should actively enforce State law against violators under the recently introduced CIC section 129218 (discussed below) It makes no sense for the Dept to refer these cases to local district attorneyrsquos offices if their decision to prosecute under the Statersquos criminal statutes is based on ldquofinancial considerationsrdquo rather than the evidence of malfeasance

There are two other remedies available to the Dept of Insurance The first is California Insurance Code (CIC) 790 et Seq The Unfair and Deceptive Trade Practices Act The second is the aforementioned and recently introduced CIC Section 129218

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Prosecution under CIC 790 et Seq does not require compensation because under section 79001 the Insurance Code applies to all persons engaged in the ldquobusinessrdquo of insurance19

Under section 79004 the Dept of Insurance is authorized to investigate any person engaged in the business of Insurance in California20 Transacting in the business of insurance without a valid license with or without compensation is clearly an unfair and deceptive competitive practice because violators seek to avoid and evade ascertainable standards in training examination licensing and continuing education required by the State for agents and brokers appointed by insurers who are performing essentially the same tasks while at the same time claiming to take the ldquoethical high groundrdquo in terms of the advice given State licensing places the agent at a competitive disadvantage because a licensed agent can only accept compensation from an insurer unless that agent is also a Life and disability Analyst Section 790035 provides substantial administrative penalties including fines and restraining orders for persons violating this Act21 The provision of unlicensed insurance advice whether for a fee or ldquofree of chargerdquo by fee-only planners is detrimental to the consumers of California because there is no ascertainable standard of education or requirement to keep current present unless such planners are subjected to the licensing requirements of the CA Dept of Insurance

The second remedy available is authorized under CIC Section 12921822 which provides for greater administrative remedies against those individuals who transact the business of insurance without proper licensure A CA Life amp Disability analyst whose business has been severely impacted filed complaints in early 2002 against prominent California fee-only planners who are flagrantly violating the law To date the CDI has taken no action against these planners and it remains unclear whether these new powers will be utilized on a proactive basis to seek out fee-only financial planners offering insurance advice or whether the Dept of Insurance will remain reactive to ldquoconsumerrdquo complaint only in the enforcement of Californiarsquos insurance laws

On a final note the CDI is considering proposed regulations pursuant to the authority granted to the Insurance Commissioner under the provisions of in SEC 8 of Assembly Bill 393 Chapter 321 Statutes of 2000 that among other things address the necessity for licensing These new regulations include a proposed section 21923

Draft

Section 21923 - Necessity of License

The following activities are not exempt from licensure under CIC Insurance Code Section 1631 because they are directly related to solicitation negotiation or effecting the sale of insurance

(a) Explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures

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limits premiums rates deductibles payment plans or any other insurance contract or potential insurance contract terms

(b) Recommending andor advising or urging applicantspotential applicantspolicyholders applicants for insurance coverage potential applicants for insurance coverage or policyholders to buy particular insurance policies or to insure with particular companies or insurers

(c) Binding of insurance coverages

Note Authority cited Section 8 of AB 393 Chapter 321 States of 2000 Reference Insurance Code Section 1631 of the Insurance Code

Should section 21923 be enacted any perceived ambiguities associated with the giving of ldquounlawfulrdquo advice by fee-only planners would be eliminated While the author applauds all these efforts to increase compliance through enforcement and regulation the consumerrsquos total ignorance of California Insurance law and the reactive nature of insurance enforcement will bring few if any real-world changes for consumers There have to date been few complaints regarding the illegal practices of fee-only financial planners by consumers because a) a licensed life insurance agent is always eventually involved in the ldquosalerdquo of a specific product to the consumer and b) the client has already received a written affirmation from the fee-only planner that he is acting in a fiduciary capacity as their trusted advisor The client therefore places greater value on the fee advice given by a fee-only planner than the advice of a licensed life agent ldquosellingrdquo the same product the fee-only planner recommends simply because the licensed individual is an agent of the insurer

Of course the consumer is paying twice for the same advice once in the form of fees and a second time in the form of commissions to a licensed ldquoagentrdquo Providing there is no relationship between the fee-only planner and the insurance agent and no referral fee is payable by the agent to the planner this fact is never disclosed to the client It is the authorrsquos personal experience that many fee-only financial planners refer these clients to out-of-state insurance agencies who have declared themselves willing to provide substantial discounts from their commissions While the author views these discounts are ldquoonly fair in light of the circumstancesrdquo it does not excuse the illegal conduct and the fact that the client is not receiving any favorable contractual benefits on their insurance policy such as shorter exclusion periods shorter surrender penalties lower mortality and expense fees or lower percentage monetary penalties for early termination of the product

The already established fiduciary relationship between a fee-only financial planner and his her client creates a bond of trust that implies by its very nature that the planner is fully complying with all federal and state laws In fact many fee-only planners subscribe to written codes of ethics established by credentialing bodies and professional membership organizations such as the CFP Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) which demand their members comply with all federal and state licensing laws However the aforementioned

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

professional membership and regulatory bodies are conflicted in their response to the problem of illegal activity because both organizations as mentioned previously on page 5 amp 6 of this report are lobbying for a change in the law that will allow such fee-only planners particularly those holding the CFPreg Certificate to qualify for a waiver from licensing These professional membership and regulatory bodies refuse to investigate or discipline such planners unless the State first prosecutes them The State of California for reasons stated elsewhere in this report have been loathe to take action against these fee-only planners despite repeated complaint filings by life and disability analysts over the most recent ten year period whose income is being severely impacted by such illegal activities

From a consumerrsquos perspective there would be absolutely no reason to question the integrity of their fee-only financial planner In fact organizations such as the National Association of Personal Financial Advisors (NAPFA) have marketed their fee-only planner members as the ldquoonlyrdquo planners capable of providing clear untainted unbiased advice on all financial matters including insurance and have disseminated brochures since the 1980rsquos claiming that commissioned based advice is somehow tainted and a totally flawed delivery method that could harm consumers NAPFArsquos position has been supported and publicized to a great extent by the media including magazines such as Bloomberg and Money to newspapers such as the Los Angeles Times which requires ldquofee-onlyrdquo as a pre-requisite ldquomethod of compensationrdquo for any planner participating in itrsquos popular ldquoMoney Makeoverrdquo series of consumer assistance feature articles It has also been supported by non-profit organizations such as the Consumer Federation of America Negative consumer perceptions of insurance licensed individuals has to a great extent been unfairly tainted by such media hype and marketing tactics

The recent introduction of section 12921822 coupled with an acceptance of proposed section 21923 would absolutely provide the CDI with additional needed powers to regulate the business of insurance It will not in the authorrsquos opinion however increase compliance in any meaningful manner Continued consumer ignorance of State insurance laws and reactive rather than pro-active enforcement by the CDI will almost certainly maintain the current status quo

This author applauds the sentiment of the recently introduced statute but believes it has no real-world practical value This license requirement will continue to be ignored by most fee-only planners because of the incredible burden it places on them in terms of initial compliance and qualification In addition the statute to date remains un-enforced because the CDI lacks the manpower and funding within the civil enforcement division to even begin to attack this widespread problem Simply stated this recently introduced legislation demands aggressive investigation large fines and numerous prosecutions to achieve even partial compliance The CA Department of Insurance has instigated a consumer-complaint driven ldquoreactiverdquo role rather than a consumer-protective ldquoproactiverdquo enforcement campaign even after the introduction of CIC section 129218

One major reason for continued non-compliance is the requirement that applicants be registered as LX agents for five years preceding their examination and licensure as LArsquos

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Fee-only planners view this as being forced to move back into a house they have already sold) Secondary reasons include fee-only planners view the LA license as an over-qualification to perform the tasks they desire to perform there are no schools or colleges currently teaching the course work required to become LArsquos because a total lack of enforcement by the CDI of this statute has created a total lack of interest on the part of fee-only planners Also there are no teaching materials or publications available for purchase to prepare for the examination These problems and potential solutions are discussed in more detail in the section below

Finally it is fascinating and significant to note that while many fee-only planners firmly believe State and SEC investment adviser regulations are outdated irrelevant and sorely in need of a complete revision and overhaul if they permit planners to ldquoperform comprehensive financial planningrdquo few if any fee-only financial planners actually violate the Investment advisory statutes One major reason for this almost total compliance is because of the rigorous enforcement efforts of the Dept of Corporations the NASD and the SEC in regards to the Investment Adviser Act of 1940 and the severe penalties including imprisonment it imposes for offenders

In light of the foregoing this author has concluded that the only way consumers will be substantially protected from unlicensed insurance activities is if (a) meaningful reforms are enacted that make statutory compliance desirable and (b) cooperation is sought with other State agencies such as the Dept of Corporations and private professional regulatory organizations such as the CFP Board of Standards (discussed later) who regulate activities in related financial service categories to facilitate the sharing of information crucial in establishing which activities fee-only financial planners are engaging in

RECOGNIZING NEW DELIVERY METHODS IN THE BUSINESS OF INSURANCE

It is the authorrsquos belief that licensing compliance in the business of insurance will only become a reality when States recognize the recent rapid developments in the ldquomethods of deliveryrdquo of insurance advice nationwide particularly those associated with the emerging profession of financial planning More and more consumers have recognized the advantages of employing one trusted advisor for all their financial affairs and view insurance advice as part of an overall financial plan Californiarsquos consumers are cognizant that conflicts of interest exist in insurance planning because LX amp FX agents are only compensated by insurers and represent the insurerrsquos interests to the client not the clientrsquos interests to the insurer Such agency relationships impact the fee-only plannerrsquos ability to honor hisher fiduciary obligation to act in the clientrsquos best interests at all times

Fee-only planners desire to perform the tasks and functions of an LX amp FX licensee Few if any desire to perform the more complex tasks and analysis normally expected of a Life and Disability Analyst Fee-only planners are committed to eliminating the conflicts of interests associated with representing an insurer and many consumers in California desire to employ one fee-only planner to handle all their affairs including the insurance planning portion of their financial plan rather than multiple professionals The net effect of this is that many

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

consumers seek out fee-only planners to reduce conflicts while ostensibly obtaining objective and untainted advice Unfortunately they are instead often given incompetent advice by unlicensed individuals In order then to benefit and protect consumers substantial but beneficial reform is necessary

Fee-only planners with established financial planning credentials equate obtaining the LA license with ldquomoving back into a house they are trying to sellrdquo They feel competent and qualified to assist consumers in insurance planning and may have held insurance licenses for years prior to allowing them to lapse State law however demands they be licensed for five years preceding their application for licensing as Analysts and during that time they would need to ldquotransactrdquo insurance as a licensed LX agent something they do not feel they can do

As the author sees it the State has two choices in this matter It can either crack down on fee-only planners and others offering unlicensed insurance advice for a fee (hardly feasible based on lack of funding staffing or voluminous consumer complaints) or seek ways to legalize regulate and supervise these plannerrsquos activities Currently financial planners are regulated at the state level under Section 25009(b) of Californiarsquos Corporations Code Which states

Section 25009 (b) (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part of another 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 publishes analyses or reports concerning securitieshelliphelliphelliphelliphelliphelliphelliprdquo

While consumers nationwide have embraced the concept of comprehensive financial planning California along with most other States has been slow to recognize that financial planning has developed far beyond the simple giving of ldquoinvestmentrdquo advice Financial planners in California are still regulated supervised and audited by the Dept of Corporations which while skilled in terms of overseeing regulated securities transactions is woefully under equipped to supervise the activities of a planner engaging in insurance investment tax retirement estate and asset protection planning The Series 65 Investment Advisor Examination is the only legal requirement for those who desire to use the term ldquofinancial plannerrdquo in California However as the Series 65 training and education requirements23 illustrate the current State educational requirements for ldquofinancial plannersrdquo are far removed from the level of competency actually required to practice ldquofinancial planningrdquo

RECOGNITION OF ldquoFINANCIAL PLANNINGrdquo AS A PROFESSION

The State of California is well known for its innovative and forward thinking and has a unique opportunity as the bell-weather State of this nation to lead the way for other States to follow It is time for Californiarsquos regulatory and licensing bodies such as the Dept of Insurance and Dept of Corporations to recognize ldquofinancial planningrdquo as an ldquoemerging

Confidential Page 14 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

allied professionrdquo that is having a significant impact on the provision of services traditionally regulated by their agencies Recognizing the emerging profession of financial planning and recommending to the legislature the necessity of developing regulations that will govern professionals who desire to practice the profession of financial planning is the only viable sensible and logical long-term solution for protecting Californiarsquos consumers from harm

As with any other emerging profession the State in developing any such regulations should recognize and seek the counsel of long established national and international organizations that have developed rules guidelines ethics and ascertainable standards of education examination criteria credentialing and continuing education requirements Consideration should also be given as to whether a new or existing State agency should regulate the activities of financial planners or whether these activities should be regulated independent of agencies in allied professions such as those agencies governing insurance and securities As an example lawyers accountants and bank employees etc are provided limited exemptions from registration under insurance and securities laws because the State has concluded that their existing professional State licensing requirements contained in the Business and Professions Code established standards of practice and a written codes of ethics and professional responsibility provide sufficient protection to consumers without requiring multiple State licensure

Regulations governing investment advisers are inadequate to address the multitude of tasks performed by comprehensive financial planners The question therefore arises as to whether a separate state license and new regulations should be developed within the Business amp Professions Code to govern comprehensive financial planners that is separate and distinct from investment advisory services in order to adequately protect Californiarsquos consumers Should the use of the commonly touted investment industry term ldquofinancial plannerrdquo be reserved for individuals who have been State certified as competent to perform comprehensive financial planning The greatest obstacle to the recognition of financial planning as an emerging profession requiring some form of licensure is by what standards should such a profession be measured Many fee-only financial planners have no professional accreditation whatsoever other than the investment adviser registration overseen by the CA Dept of Corporations Have ascertainable and acceptable standards been developed

FINANCIAL PLANNING AND THE CERTIFIED FINANCIAL PLANNERreg

CERTIFICANT

The most widely recognized professional financial planning designation worldwide is the CFPreg Certificate The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS INC24 (Hereafter CFP Board) has licensed its CFPreg and CERTIFIED FINANCIAL PLANNERreg trademarks to over 67000 individuals in 19 countries There are currently 4578 CERTIFIED FINANCIAL PLANNERreg Certificants licensed in California25 Most CFPreg Certificants hold multiple State or federal licenses (insurance securities Registered Investment Advisor etc) and are already supervised in their professional activities by

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

multiple federal and or state agencies Sadly not one auditor of any supervising federal or state agency possesses the knowledge base or skill sets to supervise the overall activities of a comprehensive fee-only financial planner It should be stated that while the CFP Board has established a code of ethics and uniform standards of practice for CFPreg Certificants that could be used as a yardstick by legislators the CFP Board does not currently supervise investigate or audit any CFPreg Certificantrsquos activities unless a formal complaint is filed against a Certificant with the Board

The CFP Board defines a ldquofinancial plannerrdquo as a person ldquowho is capable and qualified to offer objective integrated comprehensive financial advice to or for the benefit of individuals to help them achieve their financial objectivesrdquo A financial planning professional must have the ability to provide competent financial planning services to the client utilizing the ldquofinancial planning processrdquo26 which covers basic ldquofinancial planning subject areasrdquo 27

With specific regard to the business of insurance it is important to understand the benefits provided by the CFPreg Certificate course of education as well as its shortcomings The CFP Board has developed a course curriculum (Attached as Exhibit IV) in insurance planning as an integral part of the CFPreg Certificate examination requirement This educational requirement exceeds the training currently required by the California Department of Insurance on all levels There are however shortcomings to the CFP Boardrsquos program that cannot be overlooked There is no training in State insurance regulations or any Statersquos insurance code provisions governing the business of insurance Furthermore while there is a mandatory requirement that each CFPreg Certificant complete 30 hours of continuing education for each two year certification period there is currently no requirement that all of these hours be approved by the CDI for insurance continuing education credits

The CFP Board of Standards is willing to cooperate with the CDI to address and correct the shortcomings in its program Once these problems have been corrected there are two potential solutions that if implemented could encourage full compliance with State licensing laws certainly on the part of CFPreg Certificant fee-only planners not currently licensed

SOLUTION 1 PROVIDE A FULL EXEMPTION FROM INSURANCE EXAMINATION AND LICENSING TO CFPreg CERTIFICANTS WHO ARE LICENSED AS REGISTERED INVESTMENT ADVISORS

Currently section 1831(e) provides a limited exemption from insurance licensing for Registered Investment Advisors (RIArsquos) but only ldquowhen acting in that capacityrdquo (Discussed in detail earlier) This suggestion would expand the relevant code section and remove any limitation from RIArsquos performing the tasks of a LX or FX agent providing the following conditions are met

1 The person is and remains a licensed Registered Investment Advisor either with the State or by the SEC AND

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

2 The person remains a CFPreg Certificant in good standing AND

3 The person in addition to any continuing education requirements of the CFP Board of Standards in other areas of financial planning completes no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

4 The person provide to the CA Dept of Insurance proof of his current licensing status as a Registered Investment Advisor and CFPreg Certificant together with a list of all approved continuing education courses completed for each two year period or whenever required to do so by the Dept of Insurance AND

5 Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

6 Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS EXEMPTION

As previously illustrated the Registered Investment Advisor license alone does not qualify a person to offer insurance advice for a fee The CFPreg Certificate alone even once enhanced to provide training in statutory law and the regulation of the business of insurance in California would be insufficient because the CFPreg Certificate is not an official State regulated license However a combination of the CFPtrade Certificate and the Registered Investment Advisor license coupled with the other suggestions made above will provide a sound educational basis for any person desiring to offer insurance advice for a fee while protecting the public from harm to a far greater degree than they are protected under current law In addition this proposed exemption would alleviate the need for fee-only CFPreg Certificants to become licensed LArsquos in order to be compensated by the consumer thereby eliminating the requirement that they license themselves as LXrsquos for 5 years before meeting licensing qualification requirements By NOT forcing fee-only planners to move into a house theyrsquove already moved out of BUT RATHER demanding competence in return for a waiver from LA licensing requirements the CA Dept of Insurance would protect the consumer while facilitating an opportunity for immediate compliance without expensive investigation of illegal activities prosecution and supervision of future activities Compliance would go up the cost of supervision investigation and prosecution would go down

It is important to note that any advice given would be limited under this proposed change to the typical advice offered by LX or FX licensees who generally provide explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures limits premiums rates deductibles payment plans and

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance contract or potential insurance contract terms as well as recommending andor advising potential applicantspolicyholders on insurance coverage to buy particular insurance policies or to insure with particular companies or insurers The advice given should not be allowed to encroach on the more complex tasks a Life amp Disability Analyst provides

This exemption will

bull Permit Registered Investment Advisors with a CFPreg Certificate to offer insurance advice without the need for appointment by an insurer and allow them to be compensated by a third party other than the insurer for that advice (A Variant of this model already exists in Connecticut and New Hampshire A very POORLY structured derivative (that this author does NOT support) has just been signed into law in Idaho The Idaho statute gives a Registered Investment Advisor carte blanche to offer insurance advice for a fee without any training examination or continuing education requirement in insurance planning a clear violation of the public trust In addition CFPreg Certificants will shortly be given an exemption from registration as Insurance Counselors (LA equivalent license for Texas) in Texas The author finds this unacceptable because again no instruction will be mandatory in insurance regulation and insurance law)

bull Require the candidate to complete a comprehensive course of education in among other things all aspects of insurance planning and demand state licensing (as an investment adviser) before qualifying for the exemption

bull Require continuing education of 30 hours in insurance planning a significant improvement over the LA license which requires NO continuing education currently

bull Leaves intact the State Insurance Commissionerrsquos authority (under CICsect790 et Seq And CICsect129218 (supra)) to supervise audit fine punish and bar from the business of insurance in CA any person who violates the publicrsquos trust

COMPARISON OF THE ldquoCFPreg PLUS REGISTERED INVESTMENT ADVISORrdquo EXEMPTION TO THE LIFE AND DISABILITY ANALYST LICENSE REQUIREMENT

There will still be a need for the Life amp Disability Analyst license in California LArsquos provide a valuable service to the public by

bull Offering expert testimony in court regarding all insurance related matters

bull Providing complex expert comparative analysis and interpretation of the terms and conditions of various insurance contracts to consumers accountants and lawyers

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

bull Explanation of the rights of the parties under an insurance contract a service otherwise reserved exclusively to members of the Bar

The proposed exemption would not obviate the need for LA licensees It will provide a means for fee-only Registered Investment Advisor financial planners who have earned the CFPreg Certificate a professional financial planning credential that has course work superior to the current minimum standard requirement by the CA Dept of Insurance (with the noted exceptions listed above which must be addressed before an exemption would be granted) to serve their clients basic insurance needs without appointment by an insurer and the inherent conflicts of interest this may represent

EFFECT OF THIS PROPOSED EXEMPTION ON CONSUMERS

This proposed exemption would have a substantially positive effect on consumers with no negative impact whatsoever They will be able to seek out a professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education It will further provide greatly enhanced protections for the public against wrongdoing by requiring a bond in the amount of $100000 (one hundred thousand dollars) and mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CA Department of Insurance (It should however be noted that most if not all CFPreg Certificants meet all the above criteria already in terms of EampO insurance etc and obtaining a $100000 bond would not place an undue burden on any fee-only CFPreg Certificant planner) Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their insurance matters

POTENTIAL PROBLEMS ASSOCIATED WITH THE GRANTING OF AN EXEMPTION FOR CFPreg CERTIFICANTS MEETING THE ABOVE CRITERIA

One possible problem would of course be that other financial service professionals with professional insurance or financial planning credentials would seek to block any such legislation unless their credential were to be included Some other designations worthy of exemption would be

The Chartered Life Underwriter (CLU) The Chartered Financial Consultant (ChFC)

The author based on the knowledge and skill sets required to hold such designations has no objections to the inclusion of these designations for purposes of the aforementioned suggested exemption providing these professionals meet ALL the other criteria

SOLUTION 2 PERMIT STATE LICENSING AS A LX OR FX WITHOUT INSURANCE COMPANY APPOINTMENT AND AUTHORIZE PLANNERS TO BILL CLIENTS DIRECTLY

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

Under California law a person who ldquofor a fee or compensation of any kind paid by or derived from any person or source other than an insurerrdquo(emphasis added) must register a Life and Disability Insurance Analyst under CIC Section 325 As previously illustrated in this discussion however Life and Disability Insurance Analysts are required to

bull Pass an antiquated examination that has not been substantially revised since 1983 bull Self-Study in some cases already repealed statutes because no examination

revisions have been undertaken since 1983 Furthermore no educational courses are available from any college school or professional educational institution because there is simply no demand for the license due to a complete lack of enforcement of LA laws by the CDI

bull Self Study to familiarize themselves with many topics including Long Term Care and other more recently introduced exotic and hybrid insurance products because candidates are not tested on these products due to lack of LA examination revision

Oddly once licensed Life and Disability Insurance Analysts are NOT required to complete any continuing education requirements of any kind There is no requirement other than one imposed by ldquopotential liabilityrdquo through civil action for a LA to ldquoremain currentrdquo as a LA licensee

In light of the foregoing a far more sensible alternative and second potential solution would be to allow all LX amp FX agents to be licensed with the CDI without the requirement for appointment to transact on behalf of an insurer LX or FX agents desiring to be compensated directly from the consumer (for purposes of this discussion the author will refer to such agents as FLX amp FFX agents) would subject themselves to the same CDI licensing and examination requirements as traditional LX amp FX agents FLX amp FFX agents would also be subject to the same continuing education requirements as traditional LX amp FX agents The function of FLX amp FFX licensed individuals would be to act ldquoquasirdquo in the capacity of a personal representative of the client with the authority to negotiate and effect all insurance coverages on their behalf at the best possible terms with any company they choose (As fiduciaries such FLX ampFFX licensees would be subject to regulations similar to the NASDrsquos ldquobest executionrdquo rules They would be required to perform extensive due diligence and seek the best coverages at the most reasonable prices on behalf of their clients)

Currently such activities allowed under CIC sect33 are restricted to ldquoa person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurerrdquo (Emphasis added) In essence then a similar but new and distinct section would be created expanding the role of an ldquoinsurance brokerrdquo as defined under CIC sect33 to that of a FLX amp FFX who would be authorized to solicit and negotiate all forms of insurance including property casualty life health disability long-term-care and other forms of insurance

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

This new Code section would make additional demands on any person seeking to license himherself as a FLX amp FFX licensee to protect consumers from harm Among other things such licensees would be required to

bull Complete BOTH LX and FX courses of education and the appropriate licensing examinations (Based on the CFP Boardrsquos program of education in insurance planning fee-only comprehensive financial planners provide information regarding all aspects of a consumerrsquos risk management needs

bull Be a licensed Registered Investment Advisor with the State AND

bull Complete no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

bull Provide to the CA Dept of Insurance proof of current licensing status as a Registered Investment Advisor together with a list of all approved continuing education courses completed each two year period or whenever required to do so by the Dept of Insurance AND

bull Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

bull Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS NEW LICENSE

This proposed license would have a substantially positive effect on consumers with no negative impact whatsoever Consumers will be able to seek out a ldquolicensedrdquo professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education The examination requirement supports the CDIrsquos position as stated in the February 8 1998 letter written by Jeffrey Kenny (Supra) that only those individuals who pass CDIrsquos exams are to be issued licenses and that the CDI will remain ldquovia its examination and related or regulatory functions the authorizing agencyhelliphelliprdquo in the business of insurance It will further provide greatly enhanced protections for consumers against wrongdoing by requiring a California surety bond in the amount of $100000 (one hundred thousand dollars) in addition to mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CDI Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their basic insurance needs on a fee-only basis

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

SUMMARY AND CONCLUSIONS

The California Dept of Insurance has essentially four choices

1 Maintain a Status Quo approach do nothing to address the illegal activities of fee-only financial planners remaining a reactive rather than proactive regulator of the business of insurance

2 Implement a program of rigorous investigation and enforcement of illegal activities in the business of insurance utilizing current and newly introduced sections of the California Insurance Code to stamp out the widespread and growing problem of illegal activities on the part of fee-only financial planners offering advice in insurance matters for a fee in California

3 Consider implementation of one or more of the solutions suggested in this discussion

4 Develop meaningful initiatives such as those suggested herein to combat andor provide solutions to illegal activities in the business of insurance

Maintaining the status quo and doing nothing to address the illegal activities of fee-only planners will eventually cause the CDI to lose control and regulatory authority over the business of providing insurance advice to consumers to other state agencies such as the Dept of Corporations an agency ill equipped and hardly qualified to supervise and monitor such activities More and more broker-dealer registered financial planners and life agents are transitioning to the more profitable fee-only model Without aggressive enforcement of the law many of these planners may eventually surrender their insurance licenses to avoid multiple state licensure layering of regulation supervision and audit The current lack of any enforcement by the CDI against prominent planners who have already been reported to CDIrsquos investigations division by Errold Moody CFPreg and others over the past ten years is an encouragement to other transitioning planners to ignore and violate State law Inaction equates to state condoned tolerance and silent approval in the eyes and minds of many fee-only financial planners

Rigorous investigation and enforcement while preferable is also the most difficult policy to enforce The CDI has neither the manpower nor the consumer driven complaints necessary to actively enforce insurance laws against fee-only planners violating state law Simply put these planners are ldquooff the radarrdquo and rarely generate complaints Since they are not licensed they do not fall under the authority of the CDI and unless they are brought to the attention of the CDI by virtue of consumer complaints these planners will continue to remain extremely difficult to find Additionally the CDI lacks proper funding and manpower to effectively enforce Insurance laws in California at this time Therefore any consideration for rigorous investigation and enforcement must be viewed as impractical given the current budget deficit and the apparent lack of will on the part of the CDI and local district attorneyrsquos offices to prosecute violators when they are reported

Confidential Page 22 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

By implementing one or more of the suggestions contained in this discussion the CDI will facilitate voluntary and willing compliance with state law while ensuring that their mandate to protect consumers from harm by insisting that CDI established examination licensing and continuing education requirements would be met Fee-only planners would be able to offer the advice they desire to offer on a fee basis with direct client billing the CDI would be in a far better position to supervise control audit and discipline these planners if and when the need arises More importantly consumers would be able to turn to the CDI for assistance without hearing the phrase ldquoIrsquom sorry that individual is not licensed and does not fall under our jurisdictionrdquo

In conclusion the CDI has the opportunity to solicit opinions and suggestions from state sponsored agencies and boards such as the CA Agent and Broker Advisory Commission to the Dept of Insurance Some members of the CDI Agent and Broker Advisory committee are fee-only CFPreg Certificants and have an understanding of the issues involved These professionals and other insurance professionals whose livelihoods also depend in part on ethical conduct in the business of insurance are in a position to provide valuable input to the CDI regarding these suggestions

It is hoped that this discussion will generate concern and renewed scrutiny of the illegal activities of fee-only planners in California and that this in turn will lead to a necessary beneficial and long overdue overhaul of Californiarsquos insurance licensing laws for the benefit of not only Californiarsquos consumers but eventually Consumers nationwide who reside in States with similar insurance advisory statutes

Respectfully submitted

Nigel B Taylor is a Certified Financial Plannerreg Certificant General Securities Principal and CA Life Agent associated with Royal Alliance Securities Inc He is a former President of the Award Winning Institute of Certified Financial Planners Los Angeles Society (1999) and Former Chairman of the Financial Planners Association ndash Los Angeles Chapter (2000) Mr Taylor has published numerous articles regarding proposed regulation compliance ethics and professionalism for financial planners and CFPreg Certificants He is based in Santa Monica California

1 CA Insurance Code Sections 32 amp 1622 2 Source Dept of Insurance Annual Report 2000 3 Source Dept of Insurance Annual Report 2000 4 CA Insurance Code Section 325 5 CA Insurance Code Sections 1849 6 Source CA Dept of Insurance March 2002 7 Source CA Dept of Corporations March 2002 8 25009 (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part

Confidential Page 23 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

of another business of advising others either directly or through publications or writings as to the value of securitieshelliphellip(Excerpt) 9 CA Insurance Code Section 325 10 CA Insurance Code Section 1668 The commissioner may deny an application for any license issued pursuant to this chapter if helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this state 11 CA Insurance Code Section 1844 Any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

12 CA Insurance Code 17255 (a) For purposes of Sections 325 1625 1626 17245 17581 1765 1800 14020 14021 and 15006 every licensee shall prominently affix type or cause to be printed on business cards written price quotations for insurance products and print advertisements distributed exclusively in this state for insurance products its license number in type the same size as any indicated telephone number address or fax number

CIC 17255 (c) Any person in violation of this section shall be subject to a fine levied by the commissioner in the amount of two hundred dollars ($200) for the first offense five hundred dollars ($500) for the second offense and one thousand dollars ($1000) for the third and subsequent offenses The penalty shall not exceed one thousand dollars ($1000) for any one offense These fines shall be deposited into the Insurance Fund

13 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the commissioner authorizing the person to act in that capacity 14 1858 In the construction of a statute or instrument the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein not to insert what has been omitted or to omit what has been inserted and where there are several provisions or particulars such a construction is if possible to be adopted as will give effect to all 15 Flannery v Prentice (2001) 110CalRptr2d 809 26Cal 4th 572 28P3d 860 16 People v Martinez (1995) 45CalRptr2d 905 11Cal4th 434 903P2d 1037 17 Caminetti v State Mut Life Ins Co (1942) 126P2d80926Cal 4th 572 28P3d 860 18 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the

Confidential Page 24 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

commissioner authorizing the person to act in that capacity The issuance of a certificate of authority to an insurer does not exempt an insurer from complying with this article

1633 Any person who acts offers to act or assumes to act in a capacity for which a license is required without a valid license so to act is guilty of a misdemeanor

16335 It is hereby declared to be the intent of the Legislature in enacting this chapter that the regulations prescribed herein be the exclusive regulations relating to the conduct of insurance business by persons licensed to act in any of the capacities defined hereunder any local regulations or ordinances notwithstanding 19 79001 This article applies to reciprocal and interinsurance exchanges Lloyds insurers fraternal benefit societies fraternal fire insurers grants and annuities societies insurers holding certificates of exemptions motor clubs nonprofit hospital associations life agents broker-agents surplus line brokers and special lines surplus line brokers as well as all other persons engaged in the business of insurance (color amp emphasis added)

20 79004 The commissioner shall have power to examine and investigate into the affairs of every person engaged in the business of insurance in the State in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 79003 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance Such investigation may be conducted pursuant to Article 2 (commencing at Section 11180) of Chapter 2 Part 1 Division 3 Title 2 of the Government Code

21 790035 (a) Any person who engages in any unfair method of competition or any unfair or deceptive act or practice defined in Section 79003 is liable to the state for a civil penalty to be fixed by the commissioner not to exceed five thousand dollars ($5000) for each act or if the act or practice was willful a civil penalty not to exceed ten thousand dollars ($10000) for each act The commissioner shall have the discretion to establish what constitutes an act However when the issuance amendment or servicing of a policy or endorsement is inadvertent all of those acts shall be a single act for the purpose of this section

22 129218 (a) The commissioner shall have the authority to issue a cease and desist order against any person acting as or holding himself herself or itself out as an insurance agent or broker without being so licensed and against any person holding out that person as transacting or transacting the business of insurance without having been issued a certificate of authority The commissioner may issue a cease and desist order without holding a hearing prior to issuance of the order The commissioner may impose a fine of up to five thousand dollars ($5000) for each day the order is violated

22 Supra 23 See Exhibit III of this memorandum

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

24 CFP Board a 501(c)(3) certifying organization fosters professional standards in

personal financial planning so that the public values has access to and benefits from competent financial planning CFP Board owns the certification marks CFPtrade CERTIFIED FINANCIAL PLANNERtrade and federally registered CFP (with flame) logo which it awards to individuals who successfully complete initial and ongoing certification requirements CFP Board has currently authorized more than 39214 individuals to use these marks in the United States and 27343 individuals outside the United States For more about CFP Board visit wwwCFPnet 25 Source CFP Board of Standards Inc Colorado 26 Financial Planning Process denotes the process which typically includes but is not limited to the six elements of establishing and defining the client-planner relationship gathering client data including goals analyzing and evaluating the clientrsquos financial status developing and presenting financial planning recommendations and monitoring the financial planning recommendations (CFPtrade Board Code of Ethics ndash Definitions) 27 Financial planning subject areas denotes the basic subject fields covered in the financial planning process which typically include but are not limited to financial statement preparation and analysis (including cash flow analysis planning and budgeting) investment planning (Including portfolio design ie asset allocation and portfolio management) income tax planning education planning Risk Management (emphasis added) retirement planning and estate planning (CFPtrade Board Code of Ethics ndash Definitions)

Confidential Page 26 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

EXHIBIT I

Confidential Page 27 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life Agent License Information

LIFE AGENT (LX) Licensing Information

TABLE OF CONTENTS

Authorizing acts and with definitions Qualifications Filing Requirements

Individual -- Residents Organization -- Residents Individual -- Non-Residents Organization -- Non-Residents

License Term Renewal of License Additional Information

APPLICABLE FORMS

Individual Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Action Notice of Appointment (Form 447-54) Organization Endorsement (Form 411-8A) Non-Resident Insurance License Stipulation and Agreement (Form 447-68)

These forms are also included in the Individual and Business Entity applications

AUTHORIZING ACT

California State Insurance Code Chapter 5 Part 2 Division 1

A life agent (LX) is a person authorized by and on behalf of a life disability or life and disability insurer to transact life disability or life and disability insurance

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

Prelicensing ExperienceEducation

1) Require a minimum of 40 hours of approved prelicensing classroom study A new California resident applicant who had a current life license in another state and completed 40 hours of prelicensing education for life insurance in order to obtain that license or an applicant holding either a Life Underwriter Training Council Fellowship (LUTCF) or Chartered Life Underwriter (CLU) designation is exempt from the 40 hours of prelicensing education

2) Require 12 hours of approved prelicensing classroom study on ethics and the California Insurance Code Where an applicant seeks both the Fire and Casualty broker-agent license and the Life agent license the applicant shall only be required to complete one 12-hour course on ethics and the California Insurance Code

Continuing Education

1) During each of the first four 12-month periods following the date of original issue of license satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to a minimum of 25 hours

2) Any licensee who has complied with the above or was licensed as of 123191 shall satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to 30 hours of instruction during each two-year license period

3) Any agent that markets long-term care insurance must complete an 8-hour California specific long-term care continuing education course Check with your insurer regarding long-term care insurance requirements

4) Effective January 01 1998 any person who is 70 years of age or older and who has been licensed for 30 continuous years as a licensee in good standing in this state may be exempt from continuing education requirement Any licensee that markets individual long-term care contracts is still required to meet the specific education requirements for marketing such contracts

The agent who is limited by the terms of a written agreement with the insurer to transact only specific life insurance policies or annuities having an initial face amount of $10000 or less that are designated by the purchaser for the payment of funeral or burial expenses will be exempted from the prelicensing and continuing education requirements The commissioner may require the insurer appointing those life agents to certify as to the limitation of the agents representations

FILING REQUIREMENTS INDIVIDUAL - RESIDENTS

Application Application for Insurance License form 441-9

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to CaliforniaThis form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants If an examination is required fingerprint impressions will be taken at the California examination sites

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Prelicensing Certificate Of Completion Original certificate(s) of completion signed by both classroom instructorprovider director and applicant for life agent course andor Ethics and Code course

Examination Applicants who do not hold an active Life (LX) California resident license and whose eligibility for that license without examination has expired must pass the written examination prepared and administered by the Department

Fees - Individual Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice or an Organization Endorsement $21 per notice Examination $35 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 all applicants must appear at the designated exam site with a check in the amount of $74 made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal Fee $124 (2-year term)

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 1

Life Agent License Information

FILING REQUIREMENTS ORGANIZATION - RESIDENTS

Organization Application

Corporation partnership unincorporated association limited liability company or nonprofit corporation applicants must submit the Application for Organization License form 441-11

NOTE The organization must have at least one California resident LX endorsee to establish and maintain the license

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each endorsee who holds an active California non-resident LX license Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Fees - Organization Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS INDIVIDUAL - NON-RESIDENTS

Application Application for Insurance License form 441-9 must be completed by applicants who do not hold an active California LX license

NOTE Licensed non-resident agents whose state of residence does not have continuing education must meet the same requirements as a California resident in order to renew their license Licensed non-resident agents who comply with the continuing education requirements of their state of residence are exempt from California continuing education requirements If licensees transact long term care products they must meet California specific long term care education requirements

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California This form is also included in the Individual and Business Entity applications

Stipulation and Agreement Non-resident Insurance Licensee Stipulation and Agreement form 447-68

Certification Of License Status From Resident State

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Examination Not required except if the applicants state commonwealth or Canadian province of residence has no reciprocal agreement for waiving of examination

Fees - Individual Non-Resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS ORGANIZATION - NON-RESIDENTS

Organization Application

Corporation partnership unincorporated association or nonprofit corporation applicants must submit the Application for Business Entity License form 441-11

Note A California resident cannot be endorsed on a non-resident organization

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each natural person who holds an active California non-resident LX license This form is also included in the Individual and Business Entity applications Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Stipulation and Agreement Non-resident Insurance License Stipulation and Agreement as required by law form 447-68 signed by an officer or partner of the organization

Certification Of License Status From Resident State Must be in the organization name

Fees - Organization Non-resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 2

Life Agent License Information

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed to the mailing address of record approximately 90 days prior to the expiration date of the license Individuals will receive a renewal application showing total fees due for all license types held and the total number of continuing education hours completed at the time the renewal form is printed If the continuing education requirement has not been met the renewal will indicate how many hours are needed If renewal application is not received refer to the back of the permanent license for renewal instructions

All licensees that renew their licenses late will be required to file new company appointments organization endorsements or solicitor appointments Late is defined as any renewal for which the requirements to renew (this includes completing the continuing education hours) are not met until after the expiration date of the previous license term

ADDITIONAL INFORMATION

The Commissioner may grant authority to transact variable contracts to a person or an organization licensed as a Life Agent which is appointed by an admitted insurer which is required to register itself or to register a separate account or fund with the United States Securities and Exchange Commission or to register its variable policies or contracts with the Securities and Exchange Commission The person must submit acceptable proof of registration with NASD or SECO before authority to transact variable contracts can be granted

If currently licensed as a resident of another state upon becoming a California resident a clearance letter from the former state of residence is required

Limited liability company applicants are required to submit the following information to demonstrate compliance with Section 16475 of the California Insurance Code

1 A statement as to the number of licensees rendering professional services on behalf of the Limited Liability Company

2 The aggregate dollar amount of E amp O Liability Insurance Cash Bonds Bank Certificates of Deposit US Treasury obligations etc held to provide security for claims against the Limited Liability Company (The amount required over the minimum of $500000 is at least $100000 multiplied by the number of licensees rendering professional services on behalf of the company however the maximum amount is not required to exceed $5000000)

3 For purposes of satisfying the security requirements of California Insurance Code Section 16475 we will require one or more of the following

(A) A copy of the declaration page for each liability insurance policy used to satisfy the minimum security requirement

(B) Verification by the bank or escrow holder listing the type and current dollar value of the assets used to satisfy the minimum security requirements

Limited liability company licensees must file at least once each year an annual confirmation with the commissioner in the above format to demonstrate continuing compliance with the financial security requirements of Section 16475 of the California Insurance Code

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 644A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - January 16 2002 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 3

EXHIBIT II

Confidential Page 31 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life and Disability Insurance Analyst License Information

LIFE AND DISABILITY INSURANCE ANALYST (LA) License Information

APPLICABLE FORMS

Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Organization Endorsement (Form 441-8A) Request For Live Scan Service (form 442-39A)

This form is also included in the Individual and Business Entity applications

AUTHORIZING ACT California State Insurance Code Chapter 8 Part 2 Division 1

A Life and Disability Insurance Analyst is a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is required

Prelicensing ExperienceEducation Must have worked as a life licensee as defined under Chapter 5 Part 2 Division 1 of the Insurance Code for five years preceding the date of the examination or as an employee of such a licensee

Continuing Education

Not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

FILING REQUIREMENTS - INDIVIDUAL

Application Application for Insurance License form 441-9

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants You must call SYLVANIDENTIX at 1-(800) 315-4507 to schedule an appointment to have your fingerprint impressions taken prior to submitting your application Fingerprint impressions will not be accepted from any other source A copy of your Request For Live Scan Service (form 442-39A) must be submitted with your application verifying your prints were taken by SYLVANIDENTIX

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

FEES - Individual

License Filing $418 (2-year term) Examination $103 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 this fee must be paid at the designated site when the fingerprint impressions are taken You may pay by check made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal $418 (2-year term )

EXAMINATION

The applicant must pass the written examination prepared and administered by the Department

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 1

Life and Disability Insurance Analyst License Information

STUDY MATERIAL

Although the Department does not recommend any particular text method or course of study listed below is a study guide to assist in the preparation for the examination 1) The life and disability laws of this state are contained in the California Insurance Code Those sections on which an applicant might be tested are

General Provisions Sections 1 - 46 Division 1 Part 1 Chapter 1 Sections 100 - 123 Division 1 Part 1 Chapter 2 Article 1 Sections 150 - 151 Division 1 Part 1 Chapter 2 Article 3 Sections 250 - 252 Division 1 Part 1 Chapter 2 Article 4 Sections 280 - 287 Division 1 Part 1 Chapter 2 Article 5 Sections 300 - 305 Division 1 Part 1 Chapter 3 Article 1 Sections 330 - 339 Division 1 Part 1 Chapter 3 Article 2 Sections 350 - 361 Division 1 Part 1 Chapter 4 Article 1 Sections 380 - 393 Division 1 Part 1 Chapter 4 Article 3 Section 430 Division 1 Part 1 Chapter 4 Article 4 Sections 440 - 449 Division 1 Part 1 Chapter 4 Article 5 Section 460 Division 1 Part 1 Chapter 5 Sections 480 - 489 Division 1 Part 1 Chapter 6 Article 3 Sections 550 - 5575 Division 1 Part 2 Chapter 1 Article 1 Section 680 Division 1 Part 2 Chapter 1 Article 3 Sections 669 - 726 Division 1 Part 2 Chapter 1 Article 5 Sections 750 - 767 Division 1 Part 2 Chapter 1 Article 55 Sections 770 - 776 Division 1 Part 2 Chapter 1 Article 57 Sections 7771 - 7773 Division 1 Part 2 Chapter 1 Article 6 Sections 780 - 784 Division 1 Part 2 Chapter 1 Article 65 Sections 790 - 79010 Division 1 Part 2 Chapter 1 Article 75 Sections 815 - 816 Division 1 Part 2 Chapter 2 Article 5 Sections 1220 - 1221 Division 1 Part 2 Chapter 4 Article 2 Sections 1580 - 1599 Division 1 Part 2 Chapter 5 Sections 1621 - 17585 Division 1 Part 2 Chapter 5A Sections 1759 - 175910 Division 1 Part 2 Chapter 8 Sections 1831 - 1849 Division 2 Part 2 Chapters 1-13 Sections 10110 - 11533 Division 2 Part 61 Sections 12670 - 12691 Division 3 Chapters 1 and 2 Sections 12900 - 12977

2) The provisions terms and conditions of a life and disability insurance contract that might be tested are but not limited to the following Life Insurance Disability Insurance

Insuring Agreement Insurance Clause Reinstatement Schedule Incontestability Renewal Provisions Settlement Options Benefit Provisions Dividend Options Co-Insurance Ownership Provisions Waiting Periods Nonforfeiture Provisions Elimination Periods Grace Periods Deductibles Loan Provisions Waivers Suicide Exclusions Assignments of Transfers Restrictions Aviation Clause Pre-existing Conditions Beneficiaries Provisions Other Insurance

Additionally the applicants are expected to be thoroughly familiar with the types of contracts being issued in this state including but not necessarily limited to Life Disability

Individual Contracts Individual ContractsGroup Contracts Group ContractsIndustrial Contracts Blanket ContractsOrdinary Life Basic Hospital ExpenseLimited Payment Life Basic Medical-Surgical ExpenseModified and Graded Premium Basic Hospital and Medical-Surgical ExpenseEndowment Insurance Hospital Confinement IndemnityImmediate Annuities Major Medical ExpenseDeferred Annuities Comprehensive Major Medical ExpenseVariable Annuities Disability Income ProtectionLevel Term Life Accident OnlyIncreasing Term Life Specified DiseaseDecreasing Term Life Specified AccidentRe-entry Term Life Medicare SupplementUniversal Life 3) A thorough and complete knowledge of life and disability insurance may include

a Application and consequences of various policies b Applications and consequences of federal and estate taxes c Interrelationship with other investment vehicles d Interrelationship with other regulatory agencies including but not limited to SEC RIA etc e Interrelationship with contract business probate and investment laws in California f Insurance companys financial and organization analysis g Rate calculations and risk transfer

FILING REQUIREMENTS - ORGANIZATION

Organization Application

Corporation partnership nonprofit corporation or unincorporated association applicants must submit the Application for Business Entity License form 441-11

Natural Person Named On Organization

Application for insurance license form 441-9 and Organization Endorsement form 411-8A must be completed by each natural person who does not hold an active California LX license (individual filing requirements must be met)

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 2

Life and Disability Insurance Analyst License Information

Organization Endorsement form 441-8A (this form is also included in the Business Entity application) must be completed for each natural person who holds an active California LX license

FEES - ORGANIZATION

Fees are not required for the organization license Each natural person named on the organization must pay individual fees

License filing $418 (2-year term) Renewal Fee $418 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed approximately 60 days prior to the expiration date of the license and will show total fees due for all license types held If this application is not received refer to the back of the permanent license for renewal instructions

ADDITIONAL INFORMATION

The following persons are exempt from the requirements of this license

a Active members of the State Bar of California

b Any person who has passed all of the qualifying examinations necessary to become an Associate of the Society of Actuaries

c An officer or employee of any bank or trust company who receives no compensation from sources other than the bank or trust company for activities connected with his employment which would otherwise subject him to licensing requirements

d Any person employed by an employer who on behalf of his or her employer or any employee of his or her employer transacts life or disability insurance with but not on behalf of an insurer or advises his or her employer or any employee of his or her employer in any manner concerning life or disability insurance if

1 the employer receives no compensation by reason of such transactions or advice and 2 such person receives no compensation from any source other than his or her employer for such transactions or advice

e An investment advisor as defined in Section 25009 of the Corporations Code when acting in that capacity

NOTE An employee or officer of any insurer is not eligible for a license as a Life and Disability Insurance Analyst

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 765A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - December 18 2000 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 3

EXHIBIT III

Confidential Page 35 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Series 65 Exam

The Uniform Investment Adviser Law Examination and the available study outline were developed by the North American Securities Administrators Association Inc (NASAA) The examination called the Series 65 exam is designed to qualify candidates as investment adviser representatives The exam covers topics that have been determined to be necessary to understand in order to provide investment advice to clients The study outline is designed to provide an overview of the exams general content and format

The study outline is divided into corresponding sections to aid in preparing for the examination

The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline Applicants are allowed 180 minutes to complete the examination At least 89 (685) of the questions must be answered correctly for an individual to pass the Series 65 exam

The examination is conducted as a closed book test Upon completion of the examination the score for each section and the overall test score will immediately be made available to the candidate

The examination is administered by the National Association of Securities Dealers Inc (NASD) To schedule a candidate for the examination an individuals firm should file a Form U-4 or the individual should file a Form U-10 and pay the $11000 examination fee to the NASD at the following address

NASD Regulation Inc Attention Exams Dept 9509 Key West Avenue Rockville MD 20850 301590-6500

Once registered NASD will open a 120-day window within which an individual may schedule the exam A link to the NASD Forms can be found at httpwwwnasdrcom3400asp More information on exam sites can be found at httpwwwnasdrcom2630asp

The questions in the examination the examination study outline and the method by which the examination is administered have been designed by Chauncey Group International for NASAA and approved by NASAA and the Competency Exam Project Group In addition each examination question is statistically analyzed to insure reliability

Any attempt to compromise the examination may serve to destroy its validity and usefulness Therefore NASAA intends to bring appropriate action against persons who attempt to compromise the examination in whole or in part In addition such conduct may subject a candidate to further action by state administrators

Successful completion of the Uniform Investment Adviser Law Examination does not relieve a candidate of the personal responsibility to know and to abide by the specific requirements of the securities laws and regulations of the states in which the candidate transacts business Furthermore although successful completion of the examination may satisfy a portion of the requirements of a particular state it does not convey the right to transact business prior to being granted a license or registration by that state

NASAA believes that the Uniform Investment Adviser Law Examination will significantly benefit the industry and state regulators alike by such uniformity The investing public will be afforded a greater degree of protection through enhanced uniform qualification standards

NASAA Uniform Investment Adviser Law Exam (Series 65)

Exam Specifications

CONTENT AREA

OF ITEMS

I Economics and Analysis

20

A B Understand basic economic concepts

1 Inflationdeflation a Definitions b Causes of inflationdeflation

2 Interest rates and yield curves a Graphs b Definitions c Interest rate = cost of money

3 Basic economic indicators a GDP b Employment indicators c Trade deficit d Balance of payments e CPI

A

determine investment merits A Income statement

a Revenues b Cost of goods sold c Pre-tax margins d Cash flow

B Balance sheet a Assets b Liabilities c Working capital d Owners equity e Footnotes

A

C Demonstrate understanding of quantitative methods to evaluate investments

A Time value of money B Expected return C Net present value D Internal rate of return E Inflation-adjusted return (real return) F After-tax returnyield G Risk-adjusted return H Total return I Holding period return J Yield-to-maturity K Yield-to-call L Current yield M Risk measurements (eg Beta standard deviation duration) N Valuation ratios (eg PE price-to-book) O Benchmark portfolios P Annualized return

D E Identify risks (ie definitions impact on the market companies

and personal investments) D Business E Market F Interest rate G Inflation H Regulatory (eg tax law changes) I Liquidity

J Opportunity cost

II Investment Vehicles

26

A B Evaluate cash and cash equivalents

A Types and characteristics of cash and cash equivalents a Certificates of deposit b Money market funds c Treasury bills

B Benefitsrisks of owning cash and cash equivalents

B C Evaluate fixed income securities

B Types and characteristics of fixed income securities a US government and agency securities b Mortgage-backed securities c Corporate bonds (ie investment grade and high yield) d Convertible bonds e Municipal bonds f Zero-coupon bonds

C Benefitsrisks of owning fixed income securities

C D Evaluate equity securities

C Types and characteristics of equity securities a Common stock (eg voting rights etc) b Preferred stock c Convertible preferred stock

D Methods used to determine the value of equity securities (eg technical and fundamental analyses dividend discount)

E Benefitsrisks of owning equity securities

D E Evaluate investment company securities

D Types and characteristics of investment companies a Open-end investment companies

(mutual funds)

b Closed-end investment companies c Classes of shareholders expense ratios sales load

breakpoints 12b-1 fees E Benefitsrisks of owning investment company securities

E Recognize derivative securities and their benefitsrisks

F G Understand unique aspects of international investing

F Emerging vs developed markets G American Depository Receipts (ADRs) H Currency influences (concept of risk)

G H Understand real estate partnerships and investment trusts

(REITs) and variable annuities G Definitions H Benefitsrisks

III Investment Recommendations and Strategies

39

A B Determine and analyze the financial profile of the client to

develop a suitable investment policy and strategy A Type of client

a Individual b Sole proprietorship c General partnership d Limited partnership (including family limited

partnership) e Limited liability company f C corporation g S corporation h Trust i Estate

B Financial goals C Current financial status (eg cash flow balance sheet) D Capital needs (eg current retirement death disability)

E Current investments and strategies F Time horizon G Non-financial investment considerations (eg values

attitudes experience demographic characteristics) H Risk tolerance I Tax situation

B C Understand portfolio management strategies styles and

techniques (fixed income and equities) B Portfolio management styles and strategies

a Strategic and tactical asset allocation (eg style asset class rebalancing)

b Active vs passive c Growth vs value d Market capitalization (micro small mid large) e Buyhold f Indexing g Diversification

C Funding techniques a Dollar-cost averaging b Income reinvestment (eg dividend interest cap gain)

C D Recognize fundamental taxation issues

C Individual income tax (eg capital gains tax basis retirement distribution alternative minimum tax)

D Corporate trust and estate income tax E Estate and gift tax

D E Recognize types of retirement plans and related issues

D Retirement plans a Individual Retirement Arrangements (IRA) b 403(b) plans c Qualified retirement plans (eg pension and profit

sharing 401(k)) d Nonqualified retirement plans

E Important ERISA issues a Fiduciary responsibility (eg 404(c)) b Investment policy statement

c Prohibited transactions

E F Define the fundamental terms and concepts of trading securities

E Terminology (eg bids offers quotes) F Role of broker-dealers specialists market-makers G Types of orders (eg market limit stop short sale) H Types of accounts (eg cash margin option) I Commissions markups spread

F G Calculate performance

F Calculate performance a Total return (ie yield plus growth) b Inflation-adjusted return c After-tax returnyield d Current yield

IV Ethics and Legal Guidelines

45

A B Understand relevant aspects of securities acts and other rules and

regulations in order to comply as an investment adviser representative

A Investment Company Act of 1940 B Investment Advisers Act of 1940 C Securities Act of 1933 and Securities Exchange Act of 1934

(as applicable to investment adviser issues) D SEC Release No IA-1092 (applicability of the Investment

Advisers Act to financial planners and others) E State securities laws (ie Blue Sky) F NASAA rules prohibiting dishonest and unethical business

practices G Limitations on permissible practice (ie technical licensing

requirements)

B C Demonstrate ability to apply ethical practices

B Fiduciary responsibility C Conflict of interest D Prudent Investor standards E Limitations on advice and activities (ie when to consult other

professionals)

EXHIBIT IV

Confidential Page 44 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

CFP Required subject matter for ldquoInsurance Planning and Risk Managementrdquo

CFPreg Candidates must complete comprehensive training in the following subject areas at a college or university whose program has been inspected and approved by the CFP Board This course represents approximately 20 of the educational requirement for CFP Candidates Other courses include ldquoFinancial Planning Fundamentalsrdquo ldquoInvestment Planningrdquo ldquoTax Planningrdquo ldquoRetirement Planning amp Qualified Plansrdquo and ldquoEstate Planningrdquo

Principles of insurance

A Definit ions and application of

principles

1) Risk

2) Peril

3) Hazard

4) Law of large numbers

5) Adverse selection

B Response to risk

1) Retain

2) Transfer

3) Control

4) Reduce

5) Avoid

C Mortality vs morbidity

Analysis and evaluation of risk

exposures

A Personal Insurance l ines

1) Death

2) Disability

3) Poor health

4) Unemployment

5) Outliving onersquos capital

B Property Insurance l ines

1) Real

2) Personal

3) Auto

C Liability Issues

1) Negligence

2) Libel

3) Slander

4) Malpractice

D Business-related risks

E Calculation of benefits

23 Legal aspects of insurance

A Indemnity

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Insurable interest

C Contract requirements

D Contract characterist ics

Property and casualty insurance

(individual and business)

A Real property

B Automobile and recreational

vehicles

C Business

D Business activity

E Personal property

F Umbrella liability

General business liability

A Professional l iabili ty

B Errors and omissions

D Product liability

Health insurance (individual)

A Hospital-surgical

B Major medical

C Traditional indemnity

D Preferred Provider Organization

(PPO)

E Health Maintenance Organization

(HMO)

F Medicare supplemental insurance

G Other

Disability income insurance

(individual)

A Occupational definit ions and

application

1) Total

2) Partial

3) Residual

C Directors and officers

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Benefit period

C Elimination period

D Benefit amount

E Riders

F Taxation of benefits

Long-term care insurance (individual

and joint)

A Basic provisions

B Eligibility

C Benefit amount and period

D Elimination period

E Inflation protection

F Nursing home and in-home care

G Comparing and selecting policies

H Tax implications and qualification

I Appropriateness of coverage

Life insurance

A Fundamentals

B Types

C Contractual provisions

D Dividend options

E Non-forfeiture and other options

F Settlement options

G Policy replacement

H Tax issues and strategies

I Policy ownership issues and

strategies including split-dollar

Viatical settlements

A Legal principles

B Requirements

C Tax implications

D Planning

E Ethical concepts and planning

Insurance needs analysis and

rationale

A Life insurance amount required

1) Liquidity and survivor income needs

2) Human life value

3) Capital retention

B Disabili ty insurance

C Long-term care insurance

D Health insurance

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

E Property insurance E Reinsurance

F Liabili ty insurance F Investments

Taxation of l ife disability and long- G Underwriting

term care insurance H Federal and state law

A Income

B Gift

C Estate

D Generation-Skipping Transfer

Tax (GSTT)

E Ownership issues

F Beneficiary issues

G Withdrawals

Insurance policy selection

A Purpose of coverage

B Length of t ime required

C Risk tolerance

D Cash flow constraints

Insurance company selection and due

diligence

A Financials

B Ratios

C Ratings

D Mutual vs stock

Source CFP Board of Standards Inc Denver CO

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

CURRENT ISSUE

PAST ISSUES

RIA Survey 2011 Click Here

ADVISOR SERVICES Broker-Dealers

CustodianFee-Only

Technology

ADVICE 401(k) plans

Annuities

Business Transitions

ComplianceFraud

Economy

Education529

Estate Planning

Insurance

Practice Management

Retirement Planning

Retirement Income

Social Media

Tax Planning

Women in Planning

INVESTING Alternative Investments

Analysis

Commodities

ETFs

Fixed Income

International

Mutual Funds

Free Site RegistrationgtgtLogin Logout

SEARCH GO December 10 2011

HOME CE CENTER WEBCASTS CONFERENCES EVENTS SUBSCRIBE

November 23 2011

SEC OFFICIAL SCRUTINIZED FOR lsquoCRASH-PROOF RETIREMENTrsquo INTERVIEW WITH ADVISOR

(Bloomberg News) The US Securities and Exchange Commissionrsquos internal watchdog has come under scrutiny for comments he made in a 75-minute videotaped interview about the agency and the stock market to a man who markets a ldquocrash-proof retirementrdquo plan through the Internet and a paid radio program

SEC Inspector General H David Kotz has been contacted about the matter by the agencyrsquos general counselrsquos office which also has briefed the SECrsquos commissioners over concerns the interview could be construed as investment advice or an endorsement of financial services

Phillip Cannella III chief executive officer of First Senior Financial Group in King of Prussia Pennsylvania edited the interview he conducted at SEC headquarters in late July into more than a dozen video segments He posted them on YouTube and his website wwwcrashproofretirementcom and plays them on the radio as well as during his seminars about insurance products for retirees

The SEC doesnrsquot ban its employees from interviews with people connected to commercial ventures Kotz said he cleared the matter in advance with the SECrsquos internal ethics counsel He told SEC officials he would ask an outside group the Council of Inspectors General on Integrity and Efficiency to look into whether he said or did anything improper in the interview according to two people briefed on the situation

The Federal Bureau of Investigation which oversees the panel within the inspector generalrsquos group that deals with integrity matters doesnrsquot comment on its inquiries said William Carter an FBI spokesman

lsquoAppropriate Caveatsrsquo

Kotz said in an e-mailed statement to Bloomberg News that he provided ldquoall the appropriate caveats and disclaimersrdquo to Cannella and ldquospecifically stated in the radio interview that I was not in a position to nor was I providing investment advicerdquo

SEC Chairman Mary Schapiro said in a statement that she appreciated that Kotz requested an independent review

ldquoDavid Kotz is an experienced professional with expertise in the ethics rules who I

believe would not intentionally create an appearance issuerdquo Schapiro said

The SEC didnrsquot say if it was taking further action on the matter The agencyrsquos ethics counsel Shira Pavis Minton didnrsquot respond to a request for comment

In the interview segments posted on the website Kotz discusses issues ranging from the Bernard Madoff fraud to the difficulties the SEC faces policing Wall Street A press release issued by Cannellarsquos company headlined Kotzrsquos suggestion that retirees consider cutting their investments in stocks

lsquoTurbulent Timesrsquo

ldquoSo much money is in the stock market where peoplersquos lives are so affected by it that sometimes it may make sense to take things out in turbulent times to ensure that yoursquore not living and dying so to speak by the Dow Jones going up and downrdquo Kotz told Cannella as the two sat in the agencyrsquos Washington offices in front of the SEC seal ldquoParticularly with whatrsquos occurred over the last several yearsrdquo

Kotz also discusses the SECrsquos past shortcomings and says the agency has improved being a ldquofundamentally different place now than when I first started at the SEC and before we issued our Madoff reportrdquo

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 1 of 2

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

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Cannella said in a phone interview that he was contacted by an SEC attorney several weeks ago asking that he put a disclaimer on the videos to make clear that neither the agency nor Kotz endorse sponsor or promote his firm Cannella said he quickly complied Kotz said he supported efforts by the SECrsquos general counselrsquos office ldquoto ensure that my interview is not being used to endorse any productrdquo

lsquoNot a Journalistrsquo

Cannella said he was pleased to be able to interview a high-level government official like Kotz -- a man he said he greatly respects While it costs him $12000 a week to air the radio show on two Philadelphia area stations Cannella said he treats it like a consumer advocacy program not an infomercial

ldquoI canrsquot believe myselfrdquo Cannella said ldquoIrsquom not a journalist and I got over a 75-minute interview with Kotz inside the SEC buildingrdquo

Besides the radio program Cannella said he holds ldquoeducational eventsrdquo in restaurants where he teaches people in their 50s and older about ldquosafe investment alternatives in the insurance industryrdquo His website has clips of prospective clients being asked about their reaction to watching the Kotz interview

One woman who wasnrsquot identified in the video said that Cannellarsquos interview with the inspector general shows that the host is ldquostanding up for the little people and very admirable and thatrsquos one of the reasons that Irsquom very anxious to proceed with Philrdquo

Probes

In another clip an unidentified man said ldquoIt was incredible to find out that the SEC feels like it canrsquot police the securities industry because it doesnrsquot have the funding or the manpowerrdquo

The fracas adds a new chapter to Kotzrsquos contentious four-year tenure at the SEC In recent months current and former officials have spoken out about what they say are his overly aggressive probes and their negative impact on the agencyrsquos ability to police the markets Earlier this month the Justice Department declined to open an investigation into Kotzrsquos allegations that former SEC General Counsel David Becker violated ethics laws

Kotz and his supporters have dismissed the complaints saying his oversight has done much to help the SEC burnish its image after it was widely attacked for missing massive frauds like Madoffrsquos and the alleged Ponzi scheme run by R Allen Stanford

Commissions

In his interview with Cannella Kotz said victims of investment schemes ldquodeserve a strong vibrant effective aggressive SEC that goes after those people gets their money back as possible and puts them in jailrdquo

Because he doesnrsquot sell securities Cannella isnrsquot regulated by the SEC He said he is licensed to sell insurance in over 40 states His company puts together individual plans for clients and then earns commission on products they buy from an insurance company He described the investments as ldquoguaranteed tax-deferred contractual agreements with income options from a statutory corporationrdquo

The investments are ldquooutside of the securities industryrdquo and ldquomany of them have outperformed the markets since their inception with no market risk no market fees no upfront commissions or sales costsrdquo he added

The trade magazine Senior Market Advisor in January 2008 reported that Cannella said he wrote about $25 million in premiums in 2007 for fixed index annuities Cannella said he didnrsquot want to put a specific name on the investments he sells because he thinks the media has misreported on the products

ldquoIrsquom not well-liked among securities guys because I am speaking truth and logic to a deceptive industryrdquo Cannella said ldquoYou canrsquot beat the sword of truthrdquo

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 2 of 2

United States Government Accountability Office

Report to Congressional AddresseesGAO

January 2011 CONSUMER FINANCE

Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

GAO-11-235

January 2011

CONSUMER FINANCE Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

Accountability bull Integrity bull Reliability

Highlights of GAO-11-235 a report to congressional addressees

Why GAO Did This Study

Consumers are increasingly turning for help to financial plannersmdash individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products and managing tax and estate planning The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners This report examines (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of this regulation and (3) the advantages and disadvantages of alternative regulatory approaches To address these objectives GAO reviewed federal and state statutes and regulations analyzed complaint and enforcement activity and interviewed federal and state government entities and organizations representing financial planners various other arms of the financial services industry and consumers

What GAO Recommends

GAO recommends that (1) NAIC assess consumersrsquo understanding of the standards of care associated with the sale of insurance products (2) SEC assess investorsrsquo understanding of financial plannersrsquo titles and designations and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers NAIC said it would consider GAOrsquos recommendation and SEC provided no comments

View GAO-11-235 or key components For more information contact Alicia Puente Cackley at (202) 512-8678 or cackleyagaogov

What GAO Found

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level but various laws and regulations apply to most of the services they provide Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners

The regulatory structure applicable to financial planners covers the great majority of their services but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain First consumers may be unclear about when a financial planner is required to serve the clientrsquos best interest particularly when the same financial planner provides multiple services associated with different standards of care SEC is studying these issues with regard to securities transactions but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products Second financial planners can adopt numerous titles and designations which vary greatly in the expertise or training that they signify but consumers may not understand or be able to distinguish among them SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed Finally the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole A regulatory system should have data to identify risks and problem areas and given that financial planning is a growing industry that has raised certain consumer protection issues regulators could benefit from better information on the extent of problems specifically involving financial planning services

A number of stakeholders have proposed different approaches to the regulation of financial planners including (1) creation of a federally chartered board overseeing financial planners as a distinct profession (2) augmenting oversight of investment advisers with a self-regulatory organization (3) extending the fiduciary standard of care to more financial services professionals and (4) specifying standards for financial planners and the designations that they use While the views of stakeholder interests vary a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities Given available information an additional layer of regulation specific to financial planners does not appear to be warranted at this time

United States Government Accountability Office

Contents

Letter 1

Background 2 Various Federal and State Laws and Regulations Apply to Financial

Planners and Their Activities 3 Regulatory Structure for Financial Planners Covers Most Activities

but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited 11

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed 28

Conclusions 33 Recommendations 34 Agency Comments 35

Appendix I Scope and Methodology

Appendix II Comments from the National Association of

Insurance Commissioners

Appendix III Comments from the North American Securities

Administrators Association

Appendix IV GAO Contact and Staff Acknowledgments

Figures

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act 5

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners 12

Figure 3 Differences in the Standards of Care Required of Financial Planners 17

Page i GAO-11-235 Consumer Finance

37

41

42

46

Abbreviations

Advisers Act Investment Advisers Act of 1940 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer

Protection Act FINRA Financial Industry Regulatory Authority Form ADV Uniform Application for Investment Adviser

Registration FTC Federal Trade Commission NAIC National Association of Insurance Commissioners NASAA North American Securities Administrators Association SEC Securities and Exchange Commission

This is a work of the US government and is not subject to copyright protection in the United States The published product may be reproduced and distributed in its entirety without further permission from GAO However because this work may contain copyrighted images or other material permission from the copyright holder may be necessary if you wish to reproduce this material separately

Page ii GAO-11-235 Consumer Finance

United States Government Accountability Office

Washington DC 20548

January 18 2011

Congressional Addressees

Consumers are increasingly turning for help to professionals who describe themselves as financial planners for assistance with a broad range of services such as selecting the right balance of stocks and bonds for an investment portfolio choosing among insurance products and tax and estate planning Although there is no statutory or single definition of financial planning it can be broadly defined as a systematic process that individuals use to achieve their financial goals Between 2000 and 2008 the number of financial planners more than doubled and may continue to climb as more individuals are asked to take responsibility for their retirement savings and must choose among a growing array of investment options

Some financial planning organizations have raised concerns that no single law governs providers of financial planning services broadly describing this situation as a regulatory gap Concerns also exist that financial planners may have an inherent conflict of interest in recommending products they may stand to benefit from selling In addition some consumer advocates believe consumers may be confused by the numerous titles and designations that financial planners can use This report responds to a mandate included in Section 919C of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that directed GAO to conduct a study on the oversight and regulation of financial planners Our objectives are to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

To address these objectives we reviewed federal and selected state statutes and regulations applicable to financial planners We also reviewed regulations issued by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) and model laws developed by the National Association of Insurance Commissioners (NAIC) and by the North American Securities Administrators Association (NASAA) In addition we reviewed applicable securities and insurance laws and regulations of five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texas We also interviewed representatives of and

Page 1 GAO-11-235 Consumer Finance

gathered documentation from SEC FINRA the Federal Trade Commission (FTC) NAIC and organizations representing the interests of consumers financial planners and various arms of the financial services industry In addition we gathered information on complaints and enforcement activity as available from SEC FINRA FTC and selected state regulators and organizations A more extensive discussion of our scope and methodology appears in appendix I

We conducted this performance audit from June 2010 to January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Background Financial planning typically involves a variety of services including preparing financial plans for clients based on their financial circumstances and objectives and making recommendations for specific actions clients may take In many cases financial planners also help implement these recommendations by for example providing insurance products securities or other investments Individuals who provide financial planning services may call themselves a variety of different titles such as financial planner financial consultant financial adviser trust advisor or wealth manager In addition many financial planners have privately conferred professional designations or certifications such as Certified Financial Plannerreg Chartered Financial Consultantreg or Personal Financial Specialist

The number of financial planners in the United States rose from approximately 94000 in 2000 to 208400 in 2008 according to the Bureau of Labor Statistics The bureau projects the number will rise to 271200 by 2018 because of the need for advisers to assist the millions of workers expected to retire in the next 10 years1 According to the bureau 29 percent of financial planners are self-employed and the remaining 71

1While the Bureau of Labor Statistics reports these statistics using the term ldquofinancial adviserrdquo bureau officials said that this term could be used interchangeably with financial planner The bureau broadly defined a ldquopersonal financial adviserrdquo as an individual who provides financial planning services and that private bankers or wealth managers would also be categorized as financial advisers

Page 2 GAO-11-235 Consumer Finance

percent are employees of firms some of them large entities with offices nationwide that provide a variety of financial services The median annual wage for financial planners was $68200 in May 2009

According to an analysis of the 2007 Survey of Consumer Finances the most recent year for which survey results are available in 2007 about 22 percent of US households used a financial planner for investment and saving decisions and about 12 percent of US households used a financial planner for making credit and borrowing decisions Those households most likely to use a financial planner were those with higher incomes For example 37 percent of households in the top income quartile used a financial planner to make investment and saving decisions compared to 10 percent of households in the bottom quartile2

Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities

Financial planners are primarily regulated by federal and state investment adviser laws because planners typically provide advice about securities as part of their business In addition financial planners that sell securities or insurance products are subject to applicable laws governing broker-dealers and insurance agents Certain laws and regulations can also apply to the use of the titles designations and marketing materials that financial planners use

Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level However the activities of financial planners are primarily regulated under federal and state laws and regulations governing investment advisersmdashthat is individuals or firms that provide investment advice about securities for compensation According to SEC staff financial planning normally includes making general or specific recommendations about securities insurance savings and anticipated retirement3 SEC has issued guidance that broadly interprets the Investment Advisers Act of 1940 (Advisers Act) to apply to most financial planners because the advisory services they offer clients typically include

2Our percentage estimates based on the 2007 Survey of Consumer Finances have 95 percent confidence intervals of +- 25 percentage points or less For example we are 95 percent confident that between 82 and 118 percent of households in the bottom quartile used financial planners for investment decisions See appendix I for additional information

3Investment Adviser Act Release No 1092 52 Fed Reg 38400 38401 (Oct 16 1987) (IA Rel No 1092)

Page 3 GAO-11-235 Consumer Finance

providing advice about securities for compensation4 Similarly NASAA representatives told us that states take a similar approach on the application of investment adviser laws to financial planners and as a result generally register and oversee financial planners as investment advisers As investment advisers financial planners are subject to a fiduciary standard of care when they provide advisory services so that the planner ldquo[is] held to the highest standards of conduct and must act in the best interest of [the adviserrsquos] clientsrdquo5

SEC and state securities departments share responsibility for the oversight of investment advisers in accordance with the Advisers Act6 Under that act SEC generally oversees investment adviser firms that manage $25 million or more in client assets and the states that require registration oversee those firms that manage less7 However as a result of section 410 of the Dodd-Frank Act as of July 2011 the states generally will have registration and oversight responsibilities for investment adviser firms that manage less than $100 million in client assets instead of firms that manage less than $25 million in assets as under current law8 This will result in the states gaining responsibility for firms with assets under management between $25 million and $100 million As shown in figure 1 as of October 2010 of the approximately 16000 investment adviser firms providing

4The Advisers Act defines an investment adviser as any person (ie individual or firm) who is in the business of providing advice or issuing reports or analyses regarding securities for compensation 15 USC sect 80b-2(a)(11) IA Rel No 1092 In addition to applicable securities law investment advice related to a retirement savings plan such as a 401(k) plan may also be subject to the Employee Retirement Income Security Act The requirements under that act are outside the scope of this study A forthcoming GAO report GAO-11-119 will provide more information on investment advice in 401(k) plans

5In SEC v Capital Gains Research Bureau Inc 375 US 180 189-192 (1963) the US Supreme Court recognized that the Advisers Act imposes a fiduciary duty on investment advisers This standard imposes an affirmative duty to act solely in the best interests of the client The investment adviser also must eliminate or disclose all conflicts of interest

615 USC sect 80b-3a The term investment adviser can refer to a person or firm Investment adviser firms generally register with SEC or state securities departments as registered investment advisers According to NASAA certain natural persons that are employed by firms generally register with the state securities departments as investment adviser representatives

7Id Under 17 CFR sect 275203A-1 SEC registration has been optional for certain

investment advisers having assets under management between $25 and $30 million Firms also may have a different basis for registering with SEC (other than the amount of client assets the firm has under management) such as whether the principal office and place of business are within a state that has no registration requirement

8Pub L No 111-203 sect 410 124 Stat 1376 1576-77 (2010)

Page 4 GAO-11-235 Consumer Finance

financial planning services the states were overseeing about 11100 firms and SEC was overseeing about 4900 such firms9 However in July 2011 about 2400 of investment adviser firms that provided financial planning services (15 percent of the 16000 firms) may shift from SEC to state oversight10

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act

SECrsquos supervision of investment adviser firms includes evaluating their compliance with federal securities laws by conducting examinations of firmsmdashincluding reviewing disclosures made to customersmdashand investigating and imposing sanctions for violations of securities laws According to SEC staff in its examinations the agency takes specific steps to review the financial planning services of investment advisers For example SEC may review a sample of financial plans that the firm prepared for its customers to check whether the firmrsquos advice and investment recommendations are consistent with customersrsquo goals the contract with the firm and the firmrsquos disclosures

9In registering with SEC or a state investment adviser firms are required to report whether they provide financial planning services in Part 1A of the Uniform Application for Investment Adviser Registration Item 5 G(1) SEC does not provide a definition of financial planning services for firms to use when completing the registration form The total number of investment adviser firms overseenmdashincluding both those that do and do not provide financial planning servicesmdashis 15016 for the states and 11873 for SEC For data on investment adviser firms firms that were registered with both SEC and the states were counted with SEC-registered investment adviser firms

10See 75 Fed Reg 77052 (Dec 10 2010) (SEC proposed rule which if finalized would give advisers until August 20 2011 to report the market value of their assets under management to the SEC as the first step in the process)

Page 5 GAO-11-235 Consumer Finance

However the frequency with which SEC conducts these examinations varies largely because of resource constraints faced by the agency11 SEC staff told us that the agency examined only about 10 percent of the investment advisers it supervises in 2009 In addition they noted that generally an investment adviser is examined on average every 12 to 15 years although firms considered to be of higher risk are examined more frequently In 2007 we noted that harmful practices could go undetected because investment adviser firms rated lower-risk are unlikely to undergo routine examinations within a reasonable period of time if at all12

According to NASAA state oversight of investment adviser firms generally includes activities similar to those undertaken by SEC including taking specific steps to review a firmrsquos financial planning services According to NASAA states generally register not just investment adviser firms but also investment adviser representativesmdashthat is individuals who provide investment advice and work for a state- or federally registered investment adviser firm13

Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities

In addition to providing advisory services such as developing a financial plan financial planners generally help clients implement the plan by making specific recommendations and by selling securities insurance products and other investments SEC data show that as of October 2010 19 percent of investment adviser firms that provided financial planning

11GAO Securities and Exchange Commission Steps Being Taken to Make Examination

Program More Risk-Based and Transparent GAO-07-1053 (Washington DC Aug 14 2007) As we noted since the detection of mutual fund trading abuses in late 2003 in light of limited resources SEC has shifted its approach to examinations of investment advisers from one that focused on routinely examining all registered firms regardless of risk to one that focuses on more frequently examining those firms and industry practices at higher risk for compliance issues

12GAO-07-1053 SEC reported in February 2010 that it is now placing a greater emphasis on fraud detection in addition to identifying potential violations of securities laws and rules strengthening procedures and internal controls to maximize limited resources recruiting examiners with specialized skills and increasing expertise through enhanced training

13According to NASAA New York Minnesota and Wyoming do not register investment adviser representatives although New York and Minnesota do have certain examination and other requirements that must be met

Page 6 GAO-11-235 Consumer Finance

services also provided brokerage services and 27 percent provided insurance14

Financial planners that provide brokerage services such as buying or selling stocks bonds or mutual fund shares are subject to broker-dealer regulation at the federal and state levels At the federal level SEC oversees US broker-dealers and SECrsquos oversight is supplemented by self-regulatory organizations (SRO)15 The primary SRO for broker-dealers is FINRA State securities offices work in conjunction with SEC and FINRA to regulate securities firms Salespersons working for broker-dealers are subject to state registration requirements including examinations About half of broker-dealers were examined in 2009 by SEC and SROs Under broker-dealer regulation financial planners are held to a suitability standard of care when making a recommendation to a client to buy or sell a security meaning that they must recommend those securities that they reasonably believe are suitable for the customer16

Financial planners that sell insurance products such as life insurance or annuities must be licensed by the states to sell these products and are subject to state insurance regulation In contrast to securities entities (other than national banks) that are subject to dual federal and state oversight the states are generally responsible for regulating the business of insurance When acting as insurance agents financial planners are

14The brokerage and insurance services provided by these investment adviser firms are not necessarily a part of their financial planning services In addition many financial planners may sell securities- or insurance-related products through affiliated brokers or agents

15The primary law for regulating broker-dealers is the Securities Exchange Act of 1934 codified at 15 USC sectsect 78a-78oo Brokers effect transactions for the account of others while dealers buy and sell securities for their own accounts 15 USC sect 78c The term registered representative is generally used to refer to certain employees of a broker-dealer firm who are engaged in providing securities recommendations Broker-dealers must be members of a qualifying self-regulatory organization (either a national exchange or a registered securities association) 15 USC sect 78o(b)(8)

16Under NASD Conduct Rule 2310 a FINRA member making an investment recommendation to a customer must have grounds for believing that the recommendation is suitable for that customerrsquos financial situation and needs In November 2010 SEC approved FINRArsquos proposed new consolidated rules governing the suitability obligations of its members 75 Fed Reg 71479 (Nov 23 2010) This rule proposed FINRA Rule 2111 requires salespersons to have a reasonable basis for believing based on adequate due diligence that a recommendation of a transaction or strategy is suitable for at least some investors that the recommendation is suitable for a specific customer based on that customerrsquos profile and that a series of recommended transactions is not excessive and unsuitable for the customer

Page 7 GAO-11-235 Consumer Finance

subject to state standard of care requirements which can vary by product and by state As of October 2010 32 states had adopted a previous version of the NAIC Suitability in Annuities Transactions Model Regulation according to NAIC17 In general this regulation requires insurance agents to appropriately address consumersrsquo insurance needs and financial objectives at the time of an annuity transaction18 Thirty-four states had also adopted the Life Insurance Disclosure Model Regulation in a uniform and substantially similar manner as of July 2010 according to NAIC This regulation does not include a suitability requirement although it does require insurers to provide customers with information that will improve their ability to select the most appropriate life insurance plan for their needs and improve their understanding of the policyrsquos basic features

Financial planners that sell variable insurance products such as variable life insurance or variable annuities are subject to both state insurance regulation and broker-dealer regulation because these products are regulated as both securities and insurance products When selling variable insurance financial planners are subject to FINRA sales practice standards requiring that such sales be subject to suitability standards19 In addition other FINRA rules and guidance such as those governing standards for communication with the public apply to the sale of variable insurance products20 In addition as previously discussed 32 states also generally require insurance agents and companies to appropriately address a consumerrsquos insurance needs and financial objectives at the time of an annuity transaction However in the past we have reported that the effectiveness of market conduct regulationmdashthat is examination of the sales practices and behavior of insurersmdashmay be limited by a lack of

17NAIC amended this model regulation in March 2010 according to NAIC one state has adopted the updated model and additional states are expected to do so

18According to NAIC in 4 of these 32 states the regulation applies only when the consumers are senior citizens

19NASD Notice to Members 96-86 outlines that variable contracts for insurance products are subject to suitability requirements

20NASD Interpretive Material 2210-2 outlines guidance concerning communications with the public about variable life insurance and variable annuities FINRA has proposed that this guidance be replaced by a separate new FINRA Rule 2211 See FINRA Rule Filing No SR-FINRA-2009-070

Page 8 GAO-11-235 Consumer Finance

reciprocity and uniformity which may lead to uneven consumer protection across states21

Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations

At the federal level SEC and FINRA have regulations on advertising and standards of communication that apply to the strategies investment adviser firms and broker-dealers use to market their financial planning services For example SEC-registered investment advisers must follow SEC regulations on advertising and other communications which prohibit false or misleading advertisements and these regulations apply to investment advisersrsquo marketing of financial planning services22 FINRA regulations on standards for communication with the public similarly prohibit false exaggerated unwarranted or misleading statements or claims by broker-dealers and broker-dealer advertisements are subject to additional approval filing and recordkeeping requirements and review procedures23 According to many company officials we spoke with their companies responded to these requirements by putting procedures in place to determine which designations and titles their registered representatives may use in their marketing materials such as business cards

SEC and state securities regulators also regulate information that investment advisers are required to disclose to their clients In the Uniform Application for Investment Adviser Registration (Form ADV) regulators have typically required investment adviser firms to provide new and prospective clients with background information such as the basis of the advisory fees types of services provided (such as financial planning services) and strategies for addressing conflicts of interest that may arise

21GAO Insurance Reciprocity and Uniformity NAIC and State Regulators Have Made

Progress in Producer Licensing Product Approval and Market Conduct Regulation but

Challenges Remain GAO-09-372 (Washington DC Apr 6 2009) Reciprocity refers to the extent to which state regulators accept other statesrsquo regulatory actions Uniformity refers to the extent to which states have implemented either the same or substantially similar regulatory standards and procedures

2217 CFR sect 275206(4)-1

23NASD Rule 2210

Page 9 GAO-11-235 Consumer Finance

from their business activities24 Recent changes to Form ADV are designed to improve the disclosures that firms provide to clients For example firms must now provide clients with information about the advisory personnel on whom they rely for investment advice including the requirements and applicability of any professional designations or certifications advisers may choose to include in their background information

Most states regulate the use of the title ldquofinancial plannerrdquo and state securities and insurance laws can apply to the misuse of this title and other titles For example according to NASAA at least 29 states specifically include financial planners in their definition of investment adviser25 According to NAIC in many states regulators can use unfair trade practice laws to prohibit insurance agents from holding themselves out as financial planners when in fact they are only engaged in the sale of life or annuity insurance products However as noted earlier the effectiveness of the regulation of insurersrsquo market conduct varies across states In particular in 2010 we noted inconsistencies in the state regulation of life settlements a potentially high-risk transaction in which financial planners may participate26

In addition we were told some states had adopted regulations limiting the use of ldquosenior-specific designationsrdquomdashthat is designations that imply expertise or special training in advising senior citizen or elderly investors According to NAIC as of December 2010 25 states had adopted in a uniform and substantially similar manner the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities which limits the use of senior-specific designations by insurance agents According to NASAA as of December 2010 31 states had adoptedmdashand at least 9 other states were

24SEC and the states use Form ADV to register investment adviser firms and collect information from them Part 2 of Form ADV provides information about the investment adviser and its business for use of the clients and is publicly available on the Investment Adviser Public Depository Web site The SEC adopted amendments to Form ADV that were effective October 12 2010 requiring Part 2 of Form ADV be written in a plain English narrative format See Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (to be codified at 17 CFR pt 275 and 279)

25The District of Columbia and Puerto Rico also include financial planners in their definitions of investment adviser according to NASAA

26GAO Life Insurance Settlements Regulatory Inconsistencies May Pose a Number of

Challenges GAO-10-775 (Washington DC July 9 2010)

Page 10 GAO-11-235 Consumer Finance

planning to adoptmdashthe NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations which prohibits the misleading use of senior-specific designations by investment adviser representatives and other financial professionals

Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited

The regulatory system for financial planners covers most activities in which they engage However enforcement of regulation may be inconsistent and some questions exist about consumersrsquo understanding of the roles standards of care and titles and designations that a financial planner may have The ability of regulators to identify potential problems is limited because they do not specifically track complaints inspections and enforcement actions specific to financial planning services

Existing Regulation Covers Most Financial Planning Services

Although there is no single stand-alone regulatory body with oversight of financial planners the regulatory structure for financial planners covers most activities in which they engage As discussed earlier and summarized in figure 2 the primary activities a financial planner performs are subject to existing regulation at the federal or state level primarily through regulation pertaining to investment advisers broker-dealers and insurance agents As such SEC FINRA and NASAA staff a majority of state securities regulators financial industry representatives consumer groups and academic and subject matter experts with whom we spoke said that in general they believe the regulatory structure for financial planners is comprehensive although as discussed below the attention paid to enforcing existing regulation has varied

Page 11 GAO-11-235 Consumer Finance

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners

Financial planner

Capacity Investment adviser Broker-dealer Insurance agent

Applicable federal and state laws

Federal bull Investment Advisers Act of 1940 and rules from SEC

State bull State securities laws

Federal bull Securities and Exchange Act of 1934 and rules of SEC and FINRA

State bull State securities laws

State bull State insurance laws

Financial planning service covered by regulation

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for specific securities products bull Purchase or sale of securities products

bull Recommendations for insurance products

bull Sale of insurance products

bull Sale of variable insurance (variable annuities variable life insurance) bull

Federal and state regulators enforcing laws

Federal bull SEC

State bull State securities agencies

Federal bull SEC and FINRA

State bull State securities agencies

State bull State insurance agencies

Customer

Source GAO

Note This figure highlights three major areas of regulatory oversight but is not comprehensive and does not include other regulatory regimes or practice standards that may be applicable to financial planners In addition not all investment advisers broker-dealers or insurance agents are financial planners

As noted earlier the activities a financial planner normally engages in generally include advice related to securitiesmdashand such activities make financial planners subject to regulation under the Advisers Act One industry association and an academic expert noted that it would be very difficult to provide financial planning services without offering investment

Page 12 GAO-11-235 Consumer Finance

advice or considering securities SEC staff told us that financial planners holding even broad discussions of securitiesmdashfor example what proportion of a portfolio should be invested in stocksmdashwould be required to register as investment advisers or investment adviser representatives In theory a financial planner could offer only services that do not fall under existing regulatory regimesmdashfor example advice on household budgetingmdashbut such an example is likely hypothetical and such a business model may be hard to sustain SEC and NASAA staff a majority of the state securities regulators we spoke with and many representatives of the financial services industry told us that they were not aware of any individuals serving as financial planners who were not regulated as investment advisers or regulated under another regulatory regime Some regulators and industry representatives also said that to the extent that financial planners offered services that did not fall under such regulation the new Bureau of Consumer Financial Protection potentially could have jurisdiction over such services27

However not everyone agreed that regulation of financial planners was comprehensive One group the Financial Planning Coalition has argued that a regulatory gap exists because no single law governs the delivery of the broad array of financial advice to the public28 According to the coalition the provision of integrated financial advicemdashwhich would cover topics such as selecting and managing investments income taxes saving for college home ownership retirement insurance and estate planningmdash is unregulated Instead the coalition says that there is patchwork regulation of financial planning advice and it views having two sets of lawsmdashone regulating the provision of investment advice and another regulating the sale of productsmdashas problematic

27Section 1011 of the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate ldquothe offering and provision of consumer financial products or services under the Federal consumer financial lawsrdquo A financial product or service is defined in section 1002(15)(A)(viii) of the act to include financial advisory services to consumers on individual financial matters with the exception of advisory services related to securities provided by a person regulated by SEC or a state securities commission to the extent that such person acts in a regulated capacity Accordingly it appears that the bureau may have jurisdiction over financial planners to the extent that they may offer services that would not be under the jurisdiction of SEC or a state securities commission

28The members of this coalition include the Certified Financial Planner Board of Standards Inc the Financial Planning Association and the National Association of Personal Financial Advisors

Page 13 GAO-11-235 Consumer Finance

In addition although the regulatory structure itself for financial planners may generally be comprehensive attention paid to enforcing existing statute and regulation has varied For example as noted earlier due to resource constraints the examination of SEC-supervised investment advisers is infrequent Further as also noted earlier market conduct regulation of insurersmdashwhich would include the examination of the sales practices and behavior of financial planners selling insurance productsmdash has been inconsistent Some representatives of industry associations told us that they believed that a better alternative to additional regulation of financial planners would be increased enforcement of existing law and regulation particularly related to fraud and unfair trade practices

Certain professionalsmdashincluding attorneys certified public accountants broker-dealers and teachersmdashwho provide financial planning advice are exempt from regulation under the Advisers Act if such advice is ldquosolely incidentalrdquo to their other business activities29 According to an SEC staff interpretation this exemption would not apply to individuals who held themselves out to the public as providing financial planning services and would apply only to individuals who provided specific investment advice on anything other than ldquorare isolated and non-periodic instancesrdquo30 Banks and bank employees are also excluded from the Advisers Act and are subject to separate banking regulation31 The American Bankers Association told us that the financial planning activities of bank employees such as trust advisors or wealth managers were typically utilized by clients with more than $5 million in investable assets The association noted that these activities were subject to a fiduciary standard and the applicable supervision of federal and state banking regulators

Most regulators and academic experts and many financial services industry representatives we spoke with told us that there is some overlap in the regulation of individuals who serve as financial planners because

2915 USC sect 80b-2(a)(11) IA Rel No 1092(II)(B) at 38403 Under 15 USC sect 80bshy2(a)(11)(C) brokers and dealers also cannot receive any special compensation for their services in order to be exempt from registration as an investment adviser

30Id

31Id The Advisers Act excludes bank and bank holding companies from the definition of

investment adviser Further a bank and a bank holding company is an investment adviser under the act to the extent that the bank or bank holding company serves or acts as an adviser to a registered investment company If such services are performed in a separate department or division of a bank the department or division and not the bank itself is the investment adviser

Page 14 GAO-11-235 Consumer Finance

such individuals might be subject to oversight by different regulatory bodies for the different services they provide For example a financial planner who recommends and sells variable annuities as part of a financial plan is regulated as a registered representative of a broker-dealer as well as an insurance agent under applicable federal and state laws However some state regulators we spoke with told us that such overlap may be appropriate since the regulatory regimes cover different functional areas

Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products

As seen in figure 3 financial planners are subject to different standards of care in their capacities as investment advisers broker-dealers and insurance agents

bull Fiduciary Standard of Care As noted earlier investment advisers are subject to a fiduciary standard of caremdashthat is they must act in their clientrsquos best interest ensure that recommended investments are suitable for the client and disclose to the client any material conflicts of interest32

According to SEC and NASAA representatives the fiduciary standard applies even when investment advisers provide advice or recommendations about products other than securities such as insurance in conjunction with advice about securities

bull Suitability Standard of Care When Recommending Security Products FINRA regulation requires broker-dealers to adhere to a suitability standard when rendering investment recommendationsmdashthat is they must recommend only those securities that they reasonably believe are suitable for the customer33 Unlike the fiduciary standard suitability rules do not necessarily require that the clientrsquos best interest be served According to FINRA staff up-front general disclosure of a broker-dealerrsquos business activities and relationships that may cause conflicts of interest is not

32The SEC has in effect established rules of conduct for investment advisers including requirements for disclosing conflicts of interest obtaining the best execution on behalf of clients allocating investments among clients fairly ensuring that investments are suitable for clients and ensuring that there is a reasonable basis for recommendations SEC also requires investment advisers to maintain records pertaining to client accounts and business operations

33A broker-dealer must have an adequate and reasonable basis for any recommendation and must make recommendations based on a customerrsquos financial situation needs and other securities holdings

Page 15 GAO-11-235 Consumer Finance

required34 However according to SEC broker-dealers are subject to many FINRA rules that require disclosure of conflicts in certain situations although SEC staff also note that those rules may not cover every possible conflict of interest and disclosure may occur after conflicted advice has already been given35

bull Suitability Standard of Care When Recommending Insurance Products Standards of care for the recommendation and sale of insurance products vary by product and by state For example as seen earlier NAICrsquos model regulations on the suitability standard for annuity transactions adopted by some states but not others require consideration of the insurance needs and financial objectives of the customer while NAICrsquos model regulation for life insurance does not include a suitability requirement per se

34Letter from Marc Menchel Executive Vice President and General Counsel FINRA to Elizabeth M Murphy Secretary SEC 4 (Aug 25 2010) available at httpwwwfinraorgwebgroupsindustryipregguidedocumentsindustryp121983p df

35The standards of conduct for broker-dealers may also be based on antifraud provisions of the securities law and agency principles Broker-dealers also have a duty of fairness in their contracts with a customer which requires them to disclose material information that the customer would consider important as an investor In addition broker-dealers that handle discretionary accounts are generally thought to owe fiduciary obligations to their customers

Page 16 GAO-11-235 Consumer Finance

Figure 3 Differences in the Standards of Care Required of Financial Planners

Financial planner

Capacity

Investment adviser Broker-dealer Insurance agent

Fiduciary Suitability Varies by product and by state insurance law

Standard of care

bull Person has an affirmative duty to render services solely in the best interests of clients

bull Requires advisers to disclose material conflicts of interest to clients

bull Rules require standard of care that includes among other things rendering

investment recommendations that are suitable for customers

bull Requires insurance agents to follow suitability standards when state has adopted such standards for products

Financial planning service covered by standard of care

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for the purchase or sale of specific securities products

bull Recommendations for the purchase of insurance products

bull Recommendations for the purchase of variable insurance (variable annuities variable life insurance)

Customer

Source GAO

Note This figure is illustrative and is not comprehensive financial planners may serve in capacities other than those shown here and not all investment advisers broker-dealers and insurance agents serve as financial planners

Conflicts of interest can exist when for example a financial services professional earns a commission on a product sold to a client Under the fiduciary standard applicable to investment advisers financial planners must mitigate any potential conflicts of interest and disclose any that remain But under a suitability standard applicable to broker-dealers conflicts of interest may exist and generally may not need to be disclosed

Page 17 GAO-11-235 Consumer Finance

up-front36 For example as confirmed by FINRA financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission as long as the product is suitable and the broker-dealer complies with other requirements Because the same individual or firm can offer a variety of services to a clientmdasha practice sometimes referred to as ldquohat switchingrdquomdashthese services could be subject to different standards of care As such representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care if any applies to a financial professional As shown above the standards of caremdashand the extent to which conflicts of interest must be disclosedmdashcan vary depending on the capacity in which the individual serves37 A 2007 report by the Financial Planning Association stated that ldquoit would be difficult if not impossible for an individual investor to discern when the adviser was acting in a fiduciary capacity or in a non-fiduciary capacityrdquo38 A 2008 SEC study conducted by the RAND Corporation consisting of a national household survey and six focus group discussions with investors found that consumers generally did not understand not only the distinction between a suitability and fiduciary standard of care but also the differences between broker-dealers and investment advisers39 Similarly a 2010 national study of investors found that most were confused about which financial professionals are required to operate under a fiduciary standard that requires professionals to put their clientrsquos interest ahead of their own40

36FINRA officials have stated that they believe that the regulation of broker-dealersmdashwhile lacking an express fiduciary dutymdashprescribes in great detail the conduct and supervision of broker-dealers who provide investment advice to retail customers

37Blackrsquos Law Dictionary (9th ed 2009) defines the term ldquoconflict of interestrdquo as a ldquoreal or seeming incompatibility between onersquos private interests and onersquos public or fiduciary dutiesrdquo

38Final Report on Financial Planner Standards of Conduct FPA Fiduciary Task Force

June 2007

39Angela A Hung et al RAND Institute for Civil Justice Investor and Industry

Perspectives on Investment Advisers and Broker-Dealers (2008)

40Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010 The survey was conducted among a sample of 2012 adults living in the continental United States including 1319 who identified themselves as investors The survey was sponsored by AARP the Consumer Federation of America NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors

Page 18 GAO-11-235 Consumer Finance

Representatives of financial services firms that provide financial planning told us they believe that clients are sufficiently informed about the differing roles and accompanying standards of care that a firm representative may have They noted that when they provide both advisory and transactional services to the same customer each servicemdashsuch as planning brokerage or insurance salesmdashis accompanied by a separate contract or agreement with the customer These agreements disclose that the firmrsquos representatives have different obligations to the customer depending on their role In addition once a financial plan has been provided some companies told us that they have customers sign an additional agreement stating that the financial planning relationship with the firm has ended

Recent revisions by SEC to Form ADV disclosure requirements were designed to address among other things consumer understanding of potential conflicts of interest by investment advisers and their representatives Effective October 12 2010 SEC revised Form ADV Part 2 which financial service firms must provide to new and prospective clients41 The new form which must be written in plain English is intended to help consumers better understand the activities and affiliations of their investment adviser It requires additional disclosu res about a firmrsquos conflicts of interest compensation business activities and disciplinary information that is material to an evaluation of the adviser rsquos integrity Similarly in October 2010 FINRA issued a regulatory notice requesting comments on a concept proposal regarding possible new disclosure requirements that would among other things detail for consumers in plain English the conflicts of interest that broker-dealers may have associated with their services42

Section 913 of the Dodd-Frank Act requires SEC to study the substantive differences between the applicable standards of care for broker-dealers and investment advisers the effectiveness of the existing legal or regulatory standards of care for brokers dealers and investment advisers and consumersrsquo ability to understand the different standards of care SEC

41Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (requires investment advisers registered with SEC to provide new and prospective clients with a brochure and brochure supplements clearly setting forth a meaningful current disclosure of the business practices conflicts of interest and background of the investment adviser and its advisory personnel and requires the brochures to be filed with SEC electronically which will make them available to the public through its Web site)

42FINRA Regulatory Notice 10-54

Page 19 GAO-11-235 Consumer Finance

will also consider the potential impact on retail customers of imposing the same fiduciary standard that now applies to investment advisers on broker-dealers when they provide personalized investment advice Under the act SEC may promulgate rules to address these issues and is specifically authorized to establish a uniform fiduciary duty for broker-dealers and investment advisers that provide personalized investment advice about securities to customers As a result further clarification of these standards may be forthcoming FINRA officials told us that they support a fiduciary standard of care for broker-dealers when they provide personalized investment advice to retail customers

Consumer confusion on standards of care may also be a source of concern with regard to the sale of some insurance products A 2010 national survey of investors found that 60 percent mistakenly believed that insurance agents had a fiduciary duty to their clients43 Some insurance products such as annuities are complex and can be difficult to understand and annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators as well as SEC and FINRA for many years44 According to NAIC many states have requirements that insurance salespersons sell annuities only if the product is suitable for the customer However NAIC notes that some states do not have a suitability requirement for annuities Consumer groups and others have stated that high sales commissions on certain insurance products including annuities may provide salespersons with a substantial financial incentive to sell these products which may or may not be in the consumerrsquos best interest As a result of section 989J of the Dodd-Frank Act one type of annuitymdashthe indexed annuitymdashis to be regulated by states as an insurance product rather than regulated by SEC as a security under certain conditions45

SECrsquos pending study related to the applicable standards of care for broker-dealers and investment advisers will not look at issues of insurance that

43Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010

44See for example Securities and Exchange Commission Rule 151A and Annuities Issues and Legislation CRS Report for Congress 7-7500 (July 29 2010)

45State regulation applies so long as a state has adopted NAICrsquos Suitability in Annuity Transactions model regulation or if an insurance company adopts and implements practices on a nationwide basis that meet or exceed the minimum requirements established by NAICrsquos model regulation Indexed annuities are products that guarantee a purchaserrsquos principal and a certain rate of return and offer a chance for additional returns linked to a securities index or indices

Page 20 GAO-11-235 Consumer Finance

fall outside of SECrsquos jurisdiction NAIC has not undertaken a similar study regarding consumer understanding of the standard of care for insurance agents As we reported in the past financial markets function best when consumers understand how financial service providers and products work and know how to choose among them46 Given the evidence of consumer confusion about differing standards of care and given the increased risks that certain insurance products can pose there could be benefits to an NAIC review of consumersrsquo understanding of standards of care for high-risk insurance products

Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public

Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public including financial planner financial consultant and financial adviser among many others However evidence suggests that the different titles financial professionals use can be confusing to consumers The 2008 RAND study found that even experienced investors were confused about the titles used by broker-dealers and investment advisers including financial planner and financial adviser Similarly in consumer focus groups of investors conducted by SEC in 2005 as part of a rulemaking process participants were generally unclear about the distinctions among titles including broker investment adviser and financial planner47 In addition a representative of one consumer advocacy group has expressed concern that some financial professionals may use as a marketing tool titles suggesting that they provide financial planning services when in fact they are only selling products One industry group the Financial Planning Coalition also has noted that some individuals may hold themselves out as financial planners without meeting minimum training or ethical requirements Federal and state regulators told us they generally focused their oversight and enforcement actions on financial plannersrsquo activities rather than the titles they use Moreover NASAA has said that no matter what title financial planners use most are required to register as investment adviser representatives and must satisfy certain competency requirements

46GAO Financial Regulation A Framework for Crafting and Assessing Proposals to

Modernize the Outdated US Financial Regulatory System GAO-09-216 (Washington DC Jan 8 2009)

47Results of Investor Focus Group Interviews About Proposed Brokerage Account

Disclosures Report to the Securities and Exchange Commission by Siegel amp Gale LLC and Gelb Consulting Group Inc Mar 10 2005

Page 21 GAO-11-235 Consumer Finance

including passing an examination or obtaining a recognized professional designation48

Financial plannersrsquo professional designations are typically conferred by a professional or trade organization These designations may indicate that a planner has passed an examination met certain educational requirements or had related professional experience Some of these designations require extensive classroom training and examination requirements and include codes of ethics with the ability to remove the designation in the event of violations State securities regulators view five specific designations as meeting or exceeding the registration requirements for investment adviser representatives according to NASAA and allow these professional designations to satisfy necessary competency requirements for prospective investment adviser representatives49 For example one of these five designations requires a bachelorrsquos degree from an accredited college or university 3 years of full-time personal financial planning experience a certification examination and 30 hours of continuing education every 2 years

The criteria used by organizations that grant professional designations for financial professionals vary greatly FINRA has stated that while some designations require formal certification procedures including examinations and continuing professional education credits others may merely signify that membership dues have been paid The Financial Planning Coalition and The American College a nonprofit educational institution that confers several financial designations similarly told us that privately conferred designations range from those with rigorous competency practice and ethical standards and enforcement to those that can be obtained with minimal effort and no ongoing evaluation

48According to NASAA all but three statesmdashNew York Minnesota and Wyomingmdashregister investment adviser representatives and require that they pass either the Series 65 (Uniform Investment Adviser Law Examination) or the Series 66 (Uniform Combined State Law Examination) or obtain a recognized professional designation While New York and Minnesota do not register individual investment adviser representatives their state laws require that the representatives meet other requirements such as passing certain examinations or obtaining a professional designation accepted by the state

49The five designations recognized as such are Certified Financial Plannerreg Chartered Financial Consultantreg Personal Financial Specialist Chartered Financial Analyst and Chartered Investment Counselor

Page 22 GAO-11-235 Consumer Finance

As noted earlier designations that imply expertise or special training in advising senior citizen or elderly investors have received particular attention from regulators A joint report of SEC FINRA and NASAA described cases in which financial professionals targeted seniors by using senior-specific designations that implied that they had a particular expertise for senior investors when in fact they did not as noted earlier NASAA and NAIC have developed a model rule to address the issue50 The report also noted these professionals targeted seniors through the use of so-called free-lunch seminars where free meals are offered in exchange for attendance of a financial education seminar However the focus of the seminars was actually on the sale of products rather than the provision of financial advice

Given the large number of designations financial planners may use concerns exist that consumers may have difficulty distinguishing among them To alleviate customer confusion FINRA has developed a Web site for consumers that provides the required qualifications and other information about the designations used by securities professionals The site lists more than 100 professional designations 5 of which include the term ldquofinancial plannerrdquo and 24 of which contain comparable terms such as financial consultant or counselor51 The American College told us that it had identified 270 financial services designations Officials from NASAA NAIC and a consumer advocacy organization told us that consumers might have difficulty distinguishing among the various designations Officials from The American College told us that the number of designations itself was not necessarily a cause for concern but rather consumersrsquo broadly held misperception that all designations or credentials are equal

To help address these concerns FINRA plans to expand its Web site on professional designations to include several dozen additional designations related to insurance However FINRA officials noted that consumersrsquo use of this tool has been limited For example in 2009 the site received only 55765 visits A recent national study of the financial capability of American adults sponsored by FINRA found that only 15 percent of adults

50Protecting Senior Investors Report of Examinations of Securities Firms Providing

ldquoFree Lunchrdquo Sales Seminars by the Office of Compliance Inspections and Examination Securities and Exchange Commission North American Securities Administrators Association and the Financial Industry Regulatory Authority September 2007

51See httpappsfinraorgDataDirectory1prodesignationsaspx

Page 23 GAO-11-235 Consumer Finance

who had used a financial professional in the last 5 years claimed to have checked the background registration or license of a financial professional52 In addition SEC staff acknowledged that there have been concerns about confusing designations and SECrsquos October 2010 changes to investment adviser disclosure requirements mandate that investment adviser representatives who list professional designations and certifications in their background information also provide the qualifications needed for these designations so that the consumer can understand the value of the designation for the services being provided

Section 917 of the Dodd-Frank Act includes a requirement that SEC conduct a study identifying the existing level of financial literacy among retail investors including the most useful and understandable relevant information that they need to make informed financial decisions before engaging a financial intermediary While the section does not specifically mention the issue of financial plannersrsquo titles and designations the confusion we found to exist could potentially be addressed or mitigated if SEC incorporated this issue into its overall review of financial literacy among investors SEC staff told us that at this time its review would not likely address this issue although it would address such things as the need for conducting background checks on financial professionals Financial markets function best when consumers have information sufficient to understand and assess financial service providers and products53

Including financial plannersrsquo use of titles and designations in SECrsquos financial literacy review could provide useful information on the implications of consumersrsquo confusion on this issue

Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners

Available data do not show a large number of consumer complaints and enforcement actions involving financial planners but the exact extent to which financial planners may be a source of problems is unknown We were able to find limited information on consumer complaints from various agencies For example representatives of FTC and the Better Business Bureau said that they had received relatively few complaints related to financial planners FTC staff told us that a search in its Consumer Sentinel Network database for the phrase ldquofinancial plannerrdquo

52Applied Research amp Consulting LLC Financial Capability in the United States Initial

Report of the Research Findings from the 2009 National Survey prepared for the FINRA Investor Education Foundation (New York December 2009)

53GAO-09-216

Page 24 GAO-11-235 Consumer Finance

found 141 complaints in the 5-year period from 2005 through 2010 but that only a handful of these appeared to actually involve activity connected to the financial planning profession54 The staff added that additional searches on other titles possibly used by financial planners such as financial consultant and personal financial adviser did not yield significant additional complaints In addition a representative of the Better Business Bureau told us that it had received relatively few complaints related to financial planners although the representative noted that additional complaints might exist in broader categories such as ldquofinancial servicesrdquo

Consumer complaint data may not be an accurate gauge of the extent of problems Complaints may represent only a small portion of potential problems and complaints related to ldquofinancial plannersrdquo may not always be recorded as such As we have previously reported consumers also may not always know where they can report complaints55 At the same time some complaints that are made may not always be valid

SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm The agency does record and track whether federally and state-registered investment adviser firms provide financial planning services but its data tracking systems for complaints examination results and enforcement actions are not programmed to readily determine and track whether the complaint result or action was specifically related to a financial planner or financial planning service For example SEC staff told us the number of complaints about financial planners would be undercounted in their data system that receives and tracks public inquiries known as the Investor Response Information System because this code would likely be used only if it could not be identified whether the person (or firm) was an investment adviser or broker-dealer In addition the data system that SEC uses to record examination results known as the Super Tracking and Reporting System

54The Consumer Sentinel Network database is a secure online database of millions of consumer complaints available only to law enforcement In addition to storing complaints received by FTC the Consumer Sentinel Network also includes complaints filed with the Internet Crime Complaint Center Better Business Bureaus Canadarsquos PhoneBusters the US Postal Inspection Service the Identity Theft Assistance Center and the National Fraud Information Center among others

55GAO Telecommunications FCC Needs to Improve Oversight of Wireless Phone Service GAO-10-34 (Washington DC November 2009) p 18

Page 25 GAO-11-235 Consumer Finance

does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers

However SEC staff told us that a review of its Investor Response Information System identified 51 complaints or inquiries that had been recorded using their code for issues related to ldquofinancial plannersrdquo between November 2009 and October 2010 SEC staff told us that the complaints most often involved allegations of unsuitable investments or fraud such as misappropriation of funds56 A review of a separate SEC database called Tips Complaints and Referralsmdashan interim system that was implemented in March 2010mdashfound 124 allegations of problems possibly related to financial planners from March 2010 to October 201057

SEC staff told us that they did not have comprehensive data on the extent of enforcement activities related to financial planners per se In addition NASAA said that states generally do not track enforcement data specific to financial planners At our request SEC and NASAA provided us with examples of enforcement actions related to individuals who held themselves out as financial planners Using a keyword search SEC identified 10 such formal enforcement actions between August 2009 and August 2010 According to SEC documents these cases involved allegations of such activities as defrauding clients through marketing schemes receiving kickbacks without making proper disclosures and misappropriation of client funds Although NASAA also did not have comprehensive data on enforcement activities involving financial planners representatives provided us with examples of 36 actions brought by 30 states from 1986 to 2010 These cases involved allegations of such things as the sale of unsuitable products fraudulent misrepresentation of qualifications failure to register as an investment adviser and misuse of client funds for personal expenses

56Of these 51 complaints or inquiries 29 involved allegations of fraud 9 involved allegations of unsuitable investments and the remaining 13 represented questions on a variety of topics

57Of these 124 allegations 13 were coded as ldquofraudulent or unregistered offer or sale of securities including Ponzi schemes high yield investment programs or other investment programsrdquo 12 as ldquomanipulation of a securityrsquos price or volumerdquo 6 as ldquotheft or misappropriation of funds or securitiesrdquo 5 as ldquofalse or misleading statements about a companyrdquo 3 as ldquoproblems with my brokerage or advisory accountrdquo and 2 as ldquoinsider tradingrdquo An additional 14 were coded as ldquoother fraudulent conductrdquo and 69 were coded simply as ldquootherrdquo

Page 26 GAO-11-235 Consumer Finance

Because of limitations in how data are gathered and tracked SEC and state securities regulators are not currently able to readily determine the extent to which financial planning services may be causing consumers harm NASAA officials told us that as with SEC state securities regulators did not typically or routinely track potential problems specific to financial planners SEC and NASAA representatives told us that they had been meeting periodically in recent months to prepare for the transition from federal to state oversight of certain additional investment adviser firms as mandated under the Dodd-Frank Act but they said that oversight of financial planners in particular had not been part of these discussions SEC staff have noted that additional tracking could consume staff time and other resources They also said that because there are no laws that directly require registration recordkeeping and other responsibilities of ldquofinancial plannersrdquo per se tracking such findings relating to those entities would require expenditure of resources on something that SEC does not have direct responsibility to oversee Yet as we have reported in the past while we recognize the need to balance the cost of data collection efforts against the usefulness of the data a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking58 Given the significant growth in the financial planning industry ongoing concerns about potential conflicts of interest and consumer confusion about standards of care regulators may benefit from identifying ways to get better information on the extent of problems specifically involving financial planners and financial planning services

58GAO Managing for Results Using GPRA to Help Congressional Decisionmaking and

Strengthen Oversight GAOT-00-95 (Washington DC March 2000) p 13 GAO Executive

Guide Effectively Implementing the Government Performance and Results Act GAOGGD-96-118 (Washington DC June 1996) p 27

Page 27 GAO-11-235 Consumer Finance

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed

Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners

Creation of a Board to Oversee Financial Planners

Over the past few years a number of stakeholdersmdashincluding consumer groups FINRA and trade associations representing financial planners securities firms and insurance firmsmdashhave proposed different approaches to the regulation of financial planners Following are four of the most prominent approaches each of which has both advantages and disadvantages

In 2009 the Financial Planning Coalitionmdashcomprised of the Certified Financial Planner Board of Standards Financial Planning Association and the National Association of Personal Financial Advisorsmdashproposed that Congress establish a professional standards-setting oversight board for financial planners According to the coalition its proposed legislation would establish federal regulation of financial planners by allowing SEC to recognize a financial planner oversight board that would set professional standards for and oversee the activities of individual financial planners although not financial planning firms For example the board would have the authority to establish baseline competency standards in the areas of education examination and continuing education and would be required to establish ethical standards designed to prevent fraudulent and manipulative acts and practices It would also have the authority to require registration or licensing of financial planners and to perform investigative and disciplinary actions Under the proposal states would retain antifraud authority over financial planners as well as full oversight for financial plannersrsquo investment advisory activity However states would not be allowed to impose additional licensing or registration requirements for financial planners or set separate standards of conduct Supporters of a new oversight board have noted that its structure and governance would be analogous to the Public Company Accounting Oversight Board a private nonprofit organization subject to SEC oversight that in turn oversees the audits of public companies that are subject to securities laws

Page 28 GAO-11-235 Consumer Finance

Augmenting Oversight of Investment Advisers with an SRO

According to the Financial Planning Coalition a potential advantage of this approach is that it would treat financial planning as a distinct profession and would regulate across the full spectrum of activities in which financial planners may engage including activities related to investments taxes education retirement planning estate planning insurance and household budgeting Proponents argue that a financial planning oversight board would also help ensure high standards and consistent regulation for all financial planners by establishing common standards for competency professional practices and ethics

However many securities regulators and financial services trade associations with whom we spoke said that they believe such a board would overlap with and in many ways duplicate existing state and federal regulations which already cover virtually all of the products and services that a financial planner provides Some added that the board would entail unnecessary additional financial costs and administrative burdens for the government and regulated entities In addition some opponents of this approach question whether ldquofinancial planningrdquo should be thought of as a distinct profession that requires its own regulatory structure noting that financial planning is not easily defined and can span multiple professions including accounting insurance investment advice and law One consumer group also noted that the regulation of individuals and professions is typically a state rather than a federal responsibility Finally we note that the analogy to the Public Company Accounting Oversight Board may not be apt That board was created in response to a crisis involving high-profile bankruptcies and investor losses caused in part by inadequacies among public accounting firms In the case of financial planners there is limited evidence of an analogous crisis or as noted earlier of severe harm to consumers

A number of proposals over the years have considered having FINRA or a newly created SRO supplement SEC oversight of investment advisers These proposals date back to at least 1963 when an SEC study recommended that all registered investment advisers be required to be a

Page 29 GAO-11-235 Consumer Finance

member of an SRO59 In 1986 the National Association of Securities Dealers a predecessor to FINRA explored the feasibility of examining the investment advisory activities of members who were also registered as investment advisers The House of Representatives passed a bill in 1993 that would have amended the Advisers Act to authorize the creation of an ldquoinspection onlyrdquo SRO for investment advisers although the bill did not become law60 In 2003 SEC requested comments on whether one or more SROs should be established for investment advisers citing among other reasons concerns that the agencyrsquos own resources were inadequate to address the growing numbers of advisers61 However SEC did not take further action Section 914 of the Dodd-Frank Act required SEC to issue a study in January 2011 on the extent to which one or more SROs for investment advisers would improve the frequency of examinations of investment advisers62

According to FINRA the primary advantage of augmenting investment adviser oversight with an SRO is that doing so would allow for more frequent examinations given the limited resources of states and SEC The Financial Services Institute an advocacy organization for independent broker-dealers and financial advisers has stated that an industry-funded SRO with the resources necessary to appropriately supervise and examine all investment advisers would close the gap that exists between the regulation of broker-dealers and investment advisers FINRA said that it finds this gap troubling given the overlap between the two groups (approximately 88 percent of all registered advisory representatives are also broker-dealer representatives) FINRA adds that any SRO should operate subject to strong SEC oversight and that releasing SEC of some of its responsibilities for investment advisers would free up SEC resources for other regulatory activities

59See Securities and Exchange Commission News Digest Issue No 63-4-3 8 (1963) which describes SECrsquos report to Congress regarding the adequacy of the rules of national securities exchanges and national securities associations pursuant to Pub L No 87-196 75 Stat 465 (1961) wherein SEC points out that the framework of industry self-regulation permitted many broker-dealer firms and registered investment advisers to remain outside of any official self-regulatory group According to the SEC News Digest the report suggested that membership in an SRO should be a prerequisite to registration with SEC as a broker-dealer or investment adviser

60HR 578 103rd Cong (1993)

61Investment Advisers Act Release No 2107 68 Fed Reg 7038 (Feb 11 2003)

62SEC is required to report the results of its study within 180 days of enactment of the Dodd-Frank Act

Page 30 GAO-11-235 Consumer Finance

Extending Coverage of the Fiduciary Standard

However NASAA some state securities regulators and one academic with whom we spoke opposed adding an SRO component to the regulatory authority of investment advisers NASAA said it believed that investment adviser regulation is a governmental function that should not be outsourced to a private third-party organization that lacks the objectivity independence expertise and experience of a government regulator Further NASAA said it is concerned with the lack of transparency associated with regulation by SROs because unlike government regulators they are not subject to open records laws through which the investing public can obtain information Two public interest groups including the Consumer Federation of America have asserted that one SROmdashFINRAmdash has an ldquoindustry mindsetrdquo that has not always put consumer protection at the forefront In addition the Investment Adviser Association and two other organizations we interviewed have noted that funding an SRO and complying with its rules can impose additional costs on a firm63

Proposals have been made to extend coverage of the fiduciary standard of care to all those who provide financial planning services Some consumer groups and others have stated that a fiduciary standard should apply to anyone who provides personalized investment advice about securities to retail customers including insurance agents who recommend securities The Financial Planning Coalition has proposed that the fiduciary standard apply to all those who hold themselves out as financial planners Proponents of extending the fiduciary standard of care which also include consumer groups and NASAA generally maintain that consumers should be able to expect that financial professionals they work with will act in their best interests They say that a fiduciary standard is more protective of consumersrsquo interests than a suitability standard which requires only that a product be suitable for a consumer rather than in the consumerrsquos best interest In addition the Financial Planning Coalition notes that extending a fiduciary standard would somewhat reduce consumer confusion about financial planners that are covered by the fiduciary standard in some capacities (such as providing investment advice) but not in others (such as selling a product)

However some participants in the insurance and broker-dealer industries have argued that a fiduciary standard of care is vague and undefined They say that replacing a suitability standard with a fiduciary standard could

63The Investment Adviser Association is a not-for-profit association that represents the interests of SEC-registered investment adviser firms

Page 31 GAO-11-235 Consumer Finance

Clarifying Financial Plannersrsquo Credentials and Standards

actually weaken consumer protections since the suitability of a product is easier to define and enforce Opponents also have argued that complying with a fiduciary standard would increase compliance costs that in turn would be passed along to consumers or otherwise lead to fewer consumer choices

The American College has proposed clarifying the credentials and standards of financial professionals including financial planners In particular it has proposed creating a working group of existing academic and practice experts to establish voluntary credentialing standards for financial professionals As noted previously consumers may be unable to distinguish among the various financial planning designations that exist and may not understand the requirements that underpin them Clarifying the credentials and standards of financial professionals could conceivably take the form of prohibiting the use of certain designations as has been done for senior-specific designations in some states or establishing minimum education testing or work experience requirements needed to obtain a designation The American College has stated that greater oversight of such credentials and standards could provide a ldquoseal of approvalrdquo that would generally raise the quality and competence of financial professionals including financial planners help consumers distinguish among the various credentials and help screen out less qualified or reputable players

However the ultimate effectiveness of such an approach is not clear since the extent to which consumers take designations into account when selecting or working with financial planners is unknown as is the extent of the harm caused by misleading designations In addition implementation and ongoing monitoring of financial plannersrsquo credentials and standards could be challenging Further the issue of unclear designations has already been addressed to some extentmdashfor example as noted earlier some states regulate the use of certain senior-specific designations and allow five professional designations to satisfy necessary competency requirements for prospective investment adviser representatives State securities regulators also have the authority to pursue the misleading use of credentials through their existing antifraud authority

Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners

In general a majority of the regulatory agencies consumer groups academics trade associations and individual financial services companies with which we spoke did not favor substantial structural change in the regulation of financial planners In particular few supported an additional oversight body which was generally seen as duplicative of existing regulation Some stakeholders in the securities and insurance industries

Page 32 GAO-11-235 Consumer Finance

Conclusions

noted that given the dynamic financial regulatory environment under way as a result of the Dodd-Frank Actmdashsuch as creation of a new Bureau of Consumer Financial Protectionmdashmore time should pass before additional regulatory changes related to financial planning services were considered Several industry associations also noted that opportunities existed for greater enforcement of existing law and regulation as discussed earlier

Existing statutes and regulations appear to cover the great majority of financial planning services and individual financial planners nearly always fall under one or more regulatory regimes depending on their activities While no single law governs the broad array of activities in which financial planners may engage given available information it does not appear that an additional layer of regulation specific to financial planners is warranted at this time At the same time as we have previously reported more robust enforcement of existing laws could strengthen oversight efforts In addition there are some actions that can be taken that may help address consumer protection issues associated with the oversight of financial planners

First as we have reported financial markets function best when consumers understand how financial providers and products work and know how to choose among them Yet consumers may be unclear about standards of care that apply to financial professionals particularly when the same individual or firm offers multiple services that have differing standards of care As such consumers may not always know whether and when a financial planner is required to serve their best interest While SEC is currently addressing the issue of whether the fiduciary standard of care should be extended to broker-dealers when they provide personalized investment advice about securities the agency is not addressing whether this extension should also apply to insurance agents who generally fall outside of SECrsquos jurisdiction Sales practices involving some high-risk insurance products such as annuities have drawn attention from federal and state regulators A review by NAIC of consumersrsquo understanding of the standards of care with regard to the sale of insurance products could provide information on the extent of consumer confusion in the area and actions needed to address the issue

Second we have seen that financial planners can adopt a variety of titles and designations The different designations can imply different types of qualifications but consumers may not understand or distinguish among these designations and thus may be unable to properly assess the qualifications and expertise of financial planners SECrsquos recent changes in this areamdashrequiring investment advisers to disclose additional information

Page 33 GAO-11-235 Consumer Finance

on professional designations and certifications they listmdashshould prove beneficial Another opportunity lies in SECrsquos mandated review of financial literacy among investors Incorporating issues of consumer confusion about financial plannersrsquo titles and designations into that review could assist the agency in assessing whether any further changes are needed in disclosure requirements or other related areas

Finally SEC has limited information about the nature and extent of problems specifically related to financial planners because it does not track complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole However a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking SEC staff have noted that additional tracking could require additional resources but other opportunities may also exist to gather additional information on financial planners Because financial planning is a growing industry and has raised certain consumer protection issues regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services

Recommendations We recommend that the National Association of Insurance Commissioners in concert with state insurance regulators take steps to assess consumersrsquo understanding of the standards of care with regard to the sale of insurance products such as annuities and take actions as appropriate to address problems revealed in this assessment

We also recommend that the Chairman of the Securities and Exchange Commission direct the Office of Investor Education and Advocacy Office of Compliance Inspections and Examinations Division of Enforcement and other offices as appropriate to

bull Incorporate into SECrsquos ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumersrsquo investment decisions and

bull Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services and take actions to address any problems that are identified

Page 34 GAO-11-235 Consumer Finance

Agency Comments We provided a draft of this report for review and comment to FINRA NAIC NASAA and SEC These organizations provided technical comments which we incorporated as appropriate In addition NAIC provided a written response which is reprinted in appendix II NAIC said it generally agreed with the contents of the draft report and would give consideration to our recommendation regarding consumersrsquo understanding of the standards of care with regard to the sale of insurance products

NASAA also provided a written response which is reprinted in appendix III In its response NASAA said it agreed that a specific layer of regulation for financial planners was unnecessary and provided additional information on some aspects of state oversight of investment advisers NASAA also said that it welcomed the opportunity to continue to collaborate with SEC to identify methods to better understand and address problems specifically involving financial planners as we recommended In addition NASAA expanded upon the reasons for its opposition to proposals that would augment oversight of investment advisers with an SRO

We are sending copies of this report to interested congressional committees the Chief Executive Officer of FINRA Chief Executive Officer of NAIC Executive Director of NASAA and the Chairman of SEC In addition the report will be available at no charge on GAOrsquos Web site at httpwwwgaogov

If you or your staffs have any questions about this report please contact me at (202) 512-8678 or cackleyagaogov Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report GAO staff who made major contributions to this report are listed in appendix IV

Alicia Puente Cackley Director Financial Markets

and Community Investment

Page 35 GAO-11-235 Consumer Finance

List of Congressional Addressees

The Honorable Bob Corker The Honorable Tim Johnson The Honorable Herbert Kohl The Honorable Richard C Shelby United States Senate

The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives

Page 36 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

Appendix I Scope and Methodology

Our reporting objectives were to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

For background information we obtained estimates for 2000 and 2008 and projections for 2018 from the Bureau of Labor Statistics on the number of individuals who reported themselves as ldquopersonal financial advisersrdquo a term that the agency said was interchangeable with ldquofinancial plannerrdquo The bureau derived these estimates from the Occupational Employment Statistics survey and the Current Population Survey1

According to the bureau the Occupational Employment Statisticsrsquo estimates for financial planners have a relative standard error of 19 percent and the median wage estimate for May 2009 has a relative standard error of 15 percent Because the overall employment estimates used are developed from multiple surveys it was not feasible for the bureau to provide the relative standard errors for these financial planner employment statistics To estimate the number of households that used financial planners we analyzed 2007 data from the Board of Governors of the Federal Reserversquos Survey of Consumer Finances This survey is conducted every three years to provide detailed information on the finances of US households2 Because the survey is a probability sample based on random selections the sample is only one of a large number of samples that might have been drawn Since each sample could have provided different estimates we express our confidence in the precision of our particular samplersquos results as a 95 percent confidence interval (eg plus or minus 25 percentage points) This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn In this report for this survey all percentage

1As explained by the Bureau of Labor Statistics the Occupational Employment Statistics program produces employment and wage estimates for over 800 occupations These are estimates of the number of people employed in certain occupations and estimates of the wages paid to them Since self-employed persons are not included in the estimates the bureau also considers information from the Current Population Survey a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics to derive its occupation estimates

2Additional information on the sample design and data collected by the Survey of Consumer Finances is available at httpwwwfederalreservegovpubsossoss2abouthtml

Page 37 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

estimates have 95 percent confidence intervals that are within plus or minus 25 percentage points from the estimate itself

To identify how financial planners are regulated and overseen at the federal and state levels we identified and reviewed on the federal level federal laws regulations and guidance applicable to financial planners the activities in which they engage and their marketing materials titles and designations We also reviewed relevant SEC interpretive releases such as IA Rel No 1092 Applicability of the Investment Advisers Act to

Financial Planners Pension Consultants and Other Persons Who

Provide Investment Advisory Services as a Component of Other

Financial Services We also discussed the laws and regulations relevant to financial planners in meetings with staff of the Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) Department of Labor and Internal Revenue Service We also interviewed two legal experts and reviewed a legal compendium on the regulation of financial planners At the state level we interviewed representatives from the North American Securities Administrators Association (NASAA) and the National Association of Insurance Commissioners (NAIC) and reviewed model regulations developed by these agencies In addition we selected five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texasmdashfor a more detailed review We chose these states because they had a large number of registered investment advisers and varying approaches to the regulation of financial planners and represented geographic diversity For each of these states we reviewed selected laws and regulations related to financial planners which included those related to senior-specific designations and insurance transactions and we interviewed staff at each statersquos securities and insurance agencies

To identify what is known about the effectiveness of the regulation of financial planners and what regulatory gaps or overlap may exist we reviewed relevant federal and state laws regulations and guidance In addition we spoke with representatives of the federal and state agencies cited above as well as FINRA and organizations that represent or train financial planners including the Financial Planning Coalition The American College and the CFA Institute organizations that represent the financial services industry including the Financial Services Institute Financial Services Roundtable Securities Industry and Financial Markets Association Investment Advisers Association American Society of Pension amp Professional Actuaries National Association of Insurance and Financial Advisors American Council of Life Insurers Association for Advanced Life Underwriting American Institute of Certified Public Accountants American Bankers Association and organizations

Page 38 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

representing consumer interests including the Consumer Federation of America and AARP We also spoke with selected academic experts knowledgeable about these issues In addition we reviewed relevant studies and other documentary evidence including a 2008 study of the RAND Corporation that was commissioned by SEC ldquoInvestor and Industry Perspectives on Investment Advisers and Broker-Dealersrdquo ldquoResults of Investor Focus Group Interviews About Proposed Brokerage Account Disclosuresrdquo sponsored by SEC results of the FPA Fiduciary Task Force ldquoFinal Report on Financial Planner Standards of Conductrdquo ldquoUS Investors amp The Fiduciary Standard A National Opinion Surveyrdquo sponsored by AARP the Consumer Federation of America the NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors and the 2009 National Financial Capability Study commissioned by FINRA We determined that the reliability of these studies was sufficient for our purposes In addition we reviewed relevant information on the titles and designations used by financial planners including FINRArsquos Web site that provides the required qualifications and other information about the designations used by securities professionals

We also obtained and reviewed available data on complaints and selected enforcement actions related to financial planners from the Federal Trade Commission Better Business Bureau and SEC We collected from the Federal Trade Commission complaint data from its Consumer Sentinel Network database using a keyword search of the term ldquofinancial plannerrdquo for complaints filed from 2005 to 2010 From the Better Business Bureau we collected the number of complaints about the financial planning industry received in 2009 From SEC we collected complaints from the agencyrsquos Investor Response Information System that had been coded as relating to ldquofinancial plannersrdquo from November 2009 to October 2010 We also reviewed data from SECrsquos Tips Complaints and Referrals database that resulted from a keyword search for the terms ldquofinancial plannerrdquo ldquofinancial adviserrdquo ldquofinancial advisorrdquo ldquofinancial consultantrdquo and ldquofinancial counselorrdquo from March 2010 to October 2010 In addition at our request SEC and NASAA provided us anecdotally with examples of enforcement actions related to individuals who held themselves out as financial planners SEC identified 10 formal enforcement actions between August 2009 and August 2010 and NASAA provided us selected examples of state enforcement actions involving financial planners from 1986 to 2010 from 30 states We gathered information on SEC- and state-registered investment advisers from SECrsquos Investment Adviser Registration Database FINRA did not provide us with data on complaints examination results or

Page 39 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

enforcement actions specific to financial planners FINRA officials told us they do not track these data specific to financial planners

To identify alternative approaches for the regulation of financial planners and their advantages and disadvantages we conducted a search for legislative and regulatory proposals related to financial planners which have been made by Members of Congress consumer groups and representatives of the financial planning securities and insurance industries We identified and reviewed position papers studies public comment letters congressional testimonies and other documentary sources that address the advantages and disadvantages of these approaches In addition we solicited views on these approaches from representatives of the wide range of organizations listed above including organizations that represent financial planners financial services companies and consumers as well as state and federal government agencies and associations and selected academic experts

We conducted this performance audit from June 2010 through January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Page 40 GAO-11-235 Consumer Finance

Appendix II Comments from the National

Association of Insurance Commissioners

Appendix II Comments from the National Association of Insurance Commissioners

Page 41 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Appendix III Comments from the North American Securities Administrators Association

Page 42 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 43 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 44 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 45 GAO-11-235 Consumer Finance

Appendix IV

A

GAO Contact and Staff

cknowledgments

Appendix IV GAO Contact and Staff Acknowledgments

Alicia Puente Cackley (202) 512-8678 or cackleyagaogov GAO Contact

In addition to the contact named above Jason Bromberg (Assistant Staff Director) Sonja J Bensen Jessica Bull Emily Chalmers Patrick Dynes

Acknowledgments Ronald Ito Sarah Kaczmarek Marc Molino Linda Rego and Andrew Stavisky made key contributions to this report

(250550) Page 46 GAO-11-235 Consumer Finance

The Government Accountability Office the audit evaluation and GAOrsquos Mission investigative arm of Congress exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people GAO examines the use of public funds evaluates federal programs and policies and provides analyses recommendations and other assistance to help Congress make informed oversight policy and funding decisions GAOrsquos commitment to good government is reflected in its core values of accountability integrity and reliability

The fastest and easiest way to obtain copies of GAO documents at no cost Obtaining Copies of is through GAOrsquos Web site (wwwgaogov) Each weekday afternoon GAO GAO Reports and posts on its Web site newly released reports testimony and

correspondence To have GAO e-mail you a list of newly posted products Testimony go to wwwgaogov and select ldquoE-mail Updatesrdquo

Order by Phone The price of each GAO publication reflects GAOrsquos actual cost of production and distribution and depends on the number of pages in the publication and whether the publication is printed in color or black and white Pricing and ordering information is posted on GAOrsquos Web site httpwwwgaogovorderinghtm

Place orders by calling (202) 512-6000 toll free (866) 801-7077 or TDD (202) 512-2537

Orders may be paid for using American Express Discover Card MasterCard Visa check or money order Call for additional information

ContactTo Report Fraud Web site wwwgaogovfraudnetfraudnethtm Waste and Abuse in E-mail fraudnetgaogov

Federal Programs Automated answering system (800) 424-5454 or (202) 512-7470

Ralph Dawn Managing Director dawnrgaogov (202) 512-4400 Congressional US Government Accountability Office 441 G Street NW Room 7125 Relations Washington DC 20548

Chuck Young Managing Director youngc1gaogov (202) 512-4800 Public Affairs US Government Accountability Office 441 G Street NW Room 7149 Washington DC 20548

Please Print on Recycled Paper

  • GAO Doc d11235pdf
    • Letter
    • Background
    • Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities
      • Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws
      • Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities
      • Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations
        • Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited
          • Existing Regulation Covers Most Financial Planning Services
          • Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products
          • Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public
          • Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners
            • Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed
              • Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners
                • Creation of a Board to Oversee Financial Planners
                • Augmenting Oversight of Investment Advisers with an SRO
                • Extending Coverage of the Fiduciary Standard
                • Clarifying Financial Plannersrsquo Credentials and Standards
                  • Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners
                    • Conclusions
                    • Recommendations
                    • Agency Comments
                      • Appendix I Scope and Methodology
                      • Appendix II Comments from the National Association of Insurance Commissioners
                      • Appendix III Comments from the North American Securities Administrators Association
                      • Appendix IV GAO Contact and Staff Acknowledgments
                        • GAO Contact
                        • Staff Acknowledgments
                        • Obtaining Copies of GAO Reports and Testimony
                          • Order by Phone

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 BGR 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 CHS ltFEFF4f7f75288fd94e9b8bbe5b9a521b5efa7684002000410064006f006200650020005000440046002065876863900275284e8e9ad88d2891cf76845370524d53705237300260a853ef4ee54f7f75280020004100630072006f0062006100740020548c002000410064006f00620065002000520065006100640065007200200035002e003000204ee553ca66f49ad87248672c676562535f00521b5efa768400200050004400460020658768633002gt CHT ltFEFF4f7f752890194e9b8a2d7f6e5efa7acb7684002000410064006f006200650020005000440046002065874ef69069752865bc9ad854c18cea76845370524d5370523786557406300260a853ef4ee54f7f75280020004100630072006f0062006100740020548c002000410064006f00620065002000520065006100640065007200200035002e003000204ee553ca66f49ad87248672c4f86958b555f5df25efa7acb76840020005000440046002065874ef63002gt CZE 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 DAN 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 DEU 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 ESP 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 ETI ltFEFF004b00610073007500740061006700650020006e0065006900640020007300e4007400740065006900640020006b00760061006c006900740065006500740073006500200074007200fc006b006900650065006c007300650020007000720069006e00740069006d0069007300650020006a0061006f006b007300200073006f00620069006c0069006b0065002000410064006f006200650020005000440046002d0064006f006b0075006d0065006e00740069006400650020006c006f006f006d006900730065006b0073002e00200020004c006f006f0064007500640020005000440046002d0064006f006b0075006d0065006e00740065002000730061006100740065002000610076006100640061002000700072006f006700720061006d006d006900640065006700610020004100630072006f0062006100740020006e0069006e0067002000410064006f00620065002000520065006100640065007200200035002e00300020006a00610020007500750065006d006100740065002000760065007200730069006f006f006e00690064006500670061002e000d000agt FRA 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 GRE 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 HEB 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 HRV (Za stvaranje Adobe PDF dokumenata najpogodnijih za visokokvalitetni ispis prije tiskanja koristite ove postavke Stvoreni PDF dokumenti mogu se otvoriti Acrobat i Adobe Reader 50 i kasnijim verzijama) HUN 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 ITA 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 JPN ltFEFF9ad854c18cea306a30d730ea30d730ec30b951fa529b7528002000410064006f0062006500200050004400460020658766f8306e4f5c6210306b4f7f75283057307e305930023053306e8a2d5b9a30674f5c62103055308c305f0020005000440046002030d530a130a430eb306f3001004100630072006f0062006100740020304a30883073002000410064006f00620065002000520065006100640065007200200035002e003000204ee5964d3067958b304f30533068304c3067304d307e305930023053306e8a2d5b9a306b306f30d530a930f330c8306e57cb30818fbc307f304c5fc59808306730593002gt KOR ltFEFFc7740020c124c815c7440020c0acc6a9d558c5ec0020ace0d488c9c80020c2dcd5d80020c778c1c4c5d00020ac00c7a50020c801d569d55c002000410064006f0062006500200050004400460020bb38c11cb97c0020c791c131d569b2c8b2e4002e0020c774b807ac8c0020c791c131b41c00200050004400460020bb38c11cb2940020004100630072006f0062006100740020bc0f002000410064006f00620065002000520065006100640065007200200035002e00300020c774c0c1c5d0c11c0020c5f40020c2180020c788c2b5b2c8b2e4002egt LTH 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 LVI ltFEFF0049007a006d0061006e0074006f006a00690065007400200161006f00730020006900650073007400610074012b006a0075006d00750073002c0020006c0061006900200076006500690064006f00740075002000410064006f00620065002000500044004600200064006f006b0075006d0065006e007400750073002c0020006b006100730020006900720020012b00700061016100690020007000690065006d01130072006f00740069002000610075006700730074006100730020006b00760061006c0069007401010074006500730020007000690072006d007300690065007300700069006501610061006e006100730020006400720075006b00610069002e00200049007a0076006500690064006f006a006900650074002000500044004600200064006f006b0075006d0065006e007400750073002c0020006b006f002000760061007200200061007400760113007200740020006100720020004100630072006f00620061007400200075006e002000410064006f00620065002000520065006100640065007200200035002e0030002c0020006b0101002000610072012b00200074006f0020006a00610075006e0101006b0101006d002000760065007200730069006a0101006d002egt NLD (Gebruik deze instellingen om Adobe PDF-documenten te maken die zijn geoptimaliseerd voor prepress-afdrukken van hoge kwaliteit De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 50 en hoger) NOR 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 POL ltFEFF0055007300740061007700690065006e0069006100200064006f002000740077006f0072007a0065006e0069006100200064006f006b0075006d0065006e007400f300770020005000440046002000700072007a0065007a006e00610063007a006f006e00790063006800200064006f002000770079006400720075006b00f30077002000770020007700790073006f006b00690065006a0020006a0061006b006f015b00630069002e002000200044006f006b0075006d0065006e0074007900200050004400460020006d006f017c006e00610020006f007400770069006500720061010700200077002000700072006f006700720061006d006900650020004100630072006f00620061007400200069002000410064006f00620065002000520065006100640065007200200035002e0030002000690020006e006f00770073007a0079006d002egt PTB 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 RUM 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 RUS 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 SKY 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 ENU (Use these settings to create Adobe PDF documents best suited for high-quality prepress printing Created PDF documents can be opened with Acrobat and Adobe Reader 50 and later) gtgt Namespace [ (Adobe) (Common) (10) ] OtherNamespaces [ ltlt AsReaderSpreads false CropImagesToFrames true ErrorControl WarnAndContinue FlattenerIgnoreSpreadOverrides false IncludeGuidesGrids false IncludeNonPrinting false IncludeSlug false Namespace [ (Adobe) (InDesign) (40) ] OmitPlacedBitmaps false OmitPlacedEPS false OmitPlacedPDF false SimulateOverprint Legacy gtgt ltlt AddBleedMarks false AddColorBars false AddCropMarks false AddPageInfo false AddRegMarks false ConvertColors ConvertToCMYK DestinationProfileName () DestinationProfileSelector DocumentCMYK Downsample16BitImages true FlattenerPreset ltlt PresetSelector MediumResolution gtgt FormElements false GenerateStructure false IncludeBookmarks false IncludeHyperlinks false IncludeInteractive false IncludeLayers false IncludeProfiles false MultimediaHandling UseObjectSettings Namespace [ (Adobe) (CreativeSuite) (20) ] PDFXOutputIntentProfileSelector DocumentCMYK 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67F3270)+F1+lt-3F32lt3237875)+F1+lt-3678927(+2+)+3D+B+7(+82+8lt378O+32)+89lt+2A8373=3875A598752=8)3)35398lt23A57BU77(lt777BV8+2A(+80)()7(95++8+lt777B08+73275+5+2 lt777B-^3+A+20)+58lt2gt758(3892+803A+28B)7589lt+2A837=37B)38+lt23+88378)3U)35398V77(lt77+2808+7325A832832+Xlt+288)9B+- 46$+B8+2+5+lt2+8+7A+82+83=+)2+82(+5797B)++2=77(lt77+2325A+287BU77(lt777BV8+2A(+8Ogt)+2O23P+25++28O+(98+)+2 _3O5+8(2lt373lt23A57B7A+8=+75A(+78+(92+8))+937389()+2=83957+(+88+2+B823787A+8=+75A8+22+lt2+8+7A+83)+2=- ^3+A+203A+28B)7589lt+2A837)+c23P+21++2+A+83+A+8=9()3O+5+82+50758B7(753(9=+737(7O+lt23A5+53+B83288)37B)+gtlt+83O98+(3789=+2889+2)+)758397+)(759789lt+2A8+52+B8+2+52+lt2+8+7A+87578927(+B+78-68)39583O+32(+9gt(37A+gt+53+B8328

)]78927(+(3=lt7+8537389lt+2A8+09503A+28++32+X=7+)+5A+287B328+8lt2((+83)+2B+78- F327[889+8(377)3lt++8880)())+O3A+7B9B+395X-F922+7gt0)+F1+lt3F32lt323787+2lt2+8)+689++2gt05+2+7+8O+++7)++2=77(Ult77+2V7577(Ult777BV75B732+87gt75A59322=)33+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67 )+MJ8-F+792gt0)7+75+X(++57Bgt(3=lt+Xlt2359(80)()(7+8gt=8+5lt+283773O++A7B)+gt2+8+(92+8lt2(92gt)+7)+gt2+5A+28+575 =2P++58)A7B3)+9lt85+3)+83(P=2P+)737+3)+53785+V0)8395+5=35+32+B937=P+8738+78+)83+A+2- 6=P+88+78+321+lt3F32lt32378+X=7+28389lt+2A8+09575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt77A+8=+75A832gt2=)+7)+gtlt(+++27+5Ogt59(2gt5A8+28O+++7jM0NNNRj0NNN32lt77A3A7BjbNN0NNN-NN388+80)+7892+gt=P+8+A+7=32+8+78+39575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt737R59(2gt78927(+B+7)3(=833+2)+U8=++A+V3 +Xlt+277(02+2+=+775+8+lt777B8+2A(+8)++277B7A+2B+3 jb0NNN-NN3787B+jbNN0NNN75+X779gt278(37053+873T +2+=+7G777B0W8+G777B0XG777B08Pamp7B+=+775)+lt2+lt23737+32)0(8)375O95B+7B8+=+788lt237gt77(lt72+Z92+8 8B7(7+Xlt+28+0737+3)()8(922+7gt(377+5)7)+8+2+8l32db3278927(+(+787B(922(99=-33lt+2837398+)++U77(lt77+2V3+2)+8+8+2A(+838+78Ogt322++752+((3=lt+37)59(2gt7A+8=+75A8+2875+7BB+7U77(75+5+2lt777BV)3989lt+2A837Ogt)+F1+lt3F32lt323788=ltgtO+(98+)+gt(=7333+25A(+78+(92+88877+7553+8 73+7(392B++)((3759(0O92)+20(9gt2+258)38+)33lt39355372+B937089lt+2A8377595)+882+8lt378Ogt75Ogt32)+2(378- )+2B+879=O+23(3=lt7837B)239B)2+B93287bN8+8)8=+72+B2583X+57575+X779+875+lt2359(88++=3O+35B+5B7878927(+B+78)3)35398+Xlt+28777(02+2+=+775+8+lt777B75)39++=3378O8+58+7B+()7Z9+89B)U)+779gtC7A+28gtVI=37B3)+28L3U7A+8V7X+575WZ9gt675+X779+875+lt2359(8-67)+(8+3+Z9gt75+Xlt2359(80)()2+732+B9+588+(92+80(=82+3+7=5+)89()lt2359(8 3+2)+9lt85+3)+83(P=2P+)737+3)+53785+-B+782+9B)3lt7lt238lt+(873(327+27532)+lt238lt+(3O+B32Z95373)+2 8+(92+8lt32337A3237779gt-cgt537B830)+97(+78+5B+7A3587gt 59(2gtOgt37)+U2+(3==+753738+V75)+2+87359(2gtOgt3289lt+2A83772+(3==+757B)+lt92()8+3775+X779gt32778927(+B+7073

<777BV>Hh99amp()amp6=amp)+amp6384<)amp4quotampY)<$+44)ZS67>mailto3+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67

+5)46$2=-67F327+80lt295+7+Xlt+287525(7O+88+2+5B7877(lt777B()278975+2D+(37aalM3)+FA(35+-^3+A+20353830)+5=B+5lt2gt7++58389+7(A(39275)+Z9+837gt88P+580)8)++X+73)+5=B+875)lt78)38+B++X(++58lNRebgt+287=7gt(8+80)3=7gtgt+28lt238+(9+)+(8+0lt2(92gt87(+)+2+8 75537++=+73(3785+2h S)++Z9gt75+X779+8)JJgt+283lt+7+8=gtO+3gt7ltlt23lt2+32=7gt8+732(+78lt2(92gt)+2B+95+7(+33A+2lbgt+2358=7gtB+788++P 390)+((397A9+8O+32+8922+75+2()2B+882++()+77A+8=+7-C7)+(3789=+2+X8)+(372()+2+2+735=B+8-67)8(8+0822+)gt+2P+89()(8+37(377B+7(gt75)+(383B3732lt3325A(+23=737R59(2gt77(lt77+2Q78927(+B+78lt23)OA+BA+7)+Ult+2(+A+5V(P35=B+8-)+D+327+gti+7+2[83(+753(582(327+gt82+3)+3lt238+(9+89()(8+8O+(98+)+8+7+7(+8)+gt(7+Xlt+(3()+A+23=89((+889lt238+(937789())B)ltlt+2(2=+2+lt2gt75)+2O95B+82+O++28lt+737=32+8+2398(2=+8-5537gt0gt+282+3+7O+33O72+8(883737)+(372(75)+2+927397583)+(+7)7389+50O98373(3=lt7+5B78)+UB+7V0)3=gt(3779+8+7Blt2359(97O+5- W+(A+gt0)+8+3(+283)+(392(+)+(2=+8lt+2lt+2+5Ogt97+)(lt77+28)239B)7(3775)+(P389lt+2A837753A+28B)389()23B9+lt77+28 Ogt)+1+lt3F32lt32378751+lt3678927(++A+8=38(3789=+283)+2375+A(+8O+(98+)+2+2+73++(A+5=782A+2+=+5+8AO+750)++B8gt8+=+7892+)+(3759((3779+8O+(98+)+(+778)+2=37+gtO(P)393=9()988- (378O+7BP+778+875Ogt46$38+=)+5+397+)(lt2((+87)875982gt-amp382+(+7gt046$889+52+B93782+Z927Bc23P+21++2889lt+2A8+8+83+Z9gt75+X779+8=5+Ogt)+22+B8+2+52+lt2+8+7A+8-82+890=7gt3)++88+)(2+lt2+8+7A+82++A7BO23P+25++280523ltlt7B)+2 8+(92+8(+78+83+X(98A+gt3+275+Xlt2359(83985+346$[889lt+2A832gt829(92+-C73297+gt0)+33lt)3+87F327[8875(P32+B9373UV 77(lt77+280+A+8F327[8(3789=+28)+=+2(gt3)+8+97+)(75A598- 5537gt0F6FD+(37MJKM-a+8)+839)+(922+77+(+88gt3(+7892+758lt+83977+(+882gt5+0)(3789+8U5A(+7)+O987+88378927(+V073)+2(37+7398889+=37B77(lt77+280)()O839+gt7++583O+552+88+5075(395O++5+2+A+3=P+)+2+B9379732=(2388bN8+8-)8O27B8 =+3 amp

1()amp$4)ampamp4$+6lt)amp4ampamp63)X$6)=amp3)4)3Iamp c+32+Y1()ampA$4)ampVamp$+6lt)Z(7O+++(A+gt75+(+7gt2+B9+5 7375+0=9828O+5+Z9+gt5+7+57=7gtD+8- +5+2((395(2++9732=5+737832U83(37V0U7+B337V0U278(37V7505537gt0U7+(+88gt3(+7892+Q2+B8237V3275A598)353737+753 U8+V78927(+8B+783)+7892+20O92)+207+753lt23A5+5A(+327+B3+5++75Q32389lt+2A8+75ltlt23A+)+(3783(+78+578927(+B+7 )=99(+7O+(98+37+X87B2+378)lt75+2+7(lt(gt-IWX=lt+87(95+83(PO23P+28077(lt77+2807A+8=+75A8+2875FG[8L7+X(983723= 2+B8237395O+gt+280)3=gt5A8+378lt+(83(372(75)3 lt+28378)395)35+388+8- 6758(98837ltlt+25+5D+lt+=O+2Mb0JKKe0)+F327G2359(+2E(+787B S32P7Bi239lt2+(3==+75+55+77BU83(37V7)+337B=77+2 A5amp+PC+252lt20+$0(0+2(0QRS(307+)02$+90102 320amp527+102)02$+amp+)-2$-+1062$)02$+T$-12+9 320amp+92amp+25UQESlt1amp1$0(0+$(30lt110+0++25050660amp6 )24+9320amp52+320amp5920amp)0+T$+020$+)0+55)-2amp1$++ +$-2+amp0)23-amp8 )8+32+57)+F327+B892+- F327832+(+7gt+4)3amp$amp64=)3amp3+7(D+(37MJKM-aR$+(+88gt3E(+78+ gt10655lt+amp40$20+00()62(5amp0+$-20-+302HCM+$-2+amp0H30 A0amp+RVWR970amp-$01020320amp520503$5amp+9+0+920660amp+ 10$506+$-2+amp0P XY)5++$93$amp-$$+$92+02)20+$69+36602+6)++$2 20amp((0+3+$+9+$-2+amp0amp4020$90)$-20$95($9)20(-($920$9 303-amp750$9)(0+)5+$92+102+$-2+amp0amp+2amp92)0+5+$-2+amp0 amp+2amp902($8 XZ0amp((0+3++3[234$+92-2+))5amp+$[)0+5))5amp+$[ )5amp15302$))5amp+$62+$-2+amp0amp40209)0+5))5amp+$62+$-2+amp0 amp402092)5amp15302$7-)2amp-52+$-2+amp0)5amp0$2+$-20lt1 )2amp-52amp()+0$2+$-202$8 X+3+6+$-2+amp0amp4020$8

D9()7B9B+395O+97+Z9A3(75(395O+7(32lt32+5734+5+2(-6 lt+7+8+2+8+739B)039532(+)38+lt23A57B+B5A(+7)+O987+883 78927(+32++389O=3D+32+5+2=75+5(+787B0+X=73775 (37797B+59(37)78(+27O+875255+A+3lt+5Ogt)+D+324+5+2+B932- )+2+87553737B37Blt23O+=)78927(+=2P+7BB+7(+8(+78+57 =9lt+8+83+27B29875+8+lt777B8+2A(+80I298amp8L)()(3789+8 )+979lt2((+30327)++2A+0)+9798)27B3+B++8)737Rgt+28-67+28+298=80=7gt3)+=3(+57$+A5)8=+07583=+297 Ogt32B73782+5gt7+532(+7892+573)+28+83lt+7gt83(78927(+B+78 75+7(392B+)+=398+O(PR53328+7B+()7Z9+87325+23B78+732(+78 298)+B)+27B8B7(777(732=37)+2O+98+538+ 779+832+78927(+lt2359(8-)8lt2((+82=lt775(3779+85+8lt+)+ 72359(3732+B937878+889()8F327-+5+2()8+287(37875lt+7+832A3378(3952+59(+32+=7+)+8+lt2((+8- 9)lt4$amp)=3)+)6)amp=64-amp3)4-64I )+2+8)395O+O23575(3=lt2+)+78A+lt23)O37378lt+(398+5+275+8+lt777B5+8B73780))+72359(3732+B93788=23)38+7F327-87F3270D+1+lt2=+7[83678927(+395lt2+lt2+83ltlt23A+5 5+8B7378753955+A+3ltA+7Blt23(+8837(95++X=7373+59(37 ++=+7802+A+7B)+)+2)++X=737lt23(+888lt23(32+5323lt+7O33P0)+)+2D+ltlt23A+5(37797B+59(3782+Z92+53=77322+7+7gt89()5+8B7370)+)+27gt5A(+BA+78537+837)+(lt(gt359(2gt075) lt3(+875lt23(+592+82+7lt(+3((+lt(3=lt7803258(lt7+)35+2837gt89()(+2(37875)+77+(+882gtlt23(+592+8322+A3(37752+lt327B358(lt72gtlt23(+592+83)+9)32+8-)8=75+(395O+=lt38+5)+5+2- C46lt46=ampD=6)+ampampC46lt46=ampD=64-Iamp 678927(+B+782+lt2+A+7+523=97B8lt+(398+5+275+8+lt777B5+8B73787325+23O2(+)+ltlt+27(+3+Xlt+28+08P+gt)+gt9273 )+37gt3)+2+AO+3)+=0)377(lt77+2-75)803(3928+0O27B8=+9(2(+3=gtlt2+A398(3==+7837)+7+(+88gt3()7B+7)+C732=67A+8=+75A8+28(-ID9lt2L)+2+32+6lt23lt38+))++2=77(lt77+27577(lt777BO+2+82(+5755+7+5975+2+5+203O+7(32lt32+5738+ 75)7gtlt+2837)3)35839877(lt77+2323+2877(lt777B8+2A(+8I833O+5+7+5LO+2+Z92+532+B8+2877A+8=+75A8+275lt23A5+ 89()5A(+859(2gt22+8lt+(A+3)+)+2)+gt833+27gt5A(+83)+A9+

37A+87B72+B9+58+(92+8-7+X+78A+895gt8lt+232=+52+5gtOgt)+i3A+27=+7((397Ogt(+37)+3lt(377(lt77+287577(lt777B I2+lt32()+5L750)+65373B2++))+2(37(983780)+gt=P+A+2gt89+3O8+2A3780)+7(+)+7(983732(37+X9lt92lt38+8087()=+73)82+lt32- 6O+)ltltgt3+Xlt75377gt3)+8+3lt(875lt23A5+5537732=3775 2+R++X=lt+8757+(53+89lt372+Z9+8-

+8lt+(9gtD9O=+50

gt32o883(+8 aJN-MdN-JJMd

$B+cgt320F4GH

Illegal Practices OfFee-Only Financial PlannersIn The Business Of Insurance

(Problems amp Solutions)

Prepared ByNigel Brian Taylor CFPreg

Santa Monica CA(Copyright copy2002 - 2009 Nigel Brian Taylor CFPreg All Rights Reserved)

Tel 310 260 1126 Website wwwiamafiduciarycom

Illegal Activities in the Business Of Insurance By Fee-Only Financial Planners (Problems And Solutions)

Prepared by Nigel Brian Taylor CFPreg

Santa Monica CA CA Insurance License Nr 0716446

INTRODUCTION

Overwhelming media focus on ldquomethods of compensationrdquo for financial services in the recent past rather than competence and regulatory compliance has fueled an ever increasing consumer-driven demand for FEE-ONLY advice in insurance planning Media and marketing hype has influenced the consumerrsquos perception and led many to conclude that ldquofee-only plannersrdquo are the only planners capable of giving objective unbiased advice relating to insurance matters because they receive no compensation from third parties are not affiliated with represent or take compensation from insurers and therefore have no conflicts of interest and loyalty that could impair their ability to provide objective and unbiased information Unfortunately however many fee-only financial planners in California and 38 other States with similar regulations are operating outside the law in order to provide this ldquoobjective and untaintedrdquo advice This discussion will highlight these illegal insurance activities and provide potential solutions (initially for California although the suggested solutions could be used as a model for other States) to increase compliance with current California insurance law It will also discuss developing trends in the business of offering insurance advice in California particularly in relation with the provision of insurance advice as a component of a ldquoComprehensive Financial Planrdquo All Statutes herein are California statutes unless otherwise indicated

INSURANCE LICENSING

The three most widely held insurance licenses issued to individuals who provide general advice to families and consumers on general insurance matters in California are The Life Agent License(LX) the Fire and Casualty Broker-Agent (FX) and to a negligible degree the Life and Disability Analyst License(LA) A full list of other licenses is available at wwwinsurancecagov

Life Agent (LX)

The licensing requirements for a Life Agent license are set forth in Chapter 5 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit I A Life Agent (LX) is defined as a person authorized by and on behalf of a life or disability or life and disability insurer to transact life disability or life and disability insurance1

Generally a life agent advises consumers as to the benefits and disadvantages of life health disability and long term care insurance etc and transact business on behalf of one or more insurance companies offering products to consumers A Life Agent must be compensated

Confidential Page 1 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

by the insurer on the sale of product in the form of commissions and cannot accept fees for service from the consumer There are approximately 154664 resident and non-resident LX agents serving Californians2

Fire amp Casualty Broker-Agent (FX)

A fire and casualty licensee is a person authorized to act as an insurance agent broker or solicitor and a fire and casualty broker-agent license is a license so to act The FX licenseersquos authority to act is determined by which documents are initially submitted

bull A $10000 Bond of Insurance Broker form 417-5 authorizes the licensee to act as an insurance broker An insurance broker is a person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurer

bull An Action Notice of Appointment form 447-54 authorizes the licensee to act as an insurance agent An insurance agent is a person authorized by and on behalf of an insurer to transact all classes of insurance except life insurance

bull An Action Notice of Solicitor form 417-31 authorizes the licensee to act as an insurance solicitor An insurance solicitor is a natural person employed to aid an insurance agent or insurance broker in transacting insurance other than life

There are approximately 88300 resident and non-resident FX agents serving Californians3

Life amp Disability Analyst (LA)

The licensing requirements for a Life and Disability Analyst license are set forth in Chapter 8 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit II A Life and Disability Insurance Analyst is defined as a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto4

Generally a LA is trained to a significantly higher level than a LX and can advise a consumer not only as to the advantages and disadvantages of all forms of insurance but can also provide competent unbiased comparative analysis of various policies for a fee as well as interpret the rights of consumers under any insurance contract The LA must among other things

bull Have been licensed as a Life Agent (LX) for a period of at least 5 years preceding a LA application5 and

bull Must complete a comprehensive course of education covering significantly more topics than the LX and

bull Pass a rigorous examination before obtaining the LA license

Confidential Page 2 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

It should be noted that the LA license currently authorizes a person to provide advice for a fee on all insurance related matters but does not currently require any training or examination in Long-Term Care insurance or require a minimum number of hours of continuing education credit in each licensing period In the past ten years the number of CA Life And Disability Analysts has remained stable at approximately 44 (forty four) for the entire Statersquos population6

ldquoFINANCIAL PLANNERSrdquo OFFERING INSURANCE ADVICE

There are over 34000 (thirty four thousand) Registered Investment Advisors and Investment Advisor Representatives in California7 An Investment Advisor in California is authorized under sect25009(b) California Corporations Code8 to utilize the title of ldquofinancial plannerrdquo (without any statutory requirement to substantiate his her competence to perform the tasks of a financial planner) and perform comprehensive financial planning services on a fee-only basis The examination and qualification requirements for the Series 65 (Uniform Investment Adviser Law Examination) are attached hereto as Exhibit III NO knowledge of insurance products or the business of insurance is required in order to register as an Investment Advisor ldquoFinancial Planningrdquo and ldquoFinancial Plannersrdquo are having an ever increasing and significant impact on the provision of insurance services in California It is important that State Agencies and boards such as the CA Dept of Insurance (CDI) Agent and Broker Advisory Committee (ABAC) provide input to regulators and legislators alike regarding allied ldquoprofessionsrdquo impacting the business of insurance to ensure that consumers are properly protected A copy of this discussion will therefore be forwarded to both the CDI and the ABAC for their consideration

Many fee-only planners offer ldquocomprehensiverdquo financial planning services that by definition include risk management analysis and recommendations as part of the planning process These recommendations include calculations regarding the amounts and types of life insurance recommendations with regard to the benefits and disadvantages of various individual and or group health insurance plans disability and long term care plans etc In some cases advice is provided on a fee basis regarding homeowners auto and other types of property casualty and general liability coverage

To avoid real and ldquoperceivedrdquo conflicts of interest many fee-only financial planners choose not to maintain affiliations or representation agreements with any insurer and therefore are unable to license themselves as LXrsquos or FXrsquos Some let their LX or FX licenses lapse when they transition to fee-only planning In both these cases California law is clear Any person accepting fees for insurance related matters from any third party other than an insurer unless otherwise exempt must be licensed as a LA9 In an attempt to circumvent the law other planners obtain a LX and or FX license to create the appearance of legal compliance but never have any intention of actually ldquotransacting businessrdquo or utilizing the license for the purpose for which it was originally issued or intended This practice is prohibited under CA law10 because it is the fee-only plannerrsquos true intention to charge the consumer for

Confidential Page 3 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance advice rather than to be compensated by an ldquoinsurerrdquo as CA Insurance Code Sections 32 amp 1622 (supra) require

Many fee-only planners quote an often-abused section of Californias Insurance code Section 1831(e) which provides a limited exemption from insurance licensing for Registered Investment Advisers to justify their unlawful behavior The following is an excerpt from a letter originally addressed to Errold Moody CFPtrade (A California Life amp Disability Analyst who has concerned himself with the illegal activities of fee-only financial planners in insurance matters for over 10 years in California) on July 27 1995 by Patricia Staggs the then Assistant General Counsel and Chief Compliance Bureau of the Legal Division Compliance Bureau of the California Department of Insurance who wrote regarding the Investment Adviser exemption

That exemption appears at Insurance Code Section 1831(e) and provides an exemption to the chapter regarding life and disability analysts for an investment adviser as defined in section 25009 of the Corporations Code when acting in that capacity (Emphasis added) Section 25009 of the Corporations Code provides as follows

Investment adviser means any 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 regular business publishes analyzes or reports concerning securities Investment Adviser does not include (a) a bank trust company or savings and loan association (b) an attorney law accountant engineer or teacher whose performance of these services is solely incidental to the practice of his profession (c) a broker-dealer whose performance of the services is solely incidental to the conduct of his business as a broker-dealer and who receives no special compensation for them or (d) a publisher of any bona fide newspaper news magazine or business or financial publication of general regular and paid circulation and the agents and servants thereof but this clause (d) does not exclude any person who engages in any other activity which would constitute him as an investment adviser within meaning of this section

A life and disability insurance analyst is defined in insurance code 325 as follows

Life and disability insurance analyst means a person who for a fee or compensation paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as a beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The Departments view to that exemption set forth in insurance code 1831(e) is that an investment adviser need not submit to regulation by the Department of Insurance so long as the activities engaged in by the investment adviser fall within the defined activities of an investment advisor as set forth in Corporations Code section 25009 It is noteworthy that the definition of an investment adviser contains no reference to insurance related activities

Confidential Page 4 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Emphasis Added) Therefore any activities included within the definition of life and disability analyst such as advising as the life insurance products are clearly outside the capacity of an investment adviser and would subject the person to the provisions of law relating to life and disability insurance analysts

Very Truly Yours Patricia Staggs

Since as early as 1995 the CDI has taken the documented position that the Investment Advisor exemption applies ONLY when a Registered Investment Advisor acts ldquoin that capacityrdquo and as defined in section 25009 of the Corporations code It is the authorrsquos conclusion based on conversations with CDI staff counsel Jody Miller therefore that the only time a Registered Investment Advisor in the State of California may lawfully provide ldquoinsurancerdquo related advice to a consumer for a fee would be for example if he were advising a client as to the allocation of sub accounts containing regulated securities within an already existing variable life insurance or variable annuity policy

This exemption does NOT however permit a Registered Investment Advisor to discuss the merits or disadvantages of any type of insurance including Life Health Disability Long Term Care Property Casualty Homeowners General Liability Auto insurance etc that do not contain any elements related to the provision of investment advisory services Under current law then any Registered Investment Advisor who provides such advice and is compensated directly by the consumer without having first obtained a LA license is guilty of a misdemeanor11

The position of the CDI was illuminated in a letter addressed to representatives of the financial services sector who attended a series of meetings held with the Dept of Insurance in late 1997 In as letter dated February 3 1998 Assistant Ombudsman and Legislative Liaison Jeffrey Kenny wrote

February 3 1998

On July 30 1997 a discussion concerning the life and disability insurance analyst license was held between the California Department of Insurance (CDI) and members of the financial planning industry As you participated in this dialog I am writing to communicate CDIs policy on this matter

The focal point for this issue is consumer protection not the interests of the individual factions With all parties based in customer service it is sad that this detail has been lost in much of the discussion As defined by insurance code Section 325 a life and disability insurance analyst is

a person who for a fee or compensation of any kind paid by or derived from any person or source other than the insurer advises purports to advise or offers to advise any person

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

insured under named as beneficiary of or have any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The fact that there are only 46 life and disability analyst in California is not a valid argument for repealing this code In fact the limited number of licensees and population in noncompliance begs for increased education and enforcement While the easy solution for those in noncompliance may be to repeal this law consumers who pay for fee advise on insurance matters deserve an analyst educated in insurance per CDI standards The current licensing requirements ensure that relationship Any legislative effort to repeal this law will likely be opposed on the basis that such action is harmful to consumers by consumer groups insurers agents and brokers and the California Department of Insurance

At the July 30 1997 meeting representatives from the financial planning industry raised two additional suggestions concerning CDIs examination requirement The first seeks to allow issuance of a Life and Disability Analyst license to Certified Financial Planners and Certified Public Accountants following the successful completion of their own professional examinations Again this is an idea that requires legislation and will certainly face opposition CDIs position remains at only those individuals who pass CDIs exam are to be issued a life and disability analyst license CDI is the agency charged with enforcing this license and will remain via its examination and related or regulatory functions the authorizing agency for this license

The final suggestion request a waiver of the requirement than an examinee must have five (5) years experience as a life licensee or employment experience under said licensee to sit for CDIs examination Again this is an idea that requires legislation CDI will reserve judgment until the full breadth of this proposal has been introduced to the state legislature

Despite some groups interest in changing current law there is an existing law which is and has always been quite clear While a financial planner may be illegally engaging in insurance analyst activities and may not be aware of their violation it is my hope that this the explanation of policy will provide them with the impetus to come into compliance or cease the illegal activity immediately Per insurance code Section 1844 any person who acts offers to acts assumes to act as a life and disability insurance analyst when not licensed by the commissioner per this article is guilty of a misdemeanor Consistent with current practice information obtained on individuals in noncompliance will be aggressively pursued

Sincerely

Jeffrey Kenny Assistant Ombudsman and Legislative Liaison

However successful criminal prosecutions for a violation of CIC sect1844 are apparently rare because the CDI must turn these matters over to local district attorneyrsquos offices Statewide Their failure to enforce the law is probably attributable to a lack of funding to prosecute

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

non-violent misdemeanor counts of this nature where no victim can be produced Unfortunately and to the detriment of Californiarsquos consumers this lack of enforcement has had the effect of creating a Cavalier attitude towards compliance with State law that essentially seems to tolerate this unlawful activity permitting fee-only planners to operate almost with impunity

There are a number of fee-only financial planners who claim in their firms disclosure form that they have no affiliations or representation agreements with any insurance carriers and that they do not represent or offer for sale any kind of insurance products However in reality they maintain LX or FX licenses and have contracts with life insurance carriers who do not require a minimum annual production level without any intention of ldquotransactingrdquo on behalf of an insurer (a violation of CA Insurance code section 1668 sub (c) amp (g) supra) while making no disclosures anywhere on their disclosure statements or advertising materials as to their active insurance licenses which is in and of itself a violation of Section 17255 of the Insurance Code12

Other fee-only financial planners claim that any insurance advice given by them to their clients as part of a comprehensive financial plan is given ldquofree of chargerdquo They claim that a fee is charged for all the other elements (investment tax retirement amp estate planning) but not for the risk management portion of the plan They point to the fact that they never ldquoact in any of the capacities defined in Article 1 (commencing with Section 1621)rdquo because they do not appoint themselves with or represent an insurance company or any particular insurance product and do not actually ldquotransactrdquo insurance business (Thereby avoiding in their minds a licensing requirement under CIC Sections 32 amp 1622) Furthermore they claim they do not charge the consumer a fee for the advice they provide regardless of the complexity of that advice (Charging a fee would trigger a licensing requirement under section 325 Insurance Code) The result if the courts upheld this logic would be that the Dept of Insurance would lose all control and authority for the provision of insurance advice to consumers by fee-only financial planners in California to the California Dept of Corporations Worse still the only recourse damaged consumers would then have against fee-only financial planners in the business of insurance would be the California Dept of Corporations a state agency woefully equipped to enforce state insurance laws

One problem that requires statutory revision is the lack of a suitable definition for ldquotransactingrdquo in the business of insurance While the Dept of Insurance has considerable leeway in determining what constitutes ldquotransactingrdquo the code itself provides little or no useful information or guidance for fee-only planners who often feel based on the wording of the current definition that they acting inside the law when performing certain services Transaction is defined under sect35 of the Insurance code as

35 Transact as applied to insurance includes any of the following a) Solicitation b) Negotiations preliminary to execution c) Execution of a contract of insurance d) Transaction of matters subsequent to execution of the contract and arising out of it

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

While the requirements under sub(s) b c amp d is self-explanatory ldquoSolicitationrdquo (sub A) Is not defined and the legislature has to date been loathe to define it leaving the interpretation to the CDI and creating a ldquofact at issuerdquo that requires administrative or judicial interpretation and determination in cases where fee-only planners dispute their activities as ldquotransactingrdquo This is not the first time the issue of defining ldquosolicitationrdquo has been brought to the attention of the Department of Insurance In a discussion paper dated September 25 1998 the Producer Licensing Working Group recommended defining ldquosolicitationrdquo in the following manner

Solicitation Any oral or written statement or image (1) made by any person either directly or by another person acting pursuant to the first persons authorization direction or control (2) which statement is made with the intention or likely effect of provoking directly or indirectly a recipients interest in potentially purchasing an insurance product

This author believes a clarification of what constitutes Solicitation under the Insurance Code will assist Registered Investment Advisors fee-only financial planners and others in assessing which license if any would be appropriate given their particular facts and circumstances If the legislature decides not to act the Dept of Insurance should issue authoritative guidelines or advisory opinions similar to those of other regulatory agencies such the SEC NASD and IRS in an effort to bolster compliance This is extremely important given recent trends and developments in the delivery methods and current practices of individuals providing insurance services in California

The issue of ldquotransactingrdquo and what constitutes ldquosolicitationrdquo aside and with regard to the practice of giving advice in insurance for free CIC Section 1631 does not mention compensation as a criteria for triggering a licensing requirement13 Even setting aside the current CDI determination of what constitutes ldquotransactingrdquo which is ambiguous Californiarsquos Insurance code for purposes of interpretation is also governed by Section 1858 of the California code of Civil Procedure (CCCP)14 There is voluminous precedent under CCCP section 1858 supporting the authorrsquos opinion that the interpretation of a statute that produces an absurd or anomalous result will not prevail when used as a defense In interpreting a statute Supreme Court avoids any construction that would produce absurd consequences15 In construing statute state Supreme Court will not parse each literal phrase of statute if doing so contravenes obvious underlying intent or leads to absurd or anomalous result16

Since it is already well settled in law that ldquoThe business of Insurance is a business affected with a public interestrdquo17 this author believes the circumvention of State Insurance licensing laws by fee-only financial planners in any manner irrespective of compensation or level of competence presents a clear and present danger to Californiarsquos consumers and is contrary to the public interest The intent and desire of the Legislature to require State licensure for insurance professionals is clearly set forth in CA Insurance Code Sections 1631 1633 amp 1633518 and is unambiguous in the authorrsquos opinion

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UNLICENSED INSURANCE ADVICE CURRENT REMEDIES

CA Insurance Code Section 1668 applies in the case of fee only planners who maintain a license but do not intend to actively transact business as LXrsquos The sole remedy for such conduct is that under this section ldquo the commissioner may deny an application for any license issued pursuant to this chapter if

helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this staterdquo

CA Insurance Code Section 1668 is problematic in that it is difficult if not impossible to enforce unless insurers are ldquorequiredrdquo to terminate all LXrsquos amp FXrsquos not actively ldquotransactingrdquo insurance business and unless the Dept of Insurance requires proof be provided to the department by the insurer that a LX or FX is in fact actively transacting business The code could require insurers to review commissions paid to appointed agents on an annual basis and terminate the appointments of all agents who do not ldquotransactrdquo over a period of 12 months unless valid cause can be shown Exceptions could be made for salaried employee of insurers and persons engaged in the regulation of insurance business in whatever form

CA Insurance Code Section 1844 is applicable to fee only planners who provide insurance advice for a fee or ldquofor freerdquo and provides that any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

Again this is difficult if not impossible to enforce because the Dept of Insurance must rely on local district attorneyrsquos offices most of which have no funds to prosecute non-violent misdemeanor counts particularly when most DArsquos offices consider this a matter for the Insurance Commissioner in the first place Therefore rather than seek prosecution under this section the Dept of Insurance should actively enforce State law against violators under the recently introduced CIC section 129218 (discussed below) It makes no sense for the Dept to refer these cases to local district attorneyrsquos offices if their decision to prosecute under the Statersquos criminal statutes is based on ldquofinancial considerationsrdquo rather than the evidence of malfeasance

There are two other remedies available to the Dept of Insurance The first is California Insurance Code (CIC) 790 et Seq The Unfair and Deceptive Trade Practices Act The second is the aforementioned and recently introduced CIC Section 129218

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Prosecution under CIC 790 et Seq does not require compensation because under section 79001 the Insurance Code applies to all persons engaged in the ldquobusinessrdquo of insurance19

Under section 79004 the Dept of Insurance is authorized to investigate any person engaged in the business of Insurance in California20 Transacting in the business of insurance without a valid license with or without compensation is clearly an unfair and deceptive competitive practice because violators seek to avoid and evade ascertainable standards in training examination licensing and continuing education required by the State for agents and brokers appointed by insurers who are performing essentially the same tasks while at the same time claiming to take the ldquoethical high groundrdquo in terms of the advice given State licensing places the agent at a competitive disadvantage because a licensed agent can only accept compensation from an insurer unless that agent is also a Life and disability Analyst Section 790035 provides substantial administrative penalties including fines and restraining orders for persons violating this Act21 The provision of unlicensed insurance advice whether for a fee or ldquofree of chargerdquo by fee-only planners is detrimental to the consumers of California because there is no ascertainable standard of education or requirement to keep current present unless such planners are subjected to the licensing requirements of the CA Dept of Insurance

The second remedy available is authorized under CIC Section 12921822 which provides for greater administrative remedies against those individuals who transact the business of insurance without proper licensure A CA Life amp Disability analyst whose business has been severely impacted filed complaints in early 2002 against prominent California fee-only planners who are flagrantly violating the law To date the CDI has taken no action against these planners and it remains unclear whether these new powers will be utilized on a proactive basis to seek out fee-only financial planners offering insurance advice or whether the Dept of Insurance will remain reactive to ldquoconsumerrdquo complaint only in the enforcement of Californiarsquos insurance laws

On a final note the CDI is considering proposed regulations pursuant to the authority granted to the Insurance Commissioner under the provisions of in SEC 8 of Assembly Bill 393 Chapter 321 Statutes of 2000 that among other things address the necessity for licensing These new regulations include a proposed section 21923

Draft

Section 21923 - Necessity of License

The following activities are not exempt from licensure under CIC Insurance Code Section 1631 because they are directly related to solicitation negotiation or effecting the sale of insurance

(a) Explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

limits premiums rates deductibles payment plans or any other insurance contract or potential insurance contract terms

(b) Recommending andor advising or urging applicantspotential applicantspolicyholders applicants for insurance coverage potential applicants for insurance coverage or policyholders to buy particular insurance policies or to insure with particular companies or insurers

(c) Binding of insurance coverages

Note Authority cited Section 8 of AB 393 Chapter 321 States of 2000 Reference Insurance Code Section 1631 of the Insurance Code

Should section 21923 be enacted any perceived ambiguities associated with the giving of ldquounlawfulrdquo advice by fee-only planners would be eliminated While the author applauds all these efforts to increase compliance through enforcement and regulation the consumerrsquos total ignorance of California Insurance law and the reactive nature of insurance enforcement will bring few if any real-world changes for consumers There have to date been few complaints regarding the illegal practices of fee-only financial planners by consumers because a) a licensed life insurance agent is always eventually involved in the ldquosalerdquo of a specific product to the consumer and b) the client has already received a written affirmation from the fee-only planner that he is acting in a fiduciary capacity as their trusted advisor The client therefore places greater value on the fee advice given by a fee-only planner than the advice of a licensed life agent ldquosellingrdquo the same product the fee-only planner recommends simply because the licensed individual is an agent of the insurer

Of course the consumer is paying twice for the same advice once in the form of fees and a second time in the form of commissions to a licensed ldquoagentrdquo Providing there is no relationship between the fee-only planner and the insurance agent and no referral fee is payable by the agent to the planner this fact is never disclosed to the client It is the authorrsquos personal experience that many fee-only financial planners refer these clients to out-of-state insurance agencies who have declared themselves willing to provide substantial discounts from their commissions While the author views these discounts are ldquoonly fair in light of the circumstancesrdquo it does not excuse the illegal conduct and the fact that the client is not receiving any favorable contractual benefits on their insurance policy such as shorter exclusion periods shorter surrender penalties lower mortality and expense fees or lower percentage monetary penalties for early termination of the product

The already established fiduciary relationship between a fee-only financial planner and his her client creates a bond of trust that implies by its very nature that the planner is fully complying with all federal and state laws In fact many fee-only planners subscribe to written codes of ethics established by credentialing bodies and professional membership organizations such as the CFP Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) which demand their members comply with all federal and state licensing laws However the aforementioned

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

professional membership and regulatory bodies are conflicted in their response to the problem of illegal activity because both organizations as mentioned previously on page 5 amp 6 of this report are lobbying for a change in the law that will allow such fee-only planners particularly those holding the CFPreg Certificate to qualify for a waiver from licensing These professional membership and regulatory bodies refuse to investigate or discipline such planners unless the State first prosecutes them The State of California for reasons stated elsewhere in this report have been loathe to take action against these fee-only planners despite repeated complaint filings by life and disability analysts over the most recent ten year period whose income is being severely impacted by such illegal activities

From a consumerrsquos perspective there would be absolutely no reason to question the integrity of their fee-only financial planner In fact organizations such as the National Association of Personal Financial Advisors (NAPFA) have marketed their fee-only planner members as the ldquoonlyrdquo planners capable of providing clear untainted unbiased advice on all financial matters including insurance and have disseminated brochures since the 1980rsquos claiming that commissioned based advice is somehow tainted and a totally flawed delivery method that could harm consumers NAPFArsquos position has been supported and publicized to a great extent by the media including magazines such as Bloomberg and Money to newspapers such as the Los Angeles Times which requires ldquofee-onlyrdquo as a pre-requisite ldquomethod of compensationrdquo for any planner participating in itrsquos popular ldquoMoney Makeoverrdquo series of consumer assistance feature articles It has also been supported by non-profit organizations such as the Consumer Federation of America Negative consumer perceptions of insurance licensed individuals has to a great extent been unfairly tainted by such media hype and marketing tactics

The recent introduction of section 12921822 coupled with an acceptance of proposed section 21923 would absolutely provide the CDI with additional needed powers to regulate the business of insurance It will not in the authorrsquos opinion however increase compliance in any meaningful manner Continued consumer ignorance of State insurance laws and reactive rather than pro-active enforcement by the CDI will almost certainly maintain the current status quo

This author applauds the sentiment of the recently introduced statute but believes it has no real-world practical value This license requirement will continue to be ignored by most fee-only planners because of the incredible burden it places on them in terms of initial compliance and qualification In addition the statute to date remains un-enforced because the CDI lacks the manpower and funding within the civil enforcement division to even begin to attack this widespread problem Simply stated this recently introduced legislation demands aggressive investigation large fines and numerous prosecutions to achieve even partial compliance The CA Department of Insurance has instigated a consumer-complaint driven ldquoreactiverdquo role rather than a consumer-protective ldquoproactiverdquo enforcement campaign even after the introduction of CIC section 129218

One major reason for continued non-compliance is the requirement that applicants be registered as LX agents for five years preceding their examination and licensure as LArsquos

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Fee-only planners view this as being forced to move back into a house they have already sold) Secondary reasons include fee-only planners view the LA license as an over-qualification to perform the tasks they desire to perform there are no schools or colleges currently teaching the course work required to become LArsquos because a total lack of enforcement by the CDI of this statute has created a total lack of interest on the part of fee-only planners Also there are no teaching materials or publications available for purchase to prepare for the examination These problems and potential solutions are discussed in more detail in the section below

Finally it is fascinating and significant to note that while many fee-only planners firmly believe State and SEC investment adviser regulations are outdated irrelevant and sorely in need of a complete revision and overhaul if they permit planners to ldquoperform comprehensive financial planningrdquo few if any fee-only financial planners actually violate the Investment advisory statutes One major reason for this almost total compliance is because of the rigorous enforcement efforts of the Dept of Corporations the NASD and the SEC in regards to the Investment Adviser Act of 1940 and the severe penalties including imprisonment it imposes for offenders

In light of the foregoing this author has concluded that the only way consumers will be substantially protected from unlicensed insurance activities is if (a) meaningful reforms are enacted that make statutory compliance desirable and (b) cooperation is sought with other State agencies such as the Dept of Corporations and private professional regulatory organizations such as the CFP Board of Standards (discussed later) who regulate activities in related financial service categories to facilitate the sharing of information crucial in establishing which activities fee-only financial planners are engaging in

RECOGNIZING NEW DELIVERY METHODS IN THE BUSINESS OF INSURANCE

It is the authorrsquos belief that licensing compliance in the business of insurance will only become a reality when States recognize the recent rapid developments in the ldquomethods of deliveryrdquo of insurance advice nationwide particularly those associated with the emerging profession of financial planning More and more consumers have recognized the advantages of employing one trusted advisor for all their financial affairs and view insurance advice as part of an overall financial plan Californiarsquos consumers are cognizant that conflicts of interest exist in insurance planning because LX amp FX agents are only compensated by insurers and represent the insurerrsquos interests to the client not the clientrsquos interests to the insurer Such agency relationships impact the fee-only plannerrsquos ability to honor hisher fiduciary obligation to act in the clientrsquos best interests at all times

Fee-only planners desire to perform the tasks and functions of an LX amp FX licensee Few if any desire to perform the more complex tasks and analysis normally expected of a Life and Disability Analyst Fee-only planners are committed to eliminating the conflicts of interests associated with representing an insurer and many consumers in California desire to employ one fee-only planner to handle all their affairs including the insurance planning portion of their financial plan rather than multiple professionals The net effect of this is that many

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consumers seek out fee-only planners to reduce conflicts while ostensibly obtaining objective and untainted advice Unfortunately they are instead often given incompetent advice by unlicensed individuals In order then to benefit and protect consumers substantial but beneficial reform is necessary

Fee-only planners with established financial planning credentials equate obtaining the LA license with ldquomoving back into a house they are trying to sellrdquo They feel competent and qualified to assist consumers in insurance planning and may have held insurance licenses for years prior to allowing them to lapse State law however demands they be licensed for five years preceding their application for licensing as Analysts and during that time they would need to ldquotransactrdquo insurance as a licensed LX agent something they do not feel they can do

As the author sees it the State has two choices in this matter It can either crack down on fee-only planners and others offering unlicensed insurance advice for a fee (hardly feasible based on lack of funding staffing or voluminous consumer complaints) or seek ways to legalize regulate and supervise these plannerrsquos activities Currently financial planners are regulated at the state level under Section 25009(b) of Californiarsquos Corporations Code Which states

Section 25009 (b) (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part of another 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 publishes analyses or reports concerning securitieshelliphelliphelliphelliphelliphelliphelliprdquo

While consumers nationwide have embraced the concept of comprehensive financial planning California along with most other States has been slow to recognize that financial planning has developed far beyond the simple giving of ldquoinvestmentrdquo advice Financial planners in California are still regulated supervised and audited by the Dept of Corporations which while skilled in terms of overseeing regulated securities transactions is woefully under equipped to supervise the activities of a planner engaging in insurance investment tax retirement estate and asset protection planning The Series 65 Investment Advisor Examination is the only legal requirement for those who desire to use the term ldquofinancial plannerrdquo in California However as the Series 65 training and education requirements23 illustrate the current State educational requirements for ldquofinancial plannersrdquo are far removed from the level of competency actually required to practice ldquofinancial planningrdquo

RECOGNITION OF ldquoFINANCIAL PLANNINGrdquo AS A PROFESSION

The State of California is well known for its innovative and forward thinking and has a unique opportunity as the bell-weather State of this nation to lead the way for other States to follow It is time for Californiarsquos regulatory and licensing bodies such as the Dept of Insurance and Dept of Corporations to recognize ldquofinancial planningrdquo as an ldquoemerging

Confidential Page 14 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

allied professionrdquo that is having a significant impact on the provision of services traditionally regulated by their agencies Recognizing the emerging profession of financial planning and recommending to the legislature the necessity of developing regulations that will govern professionals who desire to practice the profession of financial planning is the only viable sensible and logical long-term solution for protecting Californiarsquos consumers from harm

As with any other emerging profession the State in developing any such regulations should recognize and seek the counsel of long established national and international organizations that have developed rules guidelines ethics and ascertainable standards of education examination criteria credentialing and continuing education requirements Consideration should also be given as to whether a new or existing State agency should regulate the activities of financial planners or whether these activities should be regulated independent of agencies in allied professions such as those agencies governing insurance and securities As an example lawyers accountants and bank employees etc are provided limited exemptions from registration under insurance and securities laws because the State has concluded that their existing professional State licensing requirements contained in the Business and Professions Code established standards of practice and a written codes of ethics and professional responsibility provide sufficient protection to consumers without requiring multiple State licensure

Regulations governing investment advisers are inadequate to address the multitude of tasks performed by comprehensive financial planners The question therefore arises as to whether a separate state license and new regulations should be developed within the Business amp Professions Code to govern comprehensive financial planners that is separate and distinct from investment advisory services in order to adequately protect Californiarsquos consumers Should the use of the commonly touted investment industry term ldquofinancial plannerrdquo be reserved for individuals who have been State certified as competent to perform comprehensive financial planning The greatest obstacle to the recognition of financial planning as an emerging profession requiring some form of licensure is by what standards should such a profession be measured Many fee-only financial planners have no professional accreditation whatsoever other than the investment adviser registration overseen by the CA Dept of Corporations Have ascertainable and acceptable standards been developed

FINANCIAL PLANNING AND THE CERTIFIED FINANCIAL PLANNERreg

CERTIFICANT

The most widely recognized professional financial planning designation worldwide is the CFPreg Certificate The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS INC24 (Hereafter CFP Board) has licensed its CFPreg and CERTIFIED FINANCIAL PLANNERreg trademarks to over 67000 individuals in 19 countries There are currently 4578 CERTIFIED FINANCIAL PLANNERreg Certificants licensed in California25 Most CFPreg Certificants hold multiple State or federal licenses (insurance securities Registered Investment Advisor etc) and are already supervised in their professional activities by

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

multiple federal and or state agencies Sadly not one auditor of any supervising federal or state agency possesses the knowledge base or skill sets to supervise the overall activities of a comprehensive fee-only financial planner It should be stated that while the CFP Board has established a code of ethics and uniform standards of practice for CFPreg Certificants that could be used as a yardstick by legislators the CFP Board does not currently supervise investigate or audit any CFPreg Certificantrsquos activities unless a formal complaint is filed against a Certificant with the Board

The CFP Board defines a ldquofinancial plannerrdquo as a person ldquowho is capable and qualified to offer objective integrated comprehensive financial advice to or for the benefit of individuals to help them achieve their financial objectivesrdquo A financial planning professional must have the ability to provide competent financial planning services to the client utilizing the ldquofinancial planning processrdquo26 which covers basic ldquofinancial planning subject areasrdquo 27

With specific regard to the business of insurance it is important to understand the benefits provided by the CFPreg Certificate course of education as well as its shortcomings The CFP Board has developed a course curriculum (Attached as Exhibit IV) in insurance planning as an integral part of the CFPreg Certificate examination requirement This educational requirement exceeds the training currently required by the California Department of Insurance on all levels There are however shortcomings to the CFP Boardrsquos program that cannot be overlooked There is no training in State insurance regulations or any Statersquos insurance code provisions governing the business of insurance Furthermore while there is a mandatory requirement that each CFPreg Certificant complete 30 hours of continuing education for each two year certification period there is currently no requirement that all of these hours be approved by the CDI for insurance continuing education credits

The CFP Board of Standards is willing to cooperate with the CDI to address and correct the shortcomings in its program Once these problems have been corrected there are two potential solutions that if implemented could encourage full compliance with State licensing laws certainly on the part of CFPreg Certificant fee-only planners not currently licensed

SOLUTION 1 PROVIDE A FULL EXEMPTION FROM INSURANCE EXAMINATION AND LICENSING TO CFPreg CERTIFICANTS WHO ARE LICENSED AS REGISTERED INVESTMENT ADVISORS

Currently section 1831(e) provides a limited exemption from insurance licensing for Registered Investment Advisors (RIArsquos) but only ldquowhen acting in that capacityrdquo (Discussed in detail earlier) This suggestion would expand the relevant code section and remove any limitation from RIArsquos performing the tasks of a LX or FX agent providing the following conditions are met

1 The person is and remains a licensed Registered Investment Advisor either with the State or by the SEC AND

Confidential Page 16 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

2 The person remains a CFPreg Certificant in good standing AND

3 The person in addition to any continuing education requirements of the CFP Board of Standards in other areas of financial planning completes no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

4 The person provide to the CA Dept of Insurance proof of his current licensing status as a Registered Investment Advisor and CFPreg Certificant together with a list of all approved continuing education courses completed for each two year period or whenever required to do so by the Dept of Insurance AND

5 Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

6 Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS EXEMPTION

As previously illustrated the Registered Investment Advisor license alone does not qualify a person to offer insurance advice for a fee The CFPreg Certificate alone even once enhanced to provide training in statutory law and the regulation of the business of insurance in California would be insufficient because the CFPreg Certificate is not an official State regulated license However a combination of the CFPtrade Certificate and the Registered Investment Advisor license coupled with the other suggestions made above will provide a sound educational basis for any person desiring to offer insurance advice for a fee while protecting the public from harm to a far greater degree than they are protected under current law In addition this proposed exemption would alleviate the need for fee-only CFPreg Certificants to become licensed LArsquos in order to be compensated by the consumer thereby eliminating the requirement that they license themselves as LXrsquos for 5 years before meeting licensing qualification requirements By NOT forcing fee-only planners to move into a house theyrsquove already moved out of BUT RATHER demanding competence in return for a waiver from LA licensing requirements the CA Dept of Insurance would protect the consumer while facilitating an opportunity for immediate compliance without expensive investigation of illegal activities prosecution and supervision of future activities Compliance would go up the cost of supervision investigation and prosecution would go down

It is important to note that any advice given would be limited under this proposed change to the typical advice offered by LX or FX licensees who generally provide explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures limits premiums rates deductibles payment plans and

Confidential Page 17 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance contract or potential insurance contract terms as well as recommending andor advising potential applicantspolicyholders on insurance coverage to buy particular insurance policies or to insure with particular companies or insurers The advice given should not be allowed to encroach on the more complex tasks a Life amp Disability Analyst provides

This exemption will

bull Permit Registered Investment Advisors with a CFPreg Certificate to offer insurance advice without the need for appointment by an insurer and allow them to be compensated by a third party other than the insurer for that advice (A Variant of this model already exists in Connecticut and New Hampshire A very POORLY structured derivative (that this author does NOT support) has just been signed into law in Idaho The Idaho statute gives a Registered Investment Advisor carte blanche to offer insurance advice for a fee without any training examination or continuing education requirement in insurance planning a clear violation of the public trust In addition CFPreg Certificants will shortly be given an exemption from registration as Insurance Counselors (LA equivalent license for Texas) in Texas The author finds this unacceptable because again no instruction will be mandatory in insurance regulation and insurance law)

bull Require the candidate to complete a comprehensive course of education in among other things all aspects of insurance planning and demand state licensing (as an investment adviser) before qualifying for the exemption

bull Require continuing education of 30 hours in insurance planning a significant improvement over the LA license which requires NO continuing education currently

bull Leaves intact the State Insurance Commissionerrsquos authority (under CICsect790 et Seq And CICsect129218 (supra)) to supervise audit fine punish and bar from the business of insurance in CA any person who violates the publicrsquos trust

COMPARISON OF THE ldquoCFPreg PLUS REGISTERED INVESTMENT ADVISORrdquo EXEMPTION TO THE LIFE AND DISABILITY ANALYST LICENSE REQUIREMENT

There will still be a need for the Life amp Disability Analyst license in California LArsquos provide a valuable service to the public by

bull Offering expert testimony in court regarding all insurance related matters

bull Providing complex expert comparative analysis and interpretation of the terms and conditions of various insurance contracts to consumers accountants and lawyers

Confidential Page 18 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

bull Explanation of the rights of the parties under an insurance contract a service otherwise reserved exclusively to members of the Bar

The proposed exemption would not obviate the need for LA licensees It will provide a means for fee-only Registered Investment Advisor financial planners who have earned the CFPreg Certificate a professional financial planning credential that has course work superior to the current minimum standard requirement by the CA Dept of Insurance (with the noted exceptions listed above which must be addressed before an exemption would be granted) to serve their clients basic insurance needs without appointment by an insurer and the inherent conflicts of interest this may represent

EFFECT OF THIS PROPOSED EXEMPTION ON CONSUMERS

This proposed exemption would have a substantially positive effect on consumers with no negative impact whatsoever They will be able to seek out a professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education It will further provide greatly enhanced protections for the public against wrongdoing by requiring a bond in the amount of $100000 (one hundred thousand dollars) and mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CA Department of Insurance (It should however be noted that most if not all CFPreg Certificants meet all the above criteria already in terms of EampO insurance etc and obtaining a $100000 bond would not place an undue burden on any fee-only CFPreg Certificant planner) Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their insurance matters

POTENTIAL PROBLEMS ASSOCIATED WITH THE GRANTING OF AN EXEMPTION FOR CFPreg CERTIFICANTS MEETING THE ABOVE CRITERIA

One possible problem would of course be that other financial service professionals with professional insurance or financial planning credentials would seek to block any such legislation unless their credential were to be included Some other designations worthy of exemption would be

The Chartered Life Underwriter (CLU) The Chartered Financial Consultant (ChFC)

The author based on the knowledge and skill sets required to hold such designations has no objections to the inclusion of these designations for purposes of the aforementioned suggested exemption providing these professionals meet ALL the other criteria

SOLUTION 2 PERMIT STATE LICENSING AS A LX OR FX WITHOUT INSURANCE COMPANY APPOINTMENT AND AUTHORIZE PLANNERS TO BILL CLIENTS DIRECTLY

Confidential Page 19 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Under California law a person who ldquofor a fee or compensation of any kind paid by or derived from any person or source other than an insurerrdquo(emphasis added) must register a Life and Disability Insurance Analyst under CIC Section 325 As previously illustrated in this discussion however Life and Disability Insurance Analysts are required to

bull Pass an antiquated examination that has not been substantially revised since 1983 bull Self-Study in some cases already repealed statutes because no examination

revisions have been undertaken since 1983 Furthermore no educational courses are available from any college school or professional educational institution because there is simply no demand for the license due to a complete lack of enforcement of LA laws by the CDI

bull Self Study to familiarize themselves with many topics including Long Term Care and other more recently introduced exotic and hybrid insurance products because candidates are not tested on these products due to lack of LA examination revision

Oddly once licensed Life and Disability Insurance Analysts are NOT required to complete any continuing education requirements of any kind There is no requirement other than one imposed by ldquopotential liabilityrdquo through civil action for a LA to ldquoremain currentrdquo as a LA licensee

In light of the foregoing a far more sensible alternative and second potential solution would be to allow all LX amp FX agents to be licensed with the CDI without the requirement for appointment to transact on behalf of an insurer LX or FX agents desiring to be compensated directly from the consumer (for purposes of this discussion the author will refer to such agents as FLX amp FFX agents) would subject themselves to the same CDI licensing and examination requirements as traditional LX amp FX agents FLX amp FFX agents would also be subject to the same continuing education requirements as traditional LX amp FX agents The function of FLX amp FFX licensed individuals would be to act ldquoquasirdquo in the capacity of a personal representative of the client with the authority to negotiate and effect all insurance coverages on their behalf at the best possible terms with any company they choose (As fiduciaries such FLX ampFFX licensees would be subject to regulations similar to the NASDrsquos ldquobest executionrdquo rules They would be required to perform extensive due diligence and seek the best coverages at the most reasonable prices on behalf of their clients)

Currently such activities allowed under CIC sect33 are restricted to ldquoa person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurerrdquo (Emphasis added) In essence then a similar but new and distinct section would be created expanding the role of an ldquoinsurance brokerrdquo as defined under CIC sect33 to that of a FLX amp FFX who would be authorized to solicit and negotiate all forms of insurance including property casualty life health disability long-term-care and other forms of insurance

Confidential Page 20 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

This new Code section would make additional demands on any person seeking to license himherself as a FLX amp FFX licensee to protect consumers from harm Among other things such licensees would be required to

bull Complete BOTH LX and FX courses of education and the appropriate licensing examinations (Based on the CFP Boardrsquos program of education in insurance planning fee-only comprehensive financial planners provide information regarding all aspects of a consumerrsquos risk management needs

bull Be a licensed Registered Investment Advisor with the State AND

bull Complete no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

bull Provide to the CA Dept of Insurance proof of current licensing status as a Registered Investment Advisor together with a list of all approved continuing education courses completed each two year period or whenever required to do so by the Dept of Insurance AND

bull Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

bull Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS NEW LICENSE

This proposed license would have a substantially positive effect on consumers with no negative impact whatsoever Consumers will be able to seek out a ldquolicensedrdquo professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education The examination requirement supports the CDIrsquos position as stated in the February 8 1998 letter written by Jeffrey Kenny (Supra) that only those individuals who pass CDIrsquos exams are to be issued licenses and that the CDI will remain ldquovia its examination and related or regulatory functions the authorizing agencyhelliphelliprdquo in the business of insurance It will further provide greatly enhanced protections for consumers against wrongdoing by requiring a California surety bond in the amount of $100000 (one hundred thousand dollars) in addition to mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CDI Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their basic insurance needs on a fee-only basis

Confidential Page 21 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

SUMMARY AND CONCLUSIONS

The California Dept of Insurance has essentially four choices

1 Maintain a Status Quo approach do nothing to address the illegal activities of fee-only financial planners remaining a reactive rather than proactive regulator of the business of insurance

2 Implement a program of rigorous investigation and enforcement of illegal activities in the business of insurance utilizing current and newly introduced sections of the California Insurance Code to stamp out the widespread and growing problem of illegal activities on the part of fee-only financial planners offering advice in insurance matters for a fee in California

3 Consider implementation of one or more of the solutions suggested in this discussion

4 Develop meaningful initiatives such as those suggested herein to combat andor provide solutions to illegal activities in the business of insurance

Maintaining the status quo and doing nothing to address the illegal activities of fee-only planners will eventually cause the CDI to lose control and regulatory authority over the business of providing insurance advice to consumers to other state agencies such as the Dept of Corporations an agency ill equipped and hardly qualified to supervise and monitor such activities More and more broker-dealer registered financial planners and life agents are transitioning to the more profitable fee-only model Without aggressive enforcement of the law many of these planners may eventually surrender their insurance licenses to avoid multiple state licensure layering of regulation supervision and audit The current lack of any enforcement by the CDI against prominent planners who have already been reported to CDIrsquos investigations division by Errold Moody CFPreg and others over the past ten years is an encouragement to other transitioning planners to ignore and violate State law Inaction equates to state condoned tolerance and silent approval in the eyes and minds of many fee-only financial planners

Rigorous investigation and enforcement while preferable is also the most difficult policy to enforce The CDI has neither the manpower nor the consumer driven complaints necessary to actively enforce insurance laws against fee-only planners violating state law Simply put these planners are ldquooff the radarrdquo and rarely generate complaints Since they are not licensed they do not fall under the authority of the CDI and unless they are brought to the attention of the CDI by virtue of consumer complaints these planners will continue to remain extremely difficult to find Additionally the CDI lacks proper funding and manpower to effectively enforce Insurance laws in California at this time Therefore any consideration for rigorous investigation and enforcement must be viewed as impractical given the current budget deficit and the apparent lack of will on the part of the CDI and local district attorneyrsquos offices to prosecute violators when they are reported

Confidential Page 22 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

By implementing one or more of the suggestions contained in this discussion the CDI will facilitate voluntary and willing compliance with state law while ensuring that their mandate to protect consumers from harm by insisting that CDI established examination licensing and continuing education requirements would be met Fee-only planners would be able to offer the advice they desire to offer on a fee basis with direct client billing the CDI would be in a far better position to supervise control audit and discipline these planners if and when the need arises More importantly consumers would be able to turn to the CDI for assistance without hearing the phrase ldquoIrsquom sorry that individual is not licensed and does not fall under our jurisdictionrdquo

In conclusion the CDI has the opportunity to solicit opinions and suggestions from state sponsored agencies and boards such as the CA Agent and Broker Advisory Commission to the Dept of Insurance Some members of the CDI Agent and Broker Advisory committee are fee-only CFPreg Certificants and have an understanding of the issues involved These professionals and other insurance professionals whose livelihoods also depend in part on ethical conduct in the business of insurance are in a position to provide valuable input to the CDI regarding these suggestions

It is hoped that this discussion will generate concern and renewed scrutiny of the illegal activities of fee-only planners in California and that this in turn will lead to a necessary beneficial and long overdue overhaul of Californiarsquos insurance licensing laws for the benefit of not only Californiarsquos consumers but eventually Consumers nationwide who reside in States with similar insurance advisory statutes

Respectfully submitted

Nigel B Taylor is a Certified Financial Plannerreg Certificant General Securities Principal and CA Life Agent associated with Royal Alliance Securities Inc He is a former President of the Award Winning Institute of Certified Financial Planners Los Angeles Society (1999) and Former Chairman of the Financial Planners Association ndash Los Angeles Chapter (2000) Mr Taylor has published numerous articles regarding proposed regulation compliance ethics and professionalism for financial planners and CFPreg Certificants He is based in Santa Monica California

1 CA Insurance Code Sections 32 amp 1622 2 Source Dept of Insurance Annual Report 2000 3 Source Dept of Insurance Annual Report 2000 4 CA Insurance Code Section 325 5 CA Insurance Code Sections 1849 6 Source CA Dept of Insurance March 2002 7 Source CA Dept of Corporations March 2002 8 25009 (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part

Confidential Page 23 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

of another business of advising others either directly or through publications or writings as to the value of securitieshelliphellip(Excerpt) 9 CA Insurance Code Section 325 10 CA Insurance Code Section 1668 The commissioner may deny an application for any license issued pursuant to this chapter if helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this state 11 CA Insurance Code Section 1844 Any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

12 CA Insurance Code 17255 (a) For purposes of Sections 325 1625 1626 17245 17581 1765 1800 14020 14021 and 15006 every licensee shall prominently affix type or cause to be printed on business cards written price quotations for insurance products and print advertisements distributed exclusively in this state for insurance products its license number in type the same size as any indicated telephone number address or fax number

CIC 17255 (c) Any person in violation of this section shall be subject to a fine levied by the commissioner in the amount of two hundred dollars ($200) for the first offense five hundred dollars ($500) for the second offense and one thousand dollars ($1000) for the third and subsequent offenses The penalty shall not exceed one thousand dollars ($1000) for any one offense These fines shall be deposited into the Insurance Fund

13 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the commissioner authorizing the person to act in that capacity 14 1858 In the construction of a statute or instrument the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein not to insert what has been omitted or to omit what has been inserted and where there are several provisions or particulars such a construction is if possible to be adopted as will give effect to all 15 Flannery v Prentice (2001) 110CalRptr2d 809 26Cal 4th 572 28P3d 860 16 People v Martinez (1995) 45CalRptr2d 905 11Cal4th 434 903P2d 1037 17 Caminetti v State Mut Life Ins Co (1942) 126P2d80926Cal 4th 572 28P3d 860 18 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the

Confidential Page 24 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

commissioner authorizing the person to act in that capacity The issuance of a certificate of authority to an insurer does not exempt an insurer from complying with this article

1633 Any person who acts offers to act or assumes to act in a capacity for which a license is required without a valid license so to act is guilty of a misdemeanor

16335 It is hereby declared to be the intent of the Legislature in enacting this chapter that the regulations prescribed herein be the exclusive regulations relating to the conduct of insurance business by persons licensed to act in any of the capacities defined hereunder any local regulations or ordinances notwithstanding 19 79001 This article applies to reciprocal and interinsurance exchanges Lloyds insurers fraternal benefit societies fraternal fire insurers grants and annuities societies insurers holding certificates of exemptions motor clubs nonprofit hospital associations life agents broker-agents surplus line brokers and special lines surplus line brokers as well as all other persons engaged in the business of insurance (color amp emphasis added)

20 79004 The commissioner shall have power to examine and investigate into the affairs of every person engaged in the business of insurance in the State in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 79003 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance Such investigation may be conducted pursuant to Article 2 (commencing at Section 11180) of Chapter 2 Part 1 Division 3 Title 2 of the Government Code

21 790035 (a) Any person who engages in any unfair method of competition or any unfair or deceptive act or practice defined in Section 79003 is liable to the state for a civil penalty to be fixed by the commissioner not to exceed five thousand dollars ($5000) for each act or if the act or practice was willful a civil penalty not to exceed ten thousand dollars ($10000) for each act The commissioner shall have the discretion to establish what constitutes an act However when the issuance amendment or servicing of a policy or endorsement is inadvertent all of those acts shall be a single act for the purpose of this section

22 129218 (a) The commissioner shall have the authority to issue a cease and desist order against any person acting as or holding himself herself or itself out as an insurance agent or broker without being so licensed and against any person holding out that person as transacting or transacting the business of insurance without having been issued a certificate of authority The commissioner may issue a cease and desist order without holding a hearing prior to issuance of the order The commissioner may impose a fine of up to five thousand dollars ($5000) for each day the order is violated

22 Supra 23 See Exhibit III of this memorandum

Confidential Page 25 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

24 CFP Board a 501(c)(3) certifying organization fosters professional standards in

personal financial planning so that the public values has access to and benefits from competent financial planning CFP Board owns the certification marks CFPtrade CERTIFIED FINANCIAL PLANNERtrade and federally registered CFP (with flame) logo which it awards to individuals who successfully complete initial and ongoing certification requirements CFP Board has currently authorized more than 39214 individuals to use these marks in the United States and 27343 individuals outside the United States For more about CFP Board visit wwwCFPnet 25 Source CFP Board of Standards Inc Colorado 26 Financial Planning Process denotes the process which typically includes but is not limited to the six elements of establishing and defining the client-planner relationship gathering client data including goals analyzing and evaluating the clientrsquos financial status developing and presenting financial planning recommendations and monitoring the financial planning recommendations (CFPtrade Board Code of Ethics ndash Definitions) 27 Financial planning subject areas denotes the basic subject fields covered in the financial planning process which typically include but are not limited to financial statement preparation and analysis (including cash flow analysis planning and budgeting) investment planning (Including portfolio design ie asset allocation and portfolio management) income tax planning education planning Risk Management (emphasis added) retirement planning and estate planning (CFPtrade Board Code of Ethics ndash Definitions)

Confidential Page 26 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

EXHIBIT I

Confidential Page 27 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life Agent License Information

LIFE AGENT (LX) Licensing Information

TABLE OF CONTENTS

Authorizing acts and with definitions Qualifications Filing Requirements

Individual -- Residents Organization -- Residents Individual -- Non-Residents Organization -- Non-Residents

License Term Renewal of License Additional Information

APPLICABLE FORMS

Individual Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Action Notice of Appointment (Form 447-54) Organization Endorsement (Form 411-8A) Non-Resident Insurance License Stipulation and Agreement (Form 447-68)

These forms are also included in the Individual and Business Entity applications

AUTHORIZING ACT

California State Insurance Code Chapter 5 Part 2 Division 1

A life agent (LX) is a person authorized by and on behalf of a life disability or life and disability insurer to transact life disability or life and disability insurance

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

Prelicensing ExperienceEducation

1) Require a minimum of 40 hours of approved prelicensing classroom study A new California resident applicant who had a current life license in another state and completed 40 hours of prelicensing education for life insurance in order to obtain that license or an applicant holding either a Life Underwriter Training Council Fellowship (LUTCF) or Chartered Life Underwriter (CLU) designation is exempt from the 40 hours of prelicensing education

2) Require 12 hours of approved prelicensing classroom study on ethics and the California Insurance Code Where an applicant seeks both the Fire and Casualty broker-agent license and the Life agent license the applicant shall only be required to complete one 12-hour course on ethics and the California Insurance Code

Continuing Education

1) During each of the first four 12-month periods following the date of original issue of license satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to a minimum of 25 hours

2) Any licensee who has complied with the above or was licensed as of 123191 shall satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to 30 hours of instruction during each two-year license period

3) Any agent that markets long-term care insurance must complete an 8-hour California specific long-term care continuing education course Check with your insurer regarding long-term care insurance requirements

4) Effective January 01 1998 any person who is 70 years of age or older and who has been licensed for 30 continuous years as a licensee in good standing in this state may be exempt from continuing education requirement Any licensee that markets individual long-term care contracts is still required to meet the specific education requirements for marketing such contracts

The agent who is limited by the terms of a written agreement with the insurer to transact only specific life insurance policies or annuities having an initial face amount of $10000 or less that are designated by the purchaser for the payment of funeral or burial expenses will be exempted from the prelicensing and continuing education requirements The commissioner may require the insurer appointing those life agents to certify as to the limitation of the agents representations

FILING REQUIREMENTS INDIVIDUAL - RESIDENTS

Application Application for Insurance License form 441-9

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to CaliforniaThis form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants If an examination is required fingerprint impressions will be taken at the California examination sites

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Prelicensing Certificate Of Completion Original certificate(s) of completion signed by both classroom instructorprovider director and applicant for life agent course andor Ethics and Code course

Examination Applicants who do not hold an active Life (LX) California resident license and whose eligibility for that license without examination has expired must pass the written examination prepared and administered by the Department

Fees - Individual Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice or an Organization Endorsement $21 per notice Examination $35 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 all applicants must appear at the designated exam site with a check in the amount of $74 made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal Fee $124 (2-year term)

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 1

Life Agent License Information

FILING REQUIREMENTS ORGANIZATION - RESIDENTS

Organization Application

Corporation partnership unincorporated association limited liability company or nonprofit corporation applicants must submit the Application for Organization License form 441-11

NOTE The organization must have at least one California resident LX endorsee to establish and maintain the license

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each endorsee who holds an active California non-resident LX license Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Fees - Organization Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS INDIVIDUAL - NON-RESIDENTS

Application Application for Insurance License form 441-9 must be completed by applicants who do not hold an active California LX license

NOTE Licensed non-resident agents whose state of residence does not have continuing education must meet the same requirements as a California resident in order to renew their license Licensed non-resident agents who comply with the continuing education requirements of their state of residence are exempt from California continuing education requirements If licensees transact long term care products they must meet California specific long term care education requirements

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California This form is also included in the Individual and Business Entity applications

Stipulation and Agreement Non-resident Insurance Licensee Stipulation and Agreement form 447-68

Certification Of License Status From Resident State

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Examination Not required except if the applicants state commonwealth or Canadian province of residence has no reciprocal agreement for waiving of examination

Fees - Individual Non-Resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS ORGANIZATION - NON-RESIDENTS

Organization Application

Corporation partnership unincorporated association or nonprofit corporation applicants must submit the Application for Business Entity License form 441-11

Note A California resident cannot be endorsed on a non-resident organization

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each natural person who holds an active California non-resident LX license This form is also included in the Individual and Business Entity applications Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Stipulation and Agreement Non-resident Insurance License Stipulation and Agreement as required by law form 447-68 signed by an officer or partner of the organization

Certification Of License Status From Resident State Must be in the organization name

Fees - Organization Non-resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 2

Life Agent License Information

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed to the mailing address of record approximately 90 days prior to the expiration date of the license Individuals will receive a renewal application showing total fees due for all license types held and the total number of continuing education hours completed at the time the renewal form is printed If the continuing education requirement has not been met the renewal will indicate how many hours are needed If renewal application is not received refer to the back of the permanent license for renewal instructions

All licensees that renew their licenses late will be required to file new company appointments organization endorsements or solicitor appointments Late is defined as any renewal for which the requirements to renew (this includes completing the continuing education hours) are not met until after the expiration date of the previous license term

ADDITIONAL INFORMATION

The Commissioner may grant authority to transact variable contracts to a person or an organization licensed as a Life Agent which is appointed by an admitted insurer which is required to register itself or to register a separate account or fund with the United States Securities and Exchange Commission or to register its variable policies or contracts with the Securities and Exchange Commission The person must submit acceptable proof of registration with NASD or SECO before authority to transact variable contracts can be granted

If currently licensed as a resident of another state upon becoming a California resident a clearance letter from the former state of residence is required

Limited liability company applicants are required to submit the following information to demonstrate compliance with Section 16475 of the California Insurance Code

1 A statement as to the number of licensees rendering professional services on behalf of the Limited Liability Company

2 The aggregate dollar amount of E amp O Liability Insurance Cash Bonds Bank Certificates of Deposit US Treasury obligations etc held to provide security for claims against the Limited Liability Company (The amount required over the minimum of $500000 is at least $100000 multiplied by the number of licensees rendering professional services on behalf of the company however the maximum amount is not required to exceed $5000000)

3 For purposes of satisfying the security requirements of California Insurance Code Section 16475 we will require one or more of the following

(A) A copy of the declaration page for each liability insurance policy used to satisfy the minimum security requirement

(B) Verification by the bank or escrow holder listing the type and current dollar value of the assets used to satisfy the minimum security requirements

Limited liability company licensees must file at least once each year an annual confirmation with the commissioner in the above format to demonstrate continuing compliance with the financial security requirements of Section 16475 of the California Insurance Code

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 644A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - January 16 2002 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 3

EXHIBIT II

Confidential Page 31 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life and Disability Insurance Analyst License Information

LIFE AND DISABILITY INSURANCE ANALYST (LA) License Information

APPLICABLE FORMS

Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Organization Endorsement (Form 441-8A) Request For Live Scan Service (form 442-39A)

This form is also included in the Individual and Business Entity applications

AUTHORIZING ACT California State Insurance Code Chapter 8 Part 2 Division 1

A Life and Disability Insurance Analyst is a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is required

Prelicensing ExperienceEducation Must have worked as a life licensee as defined under Chapter 5 Part 2 Division 1 of the Insurance Code for five years preceding the date of the examination or as an employee of such a licensee

Continuing Education

Not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

FILING REQUIREMENTS - INDIVIDUAL

Application Application for Insurance License form 441-9

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants You must call SYLVANIDENTIX at 1-(800) 315-4507 to schedule an appointment to have your fingerprint impressions taken prior to submitting your application Fingerprint impressions will not be accepted from any other source A copy of your Request For Live Scan Service (form 442-39A) must be submitted with your application verifying your prints were taken by SYLVANIDENTIX

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

FEES - Individual

License Filing $418 (2-year term) Examination $103 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 this fee must be paid at the designated site when the fingerprint impressions are taken You may pay by check made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal $418 (2-year term )

EXAMINATION

The applicant must pass the written examination prepared and administered by the Department

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 1

Life and Disability Insurance Analyst License Information

STUDY MATERIAL

Although the Department does not recommend any particular text method or course of study listed below is a study guide to assist in the preparation for the examination 1) The life and disability laws of this state are contained in the California Insurance Code Those sections on which an applicant might be tested are

General Provisions Sections 1 - 46 Division 1 Part 1 Chapter 1 Sections 100 - 123 Division 1 Part 1 Chapter 2 Article 1 Sections 150 - 151 Division 1 Part 1 Chapter 2 Article 3 Sections 250 - 252 Division 1 Part 1 Chapter 2 Article 4 Sections 280 - 287 Division 1 Part 1 Chapter 2 Article 5 Sections 300 - 305 Division 1 Part 1 Chapter 3 Article 1 Sections 330 - 339 Division 1 Part 1 Chapter 3 Article 2 Sections 350 - 361 Division 1 Part 1 Chapter 4 Article 1 Sections 380 - 393 Division 1 Part 1 Chapter 4 Article 3 Section 430 Division 1 Part 1 Chapter 4 Article 4 Sections 440 - 449 Division 1 Part 1 Chapter 4 Article 5 Section 460 Division 1 Part 1 Chapter 5 Sections 480 - 489 Division 1 Part 1 Chapter 6 Article 3 Sections 550 - 5575 Division 1 Part 2 Chapter 1 Article 1 Section 680 Division 1 Part 2 Chapter 1 Article 3 Sections 669 - 726 Division 1 Part 2 Chapter 1 Article 5 Sections 750 - 767 Division 1 Part 2 Chapter 1 Article 55 Sections 770 - 776 Division 1 Part 2 Chapter 1 Article 57 Sections 7771 - 7773 Division 1 Part 2 Chapter 1 Article 6 Sections 780 - 784 Division 1 Part 2 Chapter 1 Article 65 Sections 790 - 79010 Division 1 Part 2 Chapter 1 Article 75 Sections 815 - 816 Division 1 Part 2 Chapter 2 Article 5 Sections 1220 - 1221 Division 1 Part 2 Chapter 4 Article 2 Sections 1580 - 1599 Division 1 Part 2 Chapter 5 Sections 1621 - 17585 Division 1 Part 2 Chapter 5A Sections 1759 - 175910 Division 1 Part 2 Chapter 8 Sections 1831 - 1849 Division 2 Part 2 Chapters 1-13 Sections 10110 - 11533 Division 2 Part 61 Sections 12670 - 12691 Division 3 Chapters 1 and 2 Sections 12900 - 12977

2) The provisions terms and conditions of a life and disability insurance contract that might be tested are but not limited to the following Life Insurance Disability Insurance

Insuring Agreement Insurance Clause Reinstatement Schedule Incontestability Renewal Provisions Settlement Options Benefit Provisions Dividend Options Co-Insurance Ownership Provisions Waiting Periods Nonforfeiture Provisions Elimination Periods Grace Periods Deductibles Loan Provisions Waivers Suicide Exclusions Assignments of Transfers Restrictions Aviation Clause Pre-existing Conditions Beneficiaries Provisions Other Insurance

Additionally the applicants are expected to be thoroughly familiar with the types of contracts being issued in this state including but not necessarily limited to Life Disability

Individual Contracts Individual ContractsGroup Contracts Group ContractsIndustrial Contracts Blanket ContractsOrdinary Life Basic Hospital ExpenseLimited Payment Life Basic Medical-Surgical ExpenseModified and Graded Premium Basic Hospital and Medical-Surgical ExpenseEndowment Insurance Hospital Confinement IndemnityImmediate Annuities Major Medical ExpenseDeferred Annuities Comprehensive Major Medical ExpenseVariable Annuities Disability Income ProtectionLevel Term Life Accident OnlyIncreasing Term Life Specified DiseaseDecreasing Term Life Specified AccidentRe-entry Term Life Medicare SupplementUniversal Life 3) A thorough and complete knowledge of life and disability insurance may include

a Application and consequences of various policies b Applications and consequences of federal and estate taxes c Interrelationship with other investment vehicles d Interrelationship with other regulatory agencies including but not limited to SEC RIA etc e Interrelationship with contract business probate and investment laws in California f Insurance companys financial and organization analysis g Rate calculations and risk transfer

FILING REQUIREMENTS - ORGANIZATION

Organization Application

Corporation partnership nonprofit corporation or unincorporated association applicants must submit the Application for Business Entity License form 441-11

Natural Person Named On Organization

Application for insurance license form 441-9 and Organization Endorsement form 411-8A must be completed by each natural person who does not hold an active California LX license (individual filing requirements must be met)

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 2

Life and Disability Insurance Analyst License Information

Organization Endorsement form 441-8A (this form is also included in the Business Entity application) must be completed for each natural person who holds an active California LX license

FEES - ORGANIZATION

Fees are not required for the organization license Each natural person named on the organization must pay individual fees

License filing $418 (2-year term) Renewal Fee $418 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed approximately 60 days prior to the expiration date of the license and will show total fees due for all license types held If this application is not received refer to the back of the permanent license for renewal instructions

ADDITIONAL INFORMATION

The following persons are exempt from the requirements of this license

a Active members of the State Bar of California

b Any person who has passed all of the qualifying examinations necessary to become an Associate of the Society of Actuaries

c An officer or employee of any bank or trust company who receives no compensation from sources other than the bank or trust company for activities connected with his employment which would otherwise subject him to licensing requirements

d Any person employed by an employer who on behalf of his or her employer or any employee of his or her employer transacts life or disability insurance with but not on behalf of an insurer or advises his or her employer or any employee of his or her employer in any manner concerning life or disability insurance if

1 the employer receives no compensation by reason of such transactions or advice and 2 such person receives no compensation from any source other than his or her employer for such transactions or advice

e An investment advisor as defined in Section 25009 of the Corporations Code when acting in that capacity

NOTE An employee or officer of any insurer is not eligible for a license as a Life and Disability Insurance Analyst

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 765A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - December 18 2000 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 3

EXHIBIT III

Confidential Page 35 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Series 65 Exam

The Uniform Investment Adviser Law Examination and the available study outline were developed by the North American Securities Administrators Association Inc (NASAA) The examination called the Series 65 exam is designed to qualify candidates as investment adviser representatives The exam covers topics that have been determined to be necessary to understand in order to provide investment advice to clients The study outline is designed to provide an overview of the exams general content and format

The study outline is divided into corresponding sections to aid in preparing for the examination

The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline Applicants are allowed 180 minutes to complete the examination At least 89 (685) of the questions must be answered correctly for an individual to pass the Series 65 exam

The examination is conducted as a closed book test Upon completion of the examination the score for each section and the overall test score will immediately be made available to the candidate

The examination is administered by the National Association of Securities Dealers Inc (NASD) To schedule a candidate for the examination an individuals firm should file a Form U-4 or the individual should file a Form U-10 and pay the $11000 examination fee to the NASD at the following address

NASD Regulation Inc Attention Exams Dept 9509 Key West Avenue Rockville MD 20850 301590-6500

Once registered NASD will open a 120-day window within which an individual may schedule the exam A link to the NASD Forms can be found at httpwwwnasdrcom3400asp More information on exam sites can be found at httpwwwnasdrcom2630asp

The questions in the examination the examination study outline and the method by which the examination is administered have been designed by Chauncey Group International for NASAA and approved by NASAA and the Competency Exam Project Group In addition each examination question is statistically analyzed to insure reliability

Any attempt to compromise the examination may serve to destroy its validity and usefulness Therefore NASAA intends to bring appropriate action against persons who attempt to compromise the examination in whole or in part In addition such conduct may subject a candidate to further action by state administrators

Successful completion of the Uniform Investment Adviser Law Examination does not relieve a candidate of the personal responsibility to know and to abide by the specific requirements of the securities laws and regulations of the states in which the candidate transacts business Furthermore although successful completion of the examination may satisfy a portion of the requirements of a particular state it does not convey the right to transact business prior to being granted a license or registration by that state

NASAA believes that the Uniform Investment Adviser Law Examination will significantly benefit the industry and state regulators alike by such uniformity The investing public will be afforded a greater degree of protection through enhanced uniform qualification standards

NASAA Uniform Investment Adviser Law Exam (Series 65)

Exam Specifications

CONTENT AREA

OF ITEMS

I Economics and Analysis

20

A B Understand basic economic concepts

1 Inflationdeflation a Definitions b Causes of inflationdeflation

2 Interest rates and yield curves a Graphs b Definitions c Interest rate = cost of money

3 Basic economic indicators a GDP b Employment indicators c Trade deficit d Balance of payments e CPI

A

determine investment merits A Income statement

a Revenues b Cost of goods sold c Pre-tax margins d Cash flow

B Balance sheet a Assets b Liabilities c Working capital d Owners equity e Footnotes

A

C Demonstrate understanding of quantitative methods to evaluate investments

A Time value of money B Expected return C Net present value D Internal rate of return E Inflation-adjusted return (real return) F After-tax returnyield G Risk-adjusted return H Total return I Holding period return J Yield-to-maturity K Yield-to-call L Current yield M Risk measurements (eg Beta standard deviation duration) N Valuation ratios (eg PE price-to-book) O Benchmark portfolios P Annualized return

D E Identify risks (ie definitions impact on the market companies

and personal investments) D Business E Market F Interest rate G Inflation H Regulatory (eg tax law changes) I Liquidity

J Opportunity cost

II Investment Vehicles

26

A B Evaluate cash and cash equivalents

A Types and characteristics of cash and cash equivalents a Certificates of deposit b Money market funds c Treasury bills

B Benefitsrisks of owning cash and cash equivalents

B C Evaluate fixed income securities

B Types and characteristics of fixed income securities a US government and agency securities b Mortgage-backed securities c Corporate bonds (ie investment grade and high yield) d Convertible bonds e Municipal bonds f Zero-coupon bonds

C Benefitsrisks of owning fixed income securities

C D Evaluate equity securities

C Types and characteristics of equity securities a Common stock (eg voting rights etc) b Preferred stock c Convertible preferred stock

D Methods used to determine the value of equity securities (eg technical and fundamental analyses dividend discount)

E Benefitsrisks of owning equity securities

D E Evaluate investment company securities

D Types and characteristics of investment companies a Open-end investment companies

(mutual funds)

b Closed-end investment companies c Classes of shareholders expense ratios sales load

breakpoints 12b-1 fees E Benefitsrisks of owning investment company securities

E Recognize derivative securities and their benefitsrisks

F G Understand unique aspects of international investing

F Emerging vs developed markets G American Depository Receipts (ADRs) H Currency influences (concept of risk)

G H Understand real estate partnerships and investment trusts

(REITs) and variable annuities G Definitions H Benefitsrisks

III Investment Recommendations and Strategies

39

A B Determine and analyze the financial profile of the client to

develop a suitable investment policy and strategy A Type of client

a Individual b Sole proprietorship c General partnership d Limited partnership (including family limited

partnership) e Limited liability company f C corporation g S corporation h Trust i Estate

B Financial goals C Current financial status (eg cash flow balance sheet) D Capital needs (eg current retirement death disability)

E Current investments and strategies F Time horizon G Non-financial investment considerations (eg values

attitudes experience demographic characteristics) H Risk tolerance I Tax situation

B C Understand portfolio management strategies styles and

techniques (fixed income and equities) B Portfolio management styles and strategies

a Strategic and tactical asset allocation (eg style asset class rebalancing)

b Active vs passive c Growth vs value d Market capitalization (micro small mid large) e Buyhold f Indexing g Diversification

C Funding techniques a Dollar-cost averaging b Income reinvestment (eg dividend interest cap gain)

C D Recognize fundamental taxation issues

C Individual income tax (eg capital gains tax basis retirement distribution alternative minimum tax)

D Corporate trust and estate income tax E Estate and gift tax

D E Recognize types of retirement plans and related issues

D Retirement plans a Individual Retirement Arrangements (IRA) b 403(b) plans c Qualified retirement plans (eg pension and profit

sharing 401(k)) d Nonqualified retirement plans

E Important ERISA issues a Fiduciary responsibility (eg 404(c)) b Investment policy statement

c Prohibited transactions

E F Define the fundamental terms and concepts of trading securities

E Terminology (eg bids offers quotes) F Role of broker-dealers specialists market-makers G Types of orders (eg market limit stop short sale) H Types of accounts (eg cash margin option) I Commissions markups spread

F G Calculate performance

F Calculate performance a Total return (ie yield plus growth) b Inflation-adjusted return c After-tax returnyield d Current yield

IV Ethics and Legal Guidelines

45

A B Understand relevant aspects of securities acts and other rules and

regulations in order to comply as an investment adviser representative

A Investment Company Act of 1940 B Investment Advisers Act of 1940 C Securities Act of 1933 and Securities Exchange Act of 1934

(as applicable to investment adviser issues) D SEC Release No IA-1092 (applicability of the Investment

Advisers Act to financial planners and others) E State securities laws (ie Blue Sky) F NASAA rules prohibiting dishonest and unethical business

practices G Limitations on permissible practice (ie technical licensing

requirements)

B C Demonstrate ability to apply ethical practices

B Fiduciary responsibility C Conflict of interest D Prudent Investor standards E Limitations on advice and activities (ie when to consult other

professionals)

EXHIBIT IV

Confidential Page 44 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

CFP Required subject matter for ldquoInsurance Planning and Risk Managementrdquo

CFPreg Candidates must complete comprehensive training in the following subject areas at a college or university whose program has been inspected and approved by the CFP Board This course represents approximately 20 of the educational requirement for CFP Candidates Other courses include ldquoFinancial Planning Fundamentalsrdquo ldquoInvestment Planningrdquo ldquoTax Planningrdquo ldquoRetirement Planning amp Qualified Plansrdquo and ldquoEstate Planningrdquo

Principles of insurance

A Definit ions and application of

principles

1) Risk

2) Peril

3) Hazard

4) Law of large numbers

5) Adverse selection

B Response to risk

1) Retain

2) Transfer

3) Control

4) Reduce

5) Avoid

C Mortality vs morbidity

Analysis and evaluation of risk

exposures

A Personal Insurance l ines

1) Death

2) Disability

3) Poor health

4) Unemployment

5) Outliving onersquos capital

B Property Insurance l ines

1) Real

2) Personal

3) Auto

C Liability Issues

1) Negligence

2) Libel

3) Slander

4) Malpractice

D Business-related risks

E Calculation of benefits

23 Legal aspects of insurance

A Indemnity

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Insurable interest

C Contract requirements

D Contract characterist ics

Property and casualty insurance

(individual and business)

A Real property

B Automobile and recreational

vehicles

C Business

D Business activity

E Personal property

F Umbrella liability

General business liability

A Professional l iabili ty

B Errors and omissions

D Product liability

Health insurance (individual)

A Hospital-surgical

B Major medical

C Traditional indemnity

D Preferred Provider Organization

(PPO)

E Health Maintenance Organization

(HMO)

F Medicare supplemental insurance

G Other

Disability income insurance

(individual)

A Occupational definit ions and

application

1) Total

2) Partial

3) Residual

C Directors and officers

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Benefit period

C Elimination period

D Benefit amount

E Riders

F Taxation of benefits

Long-term care insurance (individual

and joint)

A Basic provisions

B Eligibility

C Benefit amount and period

D Elimination period

E Inflation protection

F Nursing home and in-home care

G Comparing and selecting policies

H Tax implications and qualification

I Appropriateness of coverage

Life insurance

A Fundamentals

B Types

C Contractual provisions

D Dividend options

E Non-forfeiture and other options

F Settlement options

G Policy replacement

H Tax issues and strategies

I Policy ownership issues and

strategies including split-dollar

Viatical settlements

A Legal principles

B Requirements

C Tax implications

D Planning

E Ethical concepts and planning

Insurance needs analysis and

rationale

A Life insurance amount required

1) Liquidity and survivor income needs

2) Human life value

3) Capital retention

B Disabili ty insurance

C Long-term care insurance

D Health insurance

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

E Property insurance E Reinsurance

F Liabili ty insurance F Investments

Taxation of l ife disability and long- G Underwriting

term care insurance H Federal and state law

A Income

B Gift

C Estate

D Generation-Skipping Transfer

Tax (GSTT)

E Ownership issues

F Beneficiary issues

G Withdrawals

Insurance policy selection

A Purpose of coverage

B Length of t ime required

C Risk tolerance

D Cash flow constraints

Insurance company selection and due

diligence

A Financials

B Ratios

C Ratings

D Mutual vs stock

Source CFP Board of Standards Inc Denver CO

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

CURRENT ISSUE

PAST ISSUES

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ADVISOR SERVICES Broker-Dealers

CustodianFee-Only

Technology

ADVICE 401(k) plans

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ComplianceFraud

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Practice Management

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Social Media

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Women in Planning

INVESTING Alternative Investments

Analysis

Commodities

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Mutual Funds

Free Site RegistrationgtgtLogin Logout

SEARCH GO December 10 2011

HOME CE CENTER WEBCASTS CONFERENCES EVENTS SUBSCRIBE

November 23 2011

SEC OFFICIAL SCRUTINIZED FOR lsquoCRASH-PROOF RETIREMENTrsquo INTERVIEW WITH ADVISOR

(Bloomberg News) The US Securities and Exchange Commissionrsquos internal watchdog has come under scrutiny for comments he made in a 75-minute videotaped interview about the agency and the stock market to a man who markets a ldquocrash-proof retirementrdquo plan through the Internet and a paid radio program

SEC Inspector General H David Kotz has been contacted about the matter by the agencyrsquos general counselrsquos office which also has briefed the SECrsquos commissioners over concerns the interview could be construed as investment advice or an endorsement of financial services

Phillip Cannella III chief executive officer of First Senior Financial Group in King of Prussia Pennsylvania edited the interview he conducted at SEC headquarters in late July into more than a dozen video segments He posted them on YouTube and his website wwwcrashproofretirementcom and plays them on the radio as well as during his seminars about insurance products for retirees

The SEC doesnrsquot ban its employees from interviews with people connected to commercial ventures Kotz said he cleared the matter in advance with the SECrsquos internal ethics counsel He told SEC officials he would ask an outside group the Council of Inspectors General on Integrity and Efficiency to look into whether he said or did anything improper in the interview according to two people briefed on the situation

The Federal Bureau of Investigation which oversees the panel within the inspector generalrsquos group that deals with integrity matters doesnrsquot comment on its inquiries said William Carter an FBI spokesman

lsquoAppropriate Caveatsrsquo

Kotz said in an e-mailed statement to Bloomberg News that he provided ldquoall the appropriate caveats and disclaimersrdquo to Cannella and ldquospecifically stated in the radio interview that I was not in a position to nor was I providing investment advicerdquo

SEC Chairman Mary Schapiro said in a statement that she appreciated that Kotz requested an independent review

ldquoDavid Kotz is an experienced professional with expertise in the ethics rules who I

believe would not intentionally create an appearance issuerdquo Schapiro said

The SEC didnrsquot say if it was taking further action on the matter The agencyrsquos ethics counsel Shira Pavis Minton didnrsquot respond to a request for comment

In the interview segments posted on the website Kotz discusses issues ranging from the Bernard Madoff fraud to the difficulties the SEC faces policing Wall Street A press release issued by Cannellarsquos company headlined Kotzrsquos suggestion that retirees consider cutting their investments in stocks

lsquoTurbulent Timesrsquo

ldquoSo much money is in the stock market where peoplersquos lives are so affected by it that sometimes it may make sense to take things out in turbulent times to ensure that yoursquore not living and dying so to speak by the Dow Jones going up and downrdquo Kotz told Cannella as the two sat in the agencyrsquos Washington offices in front of the SEC seal ldquoParticularly with whatrsquos occurred over the last several yearsrdquo

Kotz also discusses the SECrsquos past shortcomings and says the agency has improved being a ldquofundamentally different place now than when I first started at the SEC and before we issued our Madoff reportrdquo

FINANCIAL ADVISOR BLOGS

Evan Simonoffs Blog

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Tips on how to create stronger bonds with clients capped off IMCAs Winter Specialty Conference in Vail Colowith speaker Jamie Ziegler founder of AUMPartners telling attendees ldquoTrust is the single most important factor in building lasting relationshipsrdquo Read more

Business Growth Through Referrals

BOOKSTORE

httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 1 of 2

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

Real EstateREITs

US Equity

RESEARCH BD Ranking

RIA Ranking

SMA Ranking

MORE SERVICES BD Profiles 2011

BD Recruitment Center

RIA Services

White Papers

Cannella said in a phone interview that he was contacted by an SEC attorney several weeks ago asking that he put a disclaimer on the videos to make clear that neither the agency nor Kotz endorse sponsor or promote his firm Cannella said he quickly complied Kotz said he supported efforts by the SECrsquos general counselrsquos office ldquoto ensure that my interview is not being used to endorse any productrdquo

lsquoNot a Journalistrsquo

Cannella said he was pleased to be able to interview a high-level government official like Kotz -- a man he said he greatly respects While it costs him $12000 a week to air the radio show on two Philadelphia area stations Cannella said he treats it like a consumer advocacy program not an infomercial

ldquoI canrsquot believe myselfrdquo Cannella said ldquoIrsquom not a journalist and I got over a 75-minute interview with Kotz inside the SEC buildingrdquo

Besides the radio program Cannella said he holds ldquoeducational eventsrdquo in restaurants where he teaches people in their 50s and older about ldquosafe investment alternatives in the insurance industryrdquo His website has clips of prospective clients being asked about their reaction to watching the Kotz interview

One woman who wasnrsquot identified in the video said that Cannellarsquos interview with the inspector general shows that the host is ldquostanding up for the little people and very admirable and thatrsquos one of the reasons that Irsquom very anxious to proceed with Philrdquo

Probes

In another clip an unidentified man said ldquoIt was incredible to find out that the SEC feels like it canrsquot police the securities industry because it doesnrsquot have the funding or the manpowerrdquo

The fracas adds a new chapter to Kotzrsquos contentious four-year tenure at the SEC In recent months current and former officials have spoken out about what they say are his overly aggressive probes and their negative impact on the agencyrsquos ability to police the markets Earlier this month the Justice Department declined to open an investigation into Kotzrsquos allegations that former SEC General Counsel David Becker violated ethics laws

Kotz and his supporters have dismissed the complaints saying his oversight has done much to help the SEC burnish its image after it was widely attacked for missing massive frauds like Madoffrsquos and the alleged Ponzi scheme run by R Allen Stanford

Commissions

In his interview with Cannella Kotz said victims of investment schemes ldquodeserve a strong vibrant effective aggressive SEC that goes after those people gets their money back as possible and puts them in jailrdquo

Because he doesnrsquot sell securities Cannella isnrsquot regulated by the SEC He said he is licensed to sell insurance in over 40 states His company puts together individual plans for clients and then earns commission on products they buy from an insurance company He described the investments as ldquoguaranteed tax-deferred contractual agreements with income options from a statutory corporationrdquo

The investments are ldquooutside of the securities industryrdquo and ldquomany of them have outperformed the markets since their inception with no market risk no market fees no upfront commissions or sales costsrdquo he added

The trade magazine Senior Market Advisor in January 2008 reported that Cannella said he wrote about $25 million in premiums in 2007 for fixed index annuities Cannella said he didnrsquot want to put a specific name on the investments he sells because he thinks the media has misreported on the products

ldquoIrsquom not well-liked among securities guys because I am speaking truth and logic to a deceptive industryrdquo Cannella said ldquoYou canrsquot beat the sword of truthrdquo

Comments

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Techniques for gaining more business through client referrals were among the topics broached at the IMCA 2011 Winter Specialty Conference in Vail Colo Read more

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MARKETECONOMIC COMMENTARY

Raise Taxes On Rich To Reward True Job Creators In this opinion piece a venture capitalist makes a case for raising taxes on the rich to benefit the true job creators the middle class Read more

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ON THE MOVE

Atlanta Capital Group Continues Expansion

Birmingham Ala office will be third for Atlanta Capital Group Read more

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 2 of 2

United States Government Accountability Office

Report to Congressional AddresseesGAO

January 2011 CONSUMER FINANCE

Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

GAO-11-235

January 2011

CONSUMER FINANCE Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

Accountability bull Integrity bull Reliability

Highlights of GAO-11-235 a report to congressional addressees

Why GAO Did This Study

Consumers are increasingly turning for help to financial plannersmdash individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products and managing tax and estate planning The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners This report examines (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of this regulation and (3) the advantages and disadvantages of alternative regulatory approaches To address these objectives GAO reviewed federal and state statutes and regulations analyzed complaint and enforcement activity and interviewed federal and state government entities and organizations representing financial planners various other arms of the financial services industry and consumers

What GAO Recommends

GAO recommends that (1) NAIC assess consumersrsquo understanding of the standards of care associated with the sale of insurance products (2) SEC assess investorsrsquo understanding of financial plannersrsquo titles and designations and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers NAIC said it would consider GAOrsquos recommendation and SEC provided no comments

View GAO-11-235 or key components For more information contact Alicia Puente Cackley at (202) 512-8678 or cackleyagaogov

What GAO Found

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level but various laws and regulations apply to most of the services they provide Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners

The regulatory structure applicable to financial planners covers the great majority of their services but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain First consumers may be unclear about when a financial planner is required to serve the clientrsquos best interest particularly when the same financial planner provides multiple services associated with different standards of care SEC is studying these issues with regard to securities transactions but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products Second financial planners can adopt numerous titles and designations which vary greatly in the expertise or training that they signify but consumers may not understand or be able to distinguish among them SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed Finally the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole A regulatory system should have data to identify risks and problem areas and given that financial planning is a growing industry that has raised certain consumer protection issues regulators could benefit from better information on the extent of problems specifically involving financial planning services

A number of stakeholders have proposed different approaches to the regulation of financial planners including (1) creation of a federally chartered board overseeing financial planners as a distinct profession (2) augmenting oversight of investment advisers with a self-regulatory organization (3) extending the fiduciary standard of care to more financial services professionals and (4) specifying standards for financial planners and the designations that they use While the views of stakeholder interests vary a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities Given available information an additional layer of regulation specific to financial planners does not appear to be warranted at this time

United States Government Accountability Office

Contents

Letter 1

Background 2 Various Federal and State Laws and Regulations Apply to Financial

Planners and Their Activities 3 Regulatory Structure for Financial Planners Covers Most Activities

but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited 11

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed 28

Conclusions 33 Recommendations 34 Agency Comments 35

Appendix I Scope and Methodology

Appendix II Comments from the National Association of

Insurance Commissioners

Appendix III Comments from the North American Securities

Administrators Association

Appendix IV GAO Contact and Staff Acknowledgments

Figures

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act 5

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners 12

Figure 3 Differences in the Standards of Care Required of Financial Planners 17

Page i GAO-11-235 Consumer Finance

37

41

42

46

Abbreviations

Advisers Act Investment Advisers Act of 1940 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer

Protection Act FINRA Financial Industry Regulatory Authority Form ADV Uniform Application for Investment Adviser

Registration FTC Federal Trade Commission NAIC National Association of Insurance Commissioners NASAA North American Securities Administrators Association SEC Securities and Exchange Commission

This is a work of the US government and is not subject to copyright protection in the United States The published product may be reproduced and distributed in its entirety without further permission from GAO However because this work may contain copyrighted images or other material permission from the copyright holder may be necessary if you wish to reproduce this material separately

Page ii GAO-11-235 Consumer Finance

United States Government Accountability Office

Washington DC 20548

January 18 2011

Congressional Addressees

Consumers are increasingly turning for help to professionals who describe themselves as financial planners for assistance with a broad range of services such as selecting the right balance of stocks and bonds for an investment portfolio choosing among insurance products and tax and estate planning Although there is no statutory or single definition of financial planning it can be broadly defined as a systematic process that individuals use to achieve their financial goals Between 2000 and 2008 the number of financial planners more than doubled and may continue to climb as more individuals are asked to take responsibility for their retirement savings and must choose among a growing array of investment options

Some financial planning organizations have raised concerns that no single law governs providers of financial planning services broadly describing this situation as a regulatory gap Concerns also exist that financial planners may have an inherent conflict of interest in recommending products they may stand to benefit from selling In addition some consumer advocates believe consumers may be confused by the numerous titles and designations that financial planners can use This report responds to a mandate included in Section 919C of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that directed GAO to conduct a study on the oversight and regulation of financial planners Our objectives are to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

To address these objectives we reviewed federal and selected state statutes and regulations applicable to financial planners We also reviewed regulations issued by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) and model laws developed by the National Association of Insurance Commissioners (NAIC) and by the North American Securities Administrators Association (NASAA) In addition we reviewed applicable securities and insurance laws and regulations of five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texas We also interviewed representatives of and

Page 1 GAO-11-235 Consumer Finance

gathered documentation from SEC FINRA the Federal Trade Commission (FTC) NAIC and organizations representing the interests of consumers financial planners and various arms of the financial services industry In addition we gathered information on complaints and enforcement activity as available from SEC FINRA FTC and selected state regulators and organizations A more extensive discussion of our scope and methodology appears in appendix I

We conducted this performance audit from June 2010 to January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Background Financial planning typically involves a variety of services including preparing financial plans for clients based on their financial circumstances and objectives and making recommendations for specific actions clients may take In many cases financial planners also help implement these recommendations by for example providing insurance products securities or other investments Individuals who provide financial planning services may call themselves a variety of different titles such as financial planner financial consultant financial adviser trust advisor or wealth manager In addition many financial planners have privately conferred professional designations or certifications such as Certified Financial Plannerreg Chartered Financial Consultantreg or Personal Financial Specialist

The number of financial planners in the United States rose from approximately 94000 in 2000 to 208400 in 2008 according to the Bureau of Labor Statistics The bureau projects the number will rise to 271200 by 2018 because of the need for advisers to assist the millions of workers expected to retire in the next 10 years1 According to the bureau 29 percent of financial planners are self-employed and the remaining 71

1While the Bureau of Labor Statistics reports these statistics using the term ldquofinancial adviserrdquo bureau officials said that this term could be used interchangeably with financial planner The bureau broadly defined a ldquopersonal financial adviserrdquo as an individual who provides financial planning services and that private bankers or wealth managers would also be categorized as financial advisers

Page 2 GAO-11-235 Consumer Finance

percent are employees of firms some of them large entities with offices nationwide that provide a variety of financial services The median annual wage for financial planners was $68200 in May 2009

According to an analysis of the 2007 Survey of Consumer Finances the most recent year for which survey results are available in 2007 about 22 percent of US households used a financial planner for investment and saving decisions and about 12 percent of US households used a financial planner for making credit and borrowing decisions Those households most likely to use a financial planner were those with higher incomes For example 37 percent of households in the top income quartile used a financial planner to make investment and saving decisions compared to 10 percent of households in the bottom quartile2

Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities

Financial planners are primarily regulated by federal and state investment adviser laws because planners typically provide advice about securities as part of their business In addition financial planners that sell securities or insurance products are subject to applicable laws governing broker-dealers and insurance agents Certain laws and regulations can also apply to the use of the titles designations and marketing materials that financial planners use

Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level However the activities of financial planners are primarily regulated under federal and state laws and regulations governing investment advisersmdashthat is individuals or firms that provide investment advice about securities for compensation According to SEC staff financial planning normally includes making general or specific recommendations about securities insurance savings and anticipated retirement3 SEC has issued guidance that broadly interprets the Investment Advisers Act of 1940 (Advisers Act) to apply to most financial planners because the advisory services they offer clients typically include

2Our percentage estimates based on the 2007 Survey of Consumer Finances have 95 percent confidence intervals of +- 25 percentage points or less For example we are 95 percent confident that between 82 and 118 percent of households in the bottom quartile used financial planners for investment decisions See appendix I for additional information

3Investment Adviser Act Release No 1092 52 Fed Reg 38400 38401 (Oct 16 1987) (IA Rel No 1092)

Page 3 GAO-11-235 Consumer Finance

providing advice about securities for compensation4 Similarly NASAA representatives told us that states take a similar approach on the application of investment adviser laws to financial planners and as a result generally register and oversee financial planners as investment advisers As investment advisers financial planners are subject to a fiduciary standard of care when they provide advisory services so that the planner ldquo[is] held to the highest standards of conduct and must act in the best interest of [the adviserrsquos] clientsrdquo5

SEC and state securities departments share responsibility for the oversight of investment advisers in accordance with the Advisers Act6 Under that act SEC generally oversees investment adviser firms that manage $25 million or more in client assets and the states that require registration oversee those firms that manage less7 However as a result of section 410 of the Dodd-Frank Act as of July 2011 the states generally will have registration and oversight responsibilities for investment adviser firms that manage less than $100 million in client assets instead of firms that manage less than $25 million in assets as under current law8 This will result in the states gaining responsibility for firms with assets under management between $25 million and $100 million As shown in figure 1 as of October 2010 of the approximately 16000 investment adviser firms providing

4The Advisers Act defines an investment adviser as any person (ie individual or firm) who is in the business of providing advice or issuing reports or analyses regarding securities for compensation 15 USC sect 80b-2(a)(11) IA Rel No 1092 In addition to applicable securities law investment advice related to a retirement savings plan such as a 401(k) plan may also be subject to the Employee Retirement Income Security Act The requirements under that act are outside the scope of this study A forthcoming GAO report GAO-11-119 will provide more information on investment advice in 401(k) plans

5In SEC v Capital Gains Research Bureau Inc 375 US 180 189-192 (1963) the US Supreme Court recognized that the Advisers Act imposes a fiduciary duty on investment advisers This standard imposes an affirmative duty to act solely in the best interests of the client The investment adviser also must eliminate or disclose all conflicts of interest

615 USC sect 80b-3a The term investment adviser can refer to a person or firm Investment adviser firms generally register with SEC or state securities departments as registered investment advisers According to NASAA certain natural persons that are employed by firms generally register with the state securities departments as investment adviser representatives

7Id Under 17 CFR sect 275203A-1 SEC registration has been optional for certain

investment advisers having assets under management between $25 and $30 million Firms also may have a different basis for registering with SEC (other than the amount of client assets the firm has under management) such as whether the principal office and place of business are within a state that has no registration requirement

8Pub L No 111-203 sect 410 124 Stat 1376 1576-77 (2010)

Page 4 GAO-11-235 Consumer Finance

financial planning services the states were overseeing about 11100 firms and SEC was overseeing about 4900 such firms9 However in July 2011 about 2400 of investment adviser firms that provided financial planning services (15 percent of the 16000 firms) may shift from SEC to state oversight10

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act

SECrsquos supervision of investment adviser firms includes evaluating their compliance with federal securities laws by conducting examinations of firmsmdashincluding reviewing disclosures made to customersmdashand investigating and imposing sanctions for violations of securities laws According to SEC staff in its examinations the agency takes specific steps to review the financial planning services of investment advisers For example SEC may review a sample of financial plans that the firm prepared for its customers to check whether the firmrsquos advice and investment recommendations are consistent with customersrsquo goals the contract with the firm and the firmrsquos disclosures

9In registering with SEC or a state investment adviser firms are required to report whether they provide financial planning services in Part 1A of the Uniform Application for Investment Adviser Registration Item 5 G(1) SEC does not provide a definition of financial planning services for firms to use when completing the registration form The total number of investment adviser firms overseenmdashincluding both those that do and do not provide financial planning servicesmdashis 15016 for the states and 11873 for SEC For data on investment adviser firms firms that were registered with both SEC and the states were counted with SEC-registered investment adviser firms

10See 75 Fed Reg 77052 (Dec 10 2010) (SEC proposed rule which if finalized would give advisers until August 20 2011 to report the market value of their assets under management to the SEC as the first step in the process)

Page 5 GAO-11-235 Consumer Finance

However the frequency with which SEC conducts these examinations varies largely because of resource constraints faced by the agency11 SEC staff told us that the agency examined only about 10 percent of the investment advisers it supervises in 2009 In addition they noted that generally an investment adviser is examined on average every 12 to 15 years although firms considered to be of higher risk are examined more frequently In 2007 we noted that harmful practices could go undetected because investment adviser firms rated lower-risk are unlikely to undergo routine examinations within a reasonable period of time if at all12

According to NASAA state oversight of investment adviser firms generally includes activities similar to those undertaken by SEC including taking specific steps to review a firmrsquos financial planning services According to NASAA states generally register not just investment adviser firms but also investment adviser representativesmdashthat is individuals who provide investment advice and work for a state- or federally registered investment adviser firm13

Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities

In addition to providing advisory services such as developing a financial plan financial planners generally help clients implement the plan by making specific recommendations and by selling securities insurance products and other investments SEC data show that as of October 2010 19 percent of investment adviser firms that provided financial planning

11GAO Securities and Exchange Commission Steps Being Taken to Make Examination

Program More Risk-Based and Transparent GAO-07-1053 (Washington DC Aug 14 2007) As we noted since the detection of mutual fund trading abuses in late 2003 in light of limited resources SEC has shifted its approach to examinations of investment advisers from one that focused on routinely examining all registered firms regardless of risk to one that focuses on more frequently examining those firms and industry practices at higher risk for compliance issues

12GAO-07-1053 SEC reported in February 2010 that it is now placing a greater emphasis on fraud detection in addition to identifying potential violations of securities laws and rules strengthening procedures and internal controls to maximize limited resources recruiting examiners with specialized skills and increasing expertise through enhanced training

13According to NASAA New York Minnesota and Wyoming do not register investment adviser representatives although New York and Minnesota do have certain examination and other requirements that must be met

Page 6 GAO-11-235 Consumer Finance

services also provided brokerage services and 27 percent provided insurance14

Financial planners that provide brokerage services such as buying or selling stocks bonds or mutual fund shares are subject to broker-dealer regulation at the federal and state levels At the federal level SEC oversees US broker-dealers and SECrsquos oversight is supplemented by self-regulatory organizations (SRO)15 The primary SRO for broker-dealers is FINRA State securities offices work in conjunction with SEC and FINRA to regulate securities firms Salespersons working for broker-dealers are subject to state registration requirements including examinations About half of broker-dealers were examined in 2009 by SEC and SROs Under broker-dealer regulation financial planners are held to a suitability standard of care when making a recommendation to a client to buy or sell a security meaning that they must recommend those securities that they reasonably believe are suitable for the customer16

Financial planners that sell insurance products such as life insurance or annuities must be licensed by the states to sell these products and are subject to state insurance regulation In contrast to securities entities (other than national banks) that are subject to dual federal and state oversight the states are generally responsible for regulating the business of insurance When acting as insurance agents financial planners are

14The brokerage and insurance services provided by these investment adviser firms are not necessarily a part of their financial planning services In addition many financial planners may sell securities- or insurance-related products through affiliated brokers or agents

15The primary law for regulating broker-dealers is the Securities Exchange Act of 1934 codified at 15 USC sectsect 78a-78oo Brokers effect transactions for the account of others while dealers buy and sell securities for their own accounts 15 USC sect 78c The term registered representative is generally used to refer to certain employees of a broker-dealer firm who are engaged in providing securities recommendations Broker-dealers must be members of a qualifying self-regulatory organization (either a national exchange or a registered securities association) 15 USC sect 78o(b)(8)

16Under NASD Conduct Rule 2310 a FINRA member making an investment recommendation to a customer must have grounds for believing that the recommendation is suitable for that customerrsquos financial situation and needs In November 2010 SEC approved FINRArsquos proposed new consolidated rules governing the suitability obligations of its members 75 Fed Reg 71479 (Nov 23 2010) This rule proposed FINRA Rule 2111 requires salespersons to have a reasonable basis for believing based on adequate due diligence that a recommendation of a transaction or strategy is suitable for at least some investors that the recommendation is suitable for a specific customer based on that customerrsquos profile and that a series of recommended transactions is not excessive and unsuitable for the customer

Page 7 GAO-11-235 Consumer Finance

subject to state standard of care requirements which can vary by product and by state As of October 2010 32 states had adopted a previous version of the NAIC Suitability in Annuities Transactions Model Regulation according to NAIC17 In general this regulation requires insurance agents to appropriately address consumersrsquo insurance needs and financial objectives at the time of an annuity transaction18 Thirty-four states had also adopted the Life Insurance Disclosure Model Regulation in a uniform and substantially similar manner as of July 2010 according to NAIC This regulation does not include a suitability requirement although it does require insurers to provide customers with information that will improve their ability to select the most appropriate life insurance plan for their needs and improve their understanding of the policyrsquos basic features

Financial planners that sell variable insurance products such as variable life insurance or variable annuities are subject to both state insurance regulation and broker-dealer regulation because these products are regulated as both securities and insurance products When selling variable insurance financial planners are subject to FINRA sales practice standards requiring that such sales be subject to suitability standards19 In addition other FINRA rules and guidance such as those governing standards for communication with the public apply to the sale of variable insurance products20 In addition as previously discussed 32 states also generally require insurance agents and companies to appropriately address a consumerrsquos insurance needs and financial objectives at the time of an annuity transaction However in the past we have reported that the effectiveness of market conduct regulationmdashthat is examination of the sales practices and behavior of insurersmdashmay be limited by a lack of

17NAIC amended this model regulation in March 2010 according to NAIC one state has adopted the updated model and additional states are expected to do so

18According to NAIC in 4 of these 32 states the regulation applies only when the consumers are senior citizens

19NASD Notice to Members 96-86 outlines that variable contracts for insurance products are subject to suitability requirements

20NASD Interpretive Material 2210-2 outlines guidance concerning communications with the public about variable life insurance and variable annuities FINRA has proposed that this guidance be replaced by a separate new FINRA Rule 2211 See FINRA Rule Filing No SR-FINRA-2009-070

Page 8 GAO-11-235 Consumer Finance

reciprocity and uniformity which may lead to uneven consumer protection across states21

Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations

At the federal level SEC and FINRA have regulations on advertising and standards of communication that apply to the strategies investment adviser firms and broker-dealers use to market their financial planning services For example SEC-registered investment advisers must follow SEC regulations on advertising and other communications which prohibit false or misleading advertisements and these regulations apply to investment advisersrsquo marketing of financial planning services22 FINRA regulations on standards for communication with the public similarly prohibit false exaggerated unwarranted or misleading statements or claims by broker-dealers and broker-dealer advertisements are subject to additional approval filing and recordkeeping requirements and review procedures23 According to many company officials we spoke with their companies responded to these requirements by putting procedures in place to determine which designations and titles their registered representatives may use in their marketing materials such as business cards

SEC and state securities regulators also regulate information that investment advisers are required to disclose to their clients In the Uniform Application for Investment Adviser Registration (Form ADV) regulators have typically required investment adviser firms to provide new and prospective clients with background information such as the basis of the advisory fees types of services provided (such as financial planning services) and strategies for addressing conflicts of interest that may arise

21GAO Insurance Reciprocity and Uniformity NAIC and State Regulators Have Made

Progress in Producer Licensing Product Approval and Market Conduct Regulation but

Challenges Remain GAO-09-372 (Washington DC Apr 6 2009) Reciprocity refers to the extent to which state regulators accept other statesrsquo regulatory actions Uniformity refers to the extent to which states have implemented either the same or substantially similar regulatory standards and procedures

2217 CFR sect 275206(4)-1

23NASD Rule 2210

Page 9 GAO-11-235 Consumer Finance

from their business activities24 Recent changes to Form ADV are designed to improve the disclosures that firms provide to clients For example firms must now provide clients with information about the advisory personnel on whom they rely for investment advice including the requirements and applicability of any professional designations or certifications advisers may choose to include in their background information

Most states regulate the use of the title ldquofinancial plannerrdquo and state securities and insurance laws can apply to the misuse of this title and other titles For example according to NASAA at least 29 states specifically include financial planners in their definition of investment adviser25 According to NAIC in many states regulators can use unfair trade practice laws to prohibit insurance agents from holding themselves out as financial planners when in fact they are only engaged in the sale of life or annuity insurance products However as noted earlier the effectiveness of the regulation of insurersrsquo market conduct varies across states In particular in 2010 we noted inconsistencies in the state regulation of life settlements a potentially high-risk transaction in which financial planners may participate26

In addition we were told some states had adopted regulations limiting the use of ldquosenior-specific designationsrdquomdashthat is designations that imply expertise or special training in advising senior citizen or elderly investors According to NAIC as of December 2010 25 states had adopted in a uniform and substantially similar manner the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities which limits the use of senior-specific designations by insurance agents According to NASAA as of December 2010 31 states had adoptedmdashand at least 9 other states were

24SEC and the states use Form ADV to register investment adviser firms and collect information from them Part 2 of Form ADV provides information about the investment adviser and its business for use of the clients and is publicly available on the Investment Adviser Public Depository Web site The SEC adopted amendments to Form ADV that were effective October 12 2010 requiring Part 2 of Form ADV be written in a plain English narrative format See Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (to be codified at 17 CFR pt 275 and 279)

25The District of Columbia and Puerto Rico also include financial planners in their definitions of investment adviser according to NASAA

26GAO Life Insurance Settlements Regulatory Inconsistencies May Pose a Number of

Challenges GAO-10-775 (Washington DC July 9 2010)

Page 10 GAO-11-235 Consumer Finance

planning to adoptmdashthe NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations which prohibits the misleading use of senior-specific designations by investment adviser representatives and other financial professionals

Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited

The regulatory system for financial planners covers most activities in which they engage However enforcement of regulation may be inconsistent and some questions exist about consumersrsquo understanding of the roles standards of care and titles and designations that a financial planner may have The ability of regulators to identify potential problems is limited because they do not specifically track complaints inspections and enforcement actions specific to financial planning services

Existing Regulation Covers Most Financial Planning Services

Although there is no single stand-alone regulatory body with oversight of financial planners the regulatory structure for financial planners covers most activities in which they engage As discussed earlier and summarized in figure 2 the primary activities a financial planner performs are subject to existing regulation at the federal or state level primarily through regulation pertaining to investment advisers broker-dealers and insurance agents As such SEC FINRA and NASAA staff a majority of state securities regulators financial industry representatives consumer groups and academic and subject matter experts with whom we spoke said that in general they believe the regulatory structure for financial planners is comprehensive although as discussed below the attention paid to enforcing existing regulation has varied

Page 11 GAO-11-235 Consumer Finance

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners

Financial planner

Capacity Investment adviser Broker-dealer Insurance agent

Applicable federal and state laws

Federal bull Investment Advisers Act of 1940 and rules from SEC

State bull State securities laws

Federal bull Securities and Exchange Act of 1934 and rules of SEC and FINRA

State bull State securities laws

State bull State insurance laws

Financial planning service covered by regulation

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for specific securities products bull Purchase or sale of securities products

bull Recommendations for insurance products

bull Sale of insurance products

bull Sale of variable insurance (variable annuities variable life insurance) bull

Federal and state regulators enforcing laws

Federal bull SEC

State bull State securities agencies

Federal bull SEC and FINRA

State bull State securities agencies

State bull State insurance agencies

Customer

Source GAO

Note This figure highlights three major areas of regulatory oversight but is not comprehensive and does not include other regulatory regimes or practice standards that may be applicable to financial planners In addition not all investment advisers broker-dealers or insurance agents are financial planners

As noted earlier the activities a financial planner normally engages in generally include advice related to securitiesmdashand such activities make financial planners subject to regulation under the Advisers Act One industry association and an academic expert noted that it would be very difficult to provide financial planning services without offering investment

Page 12 GAO-11-235 Consumer Finance

advice or considering securities SEC staff told us that financial planners holding even broad discussions of securitiesmdashfor example what proportion of a portfolio should be invested in stocksmdashwould be required to register as investment advisers or investment adviser representatives In theory a financial planner could offer only services that do not fall under existing regulatory regimesmdashfor example advice on household budgetingmdashbut such an example is likely hypothetical and such a business model may be hard to sustain SEC and NASAA staff a majority of the state securities regulators we spoke with and many representatives of the financial services industry told us that they were not aware of any individuals serving as financial planners who were not regulated as investment advisers or regulated under another regulatory regime Some regulators and industry representatives also said that to the extent that financial planners offered services that did not fall under such regulation the new Bureau of Consumer Financial Protection potentially could have jurisdiction over such services27

However not everyone agreed that regulation of financial planners was comprehensive One group the Financial Planning Coalition has argued that a regulatory gap exists because no single law governs the delivery of the broad array of financial advice to the public28 According to the coalition the provision of integrated financial advicemdashwhich would cover topics such as selecting and managing investments income taxes saving for college home ownership retirement insurance and estate planningmdash is unregulated Instead the coalition says that there is patchwork regulation of financial planning advice and it views having two sets of lawsmdashone regulating the provision of investment advice and another regulating the sale of productsmdashas problematic

27Section 1011 of the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate ldquothe offering and provision of consumer financial products or services under the Federal consumer financial lawsrdquo A financial product or service is defined in section 1002(15)(A)(viii) of the act to include financial advisory services to consumers on individual financial matters with the exception of advisory services related to securities provided by a person regulated by SEC or a state securities commission to the extent that such person acts in a regulated capacity Accordingly it appears that the bureau may have jurisdiction over financial planners to the extent that they may offer services that would not be under the jurisdiction of SEC or a state securities commission

28The members of this coalition include the Certified Financial Planner Board of Standards Inc the Financial Planning Association and the National Association of Personal Financial Advisors

Page 13 GAO-11-235 Consumer Finance

In addition although the regulatory structure itself for financial planners may generally be comprehensive attention paid to enforcing existing statute and regulation has varied For example as noted earlier due to resource constraints the examination of SEC-supervised investment advisers is infrequent Further as also noted earlier market conduct regulation of insurersmdashwhich would include the examination of the sales practices and behavior of financial planners selling insurance productsmdash has been inconsistent Some representatives of industry associations told us that they believed that a better alternative to additional regulation of financial planners would be increased enforcement of existing law and regulation particularly related to fraud and unfair trade practices

Certain professionalsmdashincluding attorneys certified public accountants broker-dealers and teachersmdashwho provide financial planning advice are exempt from regulation under the Advisers Act if such advice is ldquosolely incidentalrdquo to their other business activities29 According to an SEC staff interpretation this exemption would not apply to individuals who held themselves out to the public as providing financial planning services and would apply only to individuals who provided specific investment advice on anything other than ldquorare isolated and non-periodic instancesrdquo30 Banks and bank employees are also excluded from the Advisers Act and are subject to separate banking regulation31 The American Bankers Association told us that the financial planning activities of bank employees such as trust advisors or wealth managers were typically utilized by clients with more than $5 million in investable assets The association noted that these activities were subject to a fiduciary standard and the applicable supervision of federal and state banking regulators

Most regulators and academic experts and many financial services industry representatives we spoke with told us that there is some overlap in the regulation of individuals who serve as financial planners because

2915 USC sect 80b-2(a)(11) IA Rel No 1092(II)(B) at 38403 Under 15 USC sect 80bshy2(a)(11)(C) brokers and dealers also cannot receive any special compensation for their services in order to be exempt from registration as an investment adviser

30Id

31Id The Advisers Act excludes bank and bank holding companies from the definition of

investment adviser Further a bank and a bank holding company is an investment adviser under the act to the extent that the bank or bank holding company serves or acts as an adviser to a registered investment company If such services are performed in a separate department or division of a bank the department or division and not the bank itself is the investment adviser

Page 14 GAO-11-235 Consumer Finance

such individuals might be subject to oversight by different regulatory bodies for the different services they provide For example a financial planner who recommends and sells variable annuities as part of a financial plan is regulated as a registered representative of a broker-dealer as well as an insurance agent under applicable federal and state laws However some state regulators we spoke with told us that such overlap may be appropriate since the regulatory regimes cover different functional areas

Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products

As seen in figure 3 financial planners are subject to different standards of care in their capacities as investment advisers broker-dealers and insurance agents

bull Fiduciary Standard of Care As noted earlier investment advisers are subject to a fiduciary standard of caremdashthat is they must act in their clientrsquos best interest ensure that recommended investments are suitable for the client and disclose to the client any material conflicts of interest32

According to SEC and NASAA representatives the fiduciary standard applies even when investment advisers provide advice or recommendations about products other than securities such as insurance in conjunction with advice about securities

bull Suitability Standard of Care When Recommending Security Products FINRA regulation requires broker-dealers to adhere to a suitability standard when rendering investment recommendationsmdashthat is they must recommend only those securities that they reasonably believe are suitable for the customer33 Unlike the fiduciary standard suitability rules do not necessarily require that the clientrsquos best interest be served According to FINRA staff up-front general disclosure of a broker-dealerrsquos business activities and relationships that may cause conflicts of interest is not

32The SEC has in effect established rules of conduct for investment advisers including requirements for disclosing conflicts of interest obtaining the best execution on behalf of clients allocating investments among clients fairly ensuring that investments are suitable for clients and ensuring that there is a reasonable basis for recommendations SEC also requires investment advisers to maintain records pertaining to client accounts and business operations

33A broker-dealer must have an adequate and reasonable basis for any recommendation and must make recommendations based on a customerrsquos financial situation needs and other securities holdings

Page 15 GAO-11-235 Consumer Finance

required34 However according to SEC broker-dealers are subject to many FINRA rules that require disclosure of conflicts in certain situations although SEC staff also note that those rules may not cover every possible conflict of interest and disclosure may occur after conflicted advice has already been given35

bull Suitability Standard of Care When Recommending Insurance Products Standards of care for the recommendation and sale of insurance products vary by product and by state For example as seen earlier NAICrsquos model regulations on the suitability standard for annuity transactions adopted by some states but not others require consideration of the insurance needs and financial objectives of the customer while NAICrsquos model regulation for life insurance does not include a suitability requirement per se

34Letter from Marc Menchel Executive Vice President and General Counsel FINRA to Elizabeth M Murphy Secretary SEC 4 (Aug 25 2010) available at httpwwwfinraorgwebgroupsindustryipregguidedocumentsindustryp121983p df

35The standards of conduct for broker-dealers may also be based on antifraud provisions of the securities law and agency principles Broker-dealers also have a duty of fairness in their contracts with a customer which requires them to disclose material information that the customer would consider important as an investor In addition broker-dealers that handle discretionary accounts are generally thought to owe fiduciary obligations to their customers

Page 16 GAO-11-235 Consumer Finance

Figure 3 Differences in the Standards of Care Required of Financial Planners

Financial planner

Capacity

Investment adviser Broker-dealer Insurance agent

Fiduciary Suitability Varies by product and by state insurance law

Standard of care

bull Person has an affirmative duty to render services solely in the best interests of clients

bull Requires advisers to disclose material conflicts of interest to clients

bull Rules require standard of care that includes among other things rendering

investment recommendations that are suitable for customers

bull Requires insurance agents to follow suitability standards when state has adopted such standards for products

Financial planning service covered by standard of care

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for the purchase or sale of specific securities products

bull Recommendations for the purchase of insurance products

bull Recommendations for the purchase of variable insurance (variable annuities variable life insurance)

Customer

Source GAO

Note This figure is illustrative and is not comprehensive financial planners may serve in capacities other than those shown here and not all investment advisers broker-dealers and insurance agents serve as financial planners

Conflicts of interest can exist when for example a financial services professional earns a commission on a product sold to a client Under the fiduciary standard applicable to investment advisers financial planners must mitigate any potential conflicts of interest and disclose any that remain But under a suitability standard applicable to broker-dealers conflicts of interest may exist and generally may not need to be disclosed

Page 17 GAO-11-235 Consumer Finance

up-front36 For example as confirmed by FINRA financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission as long as the product is suitable and the broker-dealer complies with other requirements Because the same individual or firm can offer a variety of services to a clientmdasha practice sometimes referred to as ldquohat switchingrdquomdashthese services could be subject to different standards of care As such representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care if any applies to a financial professional As shown above the standards of caremdashand the extent to which conflicts of interest must be disclosedmdashcan vary depending on the capacity in which the individual serves37 A 2007 report by the Financial Planning Association stated that ldquoit would be difficult if not impossible for an individual investor to discern when the adviser was acting in a fiduciary capacity or in a non-fiduciary capacityrdquo38 A 2008 SEC study conducted by the RAND Corporation consisting of a national household survey and six focus group discussions with investors found that consumers generally did not understand not only the distinction between a suitability and fiduciary standard of care but also the differences between broker-dealers and investment advisers39 Similarly a 2010 national study of investors found that most were confused about which financial professionals are required to operate under a fiduciary standard that requires professionals to put their clientrsquos interest ahead of their own40

36FINRA officials have stated that they believe that the regulation of broker-dealersmdashwhile lacking an express fiduciary dutymdashprescribes in great detail the conduct and supervision of broker-dealers who provide investment advice to retail customers

37Blackrsquos Law Dictionary (9th ed 2009) defines the term ldquoconflict of interestrdquo as a ldquoreal or seeming incompatibility between onersquos private interests and onersquos public or fiduciary dutiesrdquo

38Final Report on Financial Planner Standards of Conduct FPA Fiduciary Task Force

June 2007

39Angela A Hung et al RAND Institute for Civil Justice Investor and Industry

Perspectives on Investment Advisers and Broker-Dealers (2008)

40Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010 The survey was conducted among a sample of 2012 adults living in the continental United States including 1319 who identified themselves as investors The survey was sponsored by AARP the Consumer Federation of America NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors

Page 18 GAO-11-235 Consumer Finance

Representatives of financial services firms that provide financial planning told us they believe that clients are sufficiently informed about the differing roles and accompanying standards of care that a firm representative may have They noted that when they provide both advisory and transactional services to the same customer each servicemdashsuch as planning brokerage or insurance salesmdashis accompanied by a separate contract or agreement with the customer These agreements disclose that the firmrsquos representatives have different obligations to the customer depending on their role In addition once a financial plan has been provided some companies told us that they have customers sign an additional agreement stating that the financial planning relationship with the firm has ended

Recent revisions by SEC to Form ADV disclosure requirements were designed to address among other things consumer understanding of potential conflicts of interest by investment advisers and their representatives Effective October 12 2010 SEC revised Form ADV Part 2 which financial service firms must provide to new and prospective clients41 The new form which must be written in plain English is intended to help consumers better understand the activities and affiliations of their investment adviser It requires additional disclosu res about a firmrsquos conflicts of interest compensation business activities and disciplinary information that is material to an evaluation of the adviser rsquos integrity Similarly in October 2010 FINRA issued a regulatory notice requesting comments on a concept proposal regarding possible new disclosure requirements that would among other things detail for consumers in plain English the conflicts of interest that broker-dealers may have associated with their services42

Section 913 of the Dodd-Frank Act requires SEC to study the substantive differences between the applicable standards of care for broker-dealers and investment advisers the effectiveness of the existing legal or regulatory standards of care for brokers dealers and investment advisers and consumersrsquo ability to understand the different standards of care SEC

41Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (requires investment advisers registered with SEC to provide new and prospective clients with a brochure and brochure supplements clearly setting forth a meaningful current disclosure of the business practices conflicts of interest and background of the investment adviser and its advisory personnel and requires the brochures to be filed with SEC electronically which will make them available to the public through its Web site)

42FINRA Regulatory Notice 10-54

Page 19 GAO-11-235 Consumer Finance

will also consider the potential impact on retail customers of imposing the same fiduciary standard that now applies to investment advisers on broker-dealers when they provide personalized investment advice Under the act SEC may promulgate rules to address these issues and is specifically authorized to establish a uniform fiduciary duty for broker-dealers and investment advisers that provide personalized investment advice about securities to customers As a result further clarification of these standards may be forthcoming FINRA officials told us that they support a fiduciary standard of care for broker-dealers when they provide personalized investment advice to retail customers

Consumer confusion on standards of care may also be a source of concern with regard to the sale of some insurance products A 2010 national survey of investors found that 60 percent mistakenly believed that insurance agents had a fiduciary duty to their clients43 Some insurance products such as annuities are complex and can be difficult to understand and annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators as well as SEC and FINRA for many years44 According to NAIC many states have requirements that insurance salespersons sell annuities only if the product is suitable for the customer However NAIC notes that some states do not have a suitability requirement for annuities Consumer groups and others have stated that high sales commissions on certain insurance products including annuities may provide salespersons with a substantial financial incentive to sell these products which may or may not be in the consumerrsquos best interest As a result of section 989J of the Dodd-Frank Act one type of annuitymdashthe indexed annuitymdashis to be regulated by states as an insurance product rather than regulated by SEC as a security under certain conditions45

SECrsquos pending study related to the applicable standards of care for broker-dealers and investment advisers will not look at issues of insurance that

43Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010

44See for example Securities and Exchange Commission Rule 151A and Annuities Issues and Legislation CRS Report for Congress 7-7500 (July 29 2010)

45State regulation applies so long as a state has adopted NAICrsquos Suitability in Annuity Transactions model regulation or if an insurance company adopts and implements practices on a nationwide basis that meet or exceed the minimum requirements established by NAICrsquos model regulation Indexed annuities are products that guarantee a purchaserrsquos principal and a certain rate of return and offer a chance for additional returns linked to a securities index or indices

Page 20 GAO-11-235 Consumer Finance

fall outside of SECrsquos jurisdiction NAIC has not undertaken a similar study regarding consumer understanding of the standard of care for insurance agents As we reported in the past financial markets function best when consumers understand how financial service providers and products work and know how to choose among them46 Given the evidence of consumer confusion about differing standards of care and given the increased risks that certain insurance products can pose there could be benefits to an NAIC review of consumersrsquo understanding of standards of care for high-risk insurance products

Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public

Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public including financial planner financial consultant and financial adviser among many others However evidence suggests that the different titles financial professionals use can be confusing to consumers The 2008 RAND study found that even experienced investors were confused about the titles used by broker-dealers and investment advisers including financial planner and financial adviser Similarly in consumer focus groups of investors conducted by SEC in 2005 as part of a rulemaking process participants were generally unclear about the distinctions among titles including broker investment adviser and financial planner47 In addition a representative of one consumer advocacy group has expressed concern that some financial professionals may use as a marketing tool titles suggesting that they provide financial planning services when in fact they are only selling products One industry group the Financial Planning Coalition also has noted that some individuals may hold themselves out as financial planners without meeting minimum training or ethical requirements Federal and state regulators told us they generally focused their oversight and enforcement actions on financial plannersrsquo activities rather than the titles they use Moreover NASAA has said that no matter what title financial planners use most are required to register as investment adviser representatives and must satisfy certain competency requirements

46GAO Financial Regulation A Framework for Crafting and Assessing Proposals to

Modernize the Outdated US Financial Regulatory System GAO-09-216 (Washington DC Jan 8 2009)

47Results of Investor Focus Group Interviews About Proposed Brokerage Account

Disclosures Report to the Securities and Exchange Commission by Siegel amp Gale LLC and Gelb Consulting Group Inc Mar 10 2005

Page 21 GAO-11-235 Consumer Finance

including passing an examination or obtaining a recognized professional designation48

Financial plannersrsquo professional designations are typically conferred by a professional or trade organization These designations may indicate that a planner has passed an examination met certain educational requirements or had related professional experience Some of these designations require extensive classroom training and examination requirements and include codes of ethics with the ability to remove the designation in the event of violations State securities regulators view five specific designations as meeting or exceeding the registration requirements for investment adviser representatives according to NASAA and allow these professional designations to satisfy necessary competency requirements for prospective investment adviser representatives49 For example one of these five designations requires a bachelorrsquos degree from an accredited college or university 3 years of full-time personal financial planning experience a certification examination and 30 hours of continuing education every 2 years

The criteria used by organizations that grant professional designations for financial professionals vary greatly FINRA has stated that while some designations require formal certification procedures including examinations and continuing professional education credits others may merely signify that membership dues have been paid The Financial Planning Coalition and The American College a nonprofit educational institution that confers several financial designations similarly told us that privately conferred designations range from those with rigorous competency practice and ethical standards and enforcement to those that can be obtained with minimal effort and no ongoing evaluation

48According to NASAA all but three statesmdashNew York Minnesota and Wyomingmdashregister investment adviser representatives and require that they pass either the Series 65 (Uniform Investment Adviser Law Examination) or the Series 66 (Uniform Combined State Law Examination) or obtain a recognized professional designation While New York and Minnesota do not register individual investment adviser representatives their state laws require that the representatives meet other requirements such as passing certain examinations or obtaining a professional designation accepted by the state

49The five designations recognized as such are Certified Financial Plannerreg Chartered Financial Consultantreg Personal Financial Specialist Chartered Financial Analyst and Chartered Investment Counselor

Page 22 GAO-11-235 Consumer Finance

As noted earlier designations that imply expertise or special training in advising senior citizen or elderly investors have received particular attention from regulators A joint report of SEC FINRA and NASAA described cases in which financial professionals targeted seniors by using senior-specific designations that implied that they had a particular expertise for senior investors when in fact they did not as noted earlier NASAA and NAIC have developed a model rule to address the issue50 The report also noted these professionals targeted seniors through the use of so-called free-lunch seminars where free meals are offered in exchange for attendance of a financial education seminar However the focus of the seminars was actually on the sale of products rather than the provision of financial advice

Given the large number of designations financial planners may use concerns exist that consumers may have difficulty distinguishing among them To alleviate customer confusion FINRA has developed a Web site for consumers that provides the required qualifications and other information about the designations used by securities professionals The site lists more than 100 professional designations 5 of which include the term ldquofinancial plannerrdquo and 24 of which contain comparable terms such as financial consultant or counselor51 The American College told us that it had identified 270 financial services designations Officials from NASAA NAIC and a consumer advocacy organization told us that consumers might have difficulty distinguishing among the various designations Officials from The American College told us that the number of designations itself was not necessarily a cause for concern but rather consumersrsquo broadly held misperception that all designations or credentials are equal

To help address these concerns FINRA plans to expand its Web site on professional designations to include several dozen additional designations related to insurance However FINRA officials noted that consumersrsquo use of this tool has been limited For example in 2009 the site received only 55765 visits A recent national study of the financial capability of American adults sponsored by FINRA found that only 15 percent of adults

50Protecting Senior Investors Report of Examinations of Securities Firms Providing

ldquoFree Lunchrdquo Sales Seminars by the Office of Compliance Inspections and Examination Securities and Exchange Commission North American Securities Administrators Association and the Financial Industry Regulatory Authority September 2007

51See httpappsfinraorgDataDirectory1prodesignationsaspx

Page 23 GAO-11-235 Consumer Finance

who had used a financial professional in the last 5 years claimed to have checked the background registration or license of a financial professional52 In addition SEC staff acknowledged that there have been concerns about confusing designations and SECrsquos October 2010 changes to investment adviser disclosure requirements mandate that investment adviser representatives who list professional designations and certifications in their background information also provide the qualifications needed for these designations so that the consumer can understand the value of the designation for the services being provided

Section 917 of the Dodd-Frank Act includes a requirement that SEC conduct a study identifying the existing level of financial literacy among retail investors including the most useful and understandable relevant information that they need to make informed financial decisions before engaging a financial intermediary While the section does not specifically mention the issue of financial plannersrsquo titles and designations the confusion we found to exist could potentially be addressed or mitigated if SEC incorporated this issue into its overall review of financial literacy among investors SEC staff told us that at this time its review would not likely address this issue although it would address such things as the need for conducting background checks on financial professionals Financial markets function best when consumers have information sufficient to understand and assess financial service providers and products53

Including financial plannersrsquo use of titles and designations in SECrsquos financial literacy review could provide useful information on the implications of consumersrsquo confusion on this issue

Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners

Available data do not show a large number of consumer complaints and enforcement actions involving financial planners but the exact extent to which financial planners may be a source of problems is unknown We were able to find limited information on consumer complaints from various agencies For example representatives of FTC and the Better Business Bureau said that they had received relatively few complaints related to financial planners FTC staff told us that a search in its Consumer Sentinel Network database for the phrase ldquofinancial plannerrdquo

52Applied Research amp Consulting LLC Financial Capability in the United States Initial

Report of the Research Findings from the 2009 National Survey prepared for the FINRA Investor Education Foundation (New York December 2009)

53GAO-09-216

Page 24 GAO-11-235 Consumer Finance

found 141 complaints in the 5-year period from 2005 through 2010 but that only a handful of these appeared to actually involve activity connected to the financial planning profession54 The staff added that additional searches on other titles possibly used by financial planners such as financial consultant and personal financial adviser did not yield significant additional complaints In addition a representative of the Better Business Bureau told us that it had received relatively few complaints related to financial planners although the representative noted that additional complaints might exist in broader categories such as ldquofinancial servicesrdquo

Consumer complaint data may not be an accurate gauge of the extent of problems Complaints may represent only a small portion of potential problems and complaints related to ldquofinancial plannersrdquo may not always be recorded as such As we have previously reported consumers also may not always know where they can report complaints55 At the same time some complaints that are made may not always be valid

SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm The agency does record and track whether federally and state-registered investment adviser firms provide financial planning services but its data tracking systems for complaints examination results and enforcement actions are not programmed to readily determine and track whether the complaint result or action was specifically related to a financial planner or financial planning service For example SEC staff told us the number of complaints about financial planners would be undercounted in their data system that receives and tracks public inquiries known as the Investor Response Information System because this code would likely be used only if it could not be identified whether the person (or firm) was an investment adviser or broker-dealer In addition the data system that SEC uses to record examination results known as the Super Tracking and Reporting System

54The Consumer Sentinel Network database is a secure online database of millions of consumer complaints available only to law enforcement In addition to storing complaints received by FTC the Consumer Sentinel Network also includes complaints filed with the Internet Crime Complaint Center Better Business Bureaus Canadarsquos PhoneBusters the US Postal Inspection Service the Identity Theft Assistance Center and the National Fraud Information Center among others

55GAO Telecommunications FCC Needs to Improve Oversight of Wireless Phone Service GAO-10-34 (Washington DC November 2009) p 18

Page 25 GAO-11-235 Consumer Finance

does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers

However SEC staff told us that a review of its Investor Response Information System identified 51 complaints or inquiries that had been recorded using their code for issues related to ldquofinancial plannersrdquo between November 2009 and October 2010 SEC staff told us that the complaints most often involved allegations of unsuitable investments or fraud such as misappropriation of funds56 A review of a separate SEC database called Tips Complaints and Referralsmdashan interim system that was implemented in March 2010mdashfound 124 allegations of problems possibly related to financial planners from March 2010 to October 201057

SEC staff told us that they did not have comprehensive data on the extent of enforcement activities related to financial planners per se In addition NASAA said that states generally do not track enforcement data specific to financial planners At our request SEC and NASAA provided us with examples of enforcement actions related to individuals who held themselves out as financial planners Using a keyword search SEC identified 10 such formal enforcement actions between August 2009 and August 2010 According to SEC documents these cases involved allegations of such activities as defrauding clients through marketing schemes receiving kickbacks without making proper disclosures and misappropriation of client funds Although NASAA also did not have comprehensive data on enforcement activities involving financial planners representatives provided us with examples of 36 actions brought by 30 states from 1986 to 2010 These cases involved allegations of such things as the sale of unsuitable products fraudulent misrepresentation of qualifications failure to register as an investment adviser and misuse of client funds for personal expenses

56Of these 51 complaints or inquiries 29 involved allegations of fraud 9 involved allegations of unsuitable investments and the remaining 13 represented questions on a variety of topics

57Of these 124 allegations 13 were coded as ldquofraudulent or unregistered offer or sale of securities including Ponzi schemes high yield investment programs or other investment programsrdquo 12 as ldquomanipulation of a securityrsquos price or volumerdquo 6 as ldquotheft or misappropriation of funds or securitiesrdquo 5 as ldquofalse or misleading statements about a companyrdquo 3 as ldquoproblems with my brokerage or advisory accountrdquo and 2 as ldquoinsider tradingrdquo An additional 14 were coded as ldquoother fraudulent conductrdquo and 69 were coded simply as ldquootherrdquo

Page 26 GAO-11-235 Consumer Finance

Because of limitations in how data are gathered and tracked SEC and state securities regulators are not currently able to readily determine the extent to which financial planning services may be causing consumers harm NASAA officials told us that as with SEC state securities regulators did not typically or routinely track potential problems specific to financial planners SEC and NASAA representatives told us that they had been meeting periodically in recent months to prepare for the transition from federal to state oversight of certain additional investment adviser firms as mandated under the Dodd-Frank Act but they said that oversight of financial planners in particular had not been part of these discussions SEC staff have noted that additional tracking could consume staff time and other resources They also said that because there are no laws that directly require registration recordkeeping and other responsibilities of ldquofinancial plannersrdquo per se tracking such findings relating to those entities would require expenditure of resources on something that SEC does not have direct responsibility to oversee Yet as we have reported in the past while we recognize the need to balance the cost of data collection efforts against the usefulness of the data a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking58 Given the significant growth in the financial planning industry ongoing concerns about potential conflicts of interest and consumer confusion about standards of care regulators may benefit from identifying ways to get better information on the extent of problems specifically involving financial planners and financial planning services

58GAO Managing for Results Using GPRA to Help Congressional Decisionmaking and

Strengthen Oversight GAOT-00-95 (Washington DC March 2000) p 13 GAO Executive

Guide Effectively Implementing the Government Performance and Results Act GAOGGD-96-118 (Washington DC June 1996) p 27

Page 27 GAO-11-235 Consumer Finance

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed

Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners

Creation of a Board to Oversee Financial Planners

Over the past few years a number of stakeholdersmdashincluding consumer groups FINRA and trade associations representing financial planners securities firms and insurance firmsmdashhave proposed different approaches to the regulation of financial planners Following are four of the most prominent approaches each of which has both advantages and disadvantages

In 2009 the Financial Planning Coalitionmdashcomprised of the Certified Financial Planner Board of Standards Financial Planning Association and the National Association of Personal Financial Advisorsmdashproposed that Congress establish a professional standards-setting oversight board for financial planners According to the coalition its proposed legislation would establish federal regulation of financial planners by allowing SEC to recognize a financial planner oversight board that would set professional standards for and oversee the activities of individual financial planners although not financial planning firms For example the board would have the authority to establish baseline competency standards in the areas of education examination and continuing education and would be required to establish ethical standards designed to prevent fraudulent and manipulative acts and practices It would also have the authority to require registration or licensing of financial planners and to perform investigative and disciplinary actions Under the proposal states would retain antifraud authority over financial planners as well as full oversight for financial plannersrsquo investment advisory activity However states would not be allowed to impose additional licensing or registration requirements for financial planners or set separate standards of conduct Supporters of a new oversight board have noted that its structure and governance would be analogous to the Public Company Accounting Oversight Board a private nonprofit organization subject to SEC oversight that in turn oversees the audits of public companies that are subject to securities laws

Page 28 GAO-11-235 Consumer Finance

Augmenting Oversight of Investment Advisers with an SRO

According to the Financial Planning Coalition a potential advantage of this approach is that it would treat financial planning as a distinct profession and would regulate across the full spectrum of activities in which financial planners may engage including activities related to investments taxes education retirement planning estate planning insurance and household budgeting Proponents argue that a financial planning oversight board would also help ensure high standards and consistent regulation for all financial planners by establishing common standards for competency professional practices and ethics

However many securities regulators and financial services trade associations with whom we spoke said that they believe such a board would overlap with and in many ways duplicate existing state and federal regulations which already cover virtually all of the products and services that a financial planner provides Some added that the board would entail unnecessary additional financial costs and administrative burdens for the government and regulated entities In addition some opponents of this approach question whether ldquofinancial planningrdquo should be thought of as a distinct profession that requires its own regulatory structure noting that financial planning is not easily defined and can span multiple professions including accounting insurance investment advice and law One consumer group also noted that the regulation of individuals and professions is typically a state rather than a federal responsibility Finally we note that the analogy to the Public Company Accounting Oversight Board may not be apt That board was created in response to a crisis involving high-profile bankruptcies and investor losses caused in part by inadequacies among public accounting firms In the case of financial planners there is limited evidence of an analogous crisis or as noted earlier of severe harm to consumers

A number of proposals over the years have considered having FINRA or a newly created SRO supplement SEC oversight of investment advisers These proposals date back to at least 1963 when an SEC study recommended that all registered investment advisers be required to be a

Page 29 GAO-11-235 Consumer Finance

member of an SRO59 In 1986 the National Association of Securities Dealers a predecessor to FINRA explored the feasibility of examining the investment advisory activities of members who were also registered as investment advisers The House of Representatives passed a bill in 1993 that would have amended the Advisers Act to authorize the creation of an ldquoinspection onlyrdquo SRO for investment advisers although the bill did not become law60 In 2003 SEC requested comments on whether one or more SROs should be established for investment advisers citing among other reasons concerns that the agencyrsquos own resources were inadequate to address the growing numbers of advisers61 However SEC did not take further action Section 914 of the Dodd-Frank Act required SEC to issue a study in January 2011 on the extent to which one or more SROs for investment advisers would improve the frequency of examinations of investment advisers62

According to FINRA the primary advantage of augmenting investment adviser oversight with an SRO is that doing so would allow for more frequent examinations given the limited resources of states and SEC The Financial Services Institute an advocacy organization for independent broker-dealers and financial advisers has stated that an industry-funded SRO with the resources necessary to appropriately supervise and examine all investment advisers would close the gap that exists between the regulation of broker-dealers and investment advisers FINRA said that it finds this gap troubling given the overlap between the two groups (approximately 88 percent of all registered advisory representatives are also broker-dealer representatives) FINRA adds that any SRO should operate subject to strong SEC oversight and that releasing SEC of some of its responsibilities for investment advisers would free up SEC resources for other regulatory activities

59See Securities and Exchange Commission News Digest Issue No 63-4-3 8 (1963) which describes SECrsquos report to Congress regarding the adequacy of the rules of national securities exchanges and national securities associations pursuant to Pub L No 87-196 75 Stat 465 (1961) wherein SEC points out that the framework of industry self-regulation permitted many broker-dealer firms and registered investment advisers to remain outside of any official self-regulatory group According to the SEC News Digest the report suggested that membership in an SRO should be a prerequisite to registration with SEC as a broker-dealer or investment adviser

60HR 578 103rd Cong (1993)

61Investment Advisers Act Release No 2107 68 Fed Reg 7038 (Feb 11 2003)

62SEC is required to report the results of its study within 180 days of enactment of the Dodd-Frank Act

Page 30 GAO-11-235 Consumer Finance

Extending Coverage of the Fiduciary Standard

However NASAA some state securities regulators and one academic with whom we spoke opposed adding an SRO component to the regulatory authority of investment advisers NASAA said it believed that investment adviser regulation is a governmental function that should not be outsourced to a private third-party organization that lacks the objectivity independence expertise and experience of a government regulator Further NASAA said it is concerned with the lack of transparency associated with regulation by SROs because unlike government regulators they are not subject to open records laws through which the investing public can obtain information Two public interest groups including the Consumer Federation of America have asserted that one SROmdashFINRAmdash has an ldquoindustry mindsetrdquo that has not always put consumer protection at the forefront In addition the Investment Adviser Association and two other organizations we interviewed have noted that funding an SRO and complying with its rules can impose additional costs on a firm63

Proposals have been made to extend coverage of the fiduciary standard of care to all those who provide financial planning services Some consumer groups and others have stated that a fiduciary standard should apply to anyone who provides personalized investment advice about securities to retail customers including insurance agents who recommend securities The Financial Planning Coalition has proposed that the fiduciary standard apply to all those who hold themselves out as financial planners Proponents of extending the fiduciary standard of care which also include consumer groups and NASAA generally maintain that consumers should be able to expect that financial professionals they work with will act in their best interests They say that a fiduciary standard is more protective of consumersrsquo interests than a suitability standard which requires only that a product be suitable for a consumer rather than in the consumerrsquos best interest In addition the Financial Planning Coalition notes that extending a fiduciary standard would somewhat reduce consumer confusion about financial planners that are covered by the fiduciary standard in some capacities (such as providing investment advice) but not in others (such as selling a product)

However some participants in the insurance and broker-dealer industries have argued that a fiduciary standard of care is vague and undefined They say that replacing a suitability standard with a fiduciary standard could

63The Investment Adviser Association is a not-for-profit association that represents the interests of SEC-registered investment adviser firms

Page 31 GAO-11-235 Consumer Finance

Clarifying Financial Plannersrsquo Credentials and Standards

actually weaken consumer protections since the suitability of a product is easier to define and enforce Opponents also have argued that complying with a fiduciary standard would increase compliance costs that in turn would be passed along to consumers or otherwise lead to fewer consumer choices

The American College has proposed clarifying the credentials and standards of financial professionals including financial planners In particular it has proposed creating a working group of existing academic and practice experts to establish voluntary credentialing standards for financial professionals As noted previously consumers may be unable to distinguish among the various financial planning designations that exist and may not understand the requirements that underpin them Clarifying the credentials and standards of financial professionals could conceivably take the form of prohibiting the use of certain designations as has been done for senior-specific designations in some states or establishing minimum education testing or work experience requirements needed to obtain a designation The American College has stated that greater oversight of such credentials and standards could provide a ldquoseal of approvalrdquo that would generally raise the quality and competence of financial professionals including financial planners help consumers distinguish among the various credentials and help screen out less qualified or reputable players

However the ultimate effectiveness of such an approach is not clear since the extent to which consumers take designations into account when selecting or working with financial planners is unknown as is the extent of the harm caused by misleading designations In addition implementation and ongoing monitoring of financial plannersrsquo credentials and standards could be challenging Further the issue of unclear designations has already been addressed to some extentmdashfor example as noted earlier some states regulate the use of certain senior-specific designations and allow five professional designations to satisfy necessary competency requirements for prospective investment adviser representatives State securities regulators also have the authority to pursue the misleading use of credentials through their existing antifraud authority

Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners

In general a majority of the regulatory agencies consumer groups academics trade associations and individual financial services companies with which we spoke did not favor substantial structural change in the regulation of financial planners In particular few supported an additional oversight body which was generally seen as duplicative of existing regulation Some stakeholders in the securities and insurance industries

Page 32 GAO-11-235 Consumer Finance

Conclusions

noted that given the dynamic financial regulatory environment under way as a result of the Dodd-Frank Actmdashsuch as creation of a new Bureau of Consumer Financial Protectionmdashmore time should pass before additional regulatory changes related to financial planning services were considered Several industry associations also noted that opportunities existed for greater enforcement of existing law and regulation as discussed earlier

Existing statutes and regulations appear to cover the great majority of financial planning services and individual financial planners nearly always fall under one or more regulatory regimes depending on their activities While no single law governs the broad array of activities in which financial planners may engage given available information it does not appear that an additional layer of regulation specific to financial planners is warranted at this time At the same time as we have previously reported more robust enforcement of existing laws could strengthen oversight efforts In addition there are some actions that can be taken that may help address consumer protection issues associated with the oversight of financial planners

First as we have reported financial markets function best when consumers understand how financial providers and products work and know how to choose among them Yet consumers may be unclear about standards of care that apply to financial professionals particularly when the same individual or firm offers multiple services that have differing standards of care As such consumers may not always know whether and when a financial planner is required to serve their best interest While SEC is currently addressing the issue of whether the fiduciary standard of care should be extended to broker-dealers when they provide personalized investment advice about securities the agency is not addressing whether this extension should also apply to insurance agents who generally fall outside of SECrsquos jurisdiction Sales practices involving some high-risk insurance products such as annuities have drawn attention from federal and state regulators A review by NAIC of consumersrsquo understanding of the standards of care with regard to the sale of insurance products could provide information on the extent of consumer confusion in the area and actions needed to address the issue

Second we have seen that financial planners can adopt a variety of titles and designations The different designations can imply different types of qualifications but consumers may not understand or distinguish among these designations and thus may be unable to properly assess the qualifications and expertise of financial planners SECrsquos recent changes in this areamdashrequiring investment advisers to disclose additional information

Page 33 GAO-11-235 Consumer Finance

on professional designations and certifications they listmdashshould prove beneficial Another opportunity lies in SECrsquos mandated review of financial literacy among investors Incorporating issues of consumer confusion about financial plannersrsquo titles and designations into that review could assist the agency in assessing whether any further changes are needed in disclosure requirements or other related areas

Finally SEC has limited information about the nature and extent of problems specifically related to financial planners because it does not track complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole However a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking SEC staff have noted that additional tracking could require additional resources but other opportunities may also exist to gather additional information on financial planners Because financial planning is a growing industry and has raised certain consumer protection issues regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services

Recommendations We recommend that the National Association of Insurance Commissioners in concert with state insurance regulators take steps to assess consumersrsquo understanding of the standards of care with regard to the sale of insurance products such as annuities and take actions as appropriate to address problems revealed in this assessment

We also recommend that the Chairman of the Securities and Exchange Commission direct the Office of Investor Education and Advocacy Office of Compliance Inspections and Examinations Division of Enforcement and other offices as appropriate to

bull Incorporate into SECrsquos ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumersrsquo investment decisions and

bull Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services and take actions to address any problems that are identified

Page 34 GAO-11-235 Consumer Finance

Agency Comments We provided a draft of this report for review and comment to FINRA NAIC NASAA and SEC These organizations provided technical comments which we incorporated as appropriate In addition NAIC provided a written response which is reprinted in appendix II NAIC said it generally agreed with the contents of the draft report and would give consideration to our recommendation regarding consumersrsquo understanding of the standards of care with regard to the sale of insurance products

NASAA also provided a written response which is reprinted in appendix III In its response NASAA said it agreed that a specific layer of regulation for financial planners was unnecessary and provided additional information on some aspects of state oversight of investment advisers NASAA also said that it welcomed the opportunity to continue to collaborate with SEC to identify methods to better understand and address problems specifically involving financial planners as we recommended In addition NASAA expanded upon the reasons for its opposition to proposals that would augment oversight of investment advisers with an SRO

We are sending copies of this report to interested congressional committees the Chief Executive Officer of FINRA Chief Executive Officer of NAIC Executive Director of NASAA and the Chairman of SEC In addition the report will be available at no charge on GAOrsquos Web site at httpwwwgaogov

If you or your staffs have any questions about this report please contact me at (202) 512-8678 or cackleyagaogov Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report GAO staff who made major contributions to this report are listed in appendix IV

Alicia Puente Cackley Director Financial Markets

and Community Investment

Page 35 GAO-11-235 Consumer Finance

List of Congressional Addressees

The Honorable Bob Corker The Honorable Tim Johnson The Honorable Herbert Kohl The Honorable Richard C Shelby United States Senate

The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives

Page 36 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

Appendix I Scope and Methodology

Our reporting objectives were to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

For background information we obtained estimates for 2000 and 2008 and projections for 2018 from the Bureau of Labor Statistics on the number of individuals who reported themselves as ldquopersonal financial advisersrdquo a term that the agency said was interchangeable with ldquofinancial plannerrdquo The bureau derived these estimates from the Occupational Employment Statistics survey and the Current Population Survey1

According to the bureau the Occupational Employment Statisticsrsquo estimates for financial planners have a relative standard error of 19 percent and the median wage estimate for May 2009 has a relative standard error of 15 percent Because the overall employment estimates used are developed from multiple surveys it was not feasible for the bureau to provide the relative standard errors for these financial planner employment statistics To estimate the number of households that used financial planners we analyzed 2007 data from the Board of Governors of the Federal Reserversquos Survey of Consumer Finances This survey is conducted every three years to provide detailed information on the finances of US households2 Because the survey is a probability sample based on random selections the sample is only one of a large number of samples that might have been drawn Since each sample could have provided different estimates we express our confidence in the precision of our particular samplersquos results as a 95 percent confidence interval (eg plus or minus 25 percentage points) This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn In this report for this survey all percentage

1As explained by the Bureau of Labor Statistics the Occupational Employment Statistics program produces employment and wage estimates for over 800 occupations These are estimates of the number of people employed in certain occupations and estimates of the wages paid to them Since self-employed persons are not included in the estimates the bureau also considers information from the Current Population Survey a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics to derive its occupation estimates

2Additional information on the sample design and data collected by the Survey of Consumer Finances is available at httpwwwfederalreservegovpubsossoss2abouthtml

Page 37 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

estimates have 95 percent confidence intervals that are within plus or minus 25 percentage points from the estimate itself

To identify how financial planners are regulated and overseen at the federal and state levels we identified and reviewed on the federal level federal laws regulations and guidance applicable to financial planners the activities in which they engage and their marketing materials titles and designations We also reviewed relevant SEC interpretive releases such as IA Rel No 1092 Applicability of the Investment Advisers Act to

Financial Planners Pension Consultants and Other Persons Who

Provide Investment Advisory Services as a Component of Other

Financial Services We also discussed the laws and regulations relevant to financial planners in meetings with staff of the Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) Department of Labor and Internal Revenue Service We also interviewed two legal experts and reviewed a legal compendium on the regulation of financial planners At the state level we interviewed representatives from the North American Securities Administrators Association (NASAA) and the National Association of Insurance Commissioners (NAIC) and reviewed model regulations developed by these agencies In addition we selected five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texasmdashfor a more detailed review We chose these states because they had a large number of registered investment advisers and varying approaches to the regulation of financial planners and represented geographic diversity For each of these states we reviewed selected laws and regulations related to financial planners which included those related to senior-specific designations and insurance transactions and we interviewed staff at each statersquos securities and insurance agencies

To identify what is known about the effectiveness of the regulation of financial planners and what regulatory gaps or overlap may exist we reviewed relevant federal and state laws regulations and guidance In addition we spoke with representatives of the federal and state agencies cited above as well as FINRA and organizations that represent or train financial planners including the Financial Planning Coalition The American College and the CFA Institute organizations that represent the financial services industry including the Financial Services Institute Financial Services Roundtable Securities Industry and Financial Markets Association Investment Advisers Association American Society of Pension amp Professional Actuaries National Association of Insurance and Financial Advisors American Council of Life Insurers Association for Advanced Life Underwriting American Institute of Certified Public Accountants American Bankers Association and organizations

Page 38 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

representing consumer interests including the Consumer Federation of America and AARP We also spoke with selected academic experts knowledgeable about these issues In addition we reviewed relevant studies and other documentary evidence including a 2008 study of the RAND Corporation that was commissioned by SEC ldquoInvestor and Industry Perspectives on Investment Advisers and Broker-Dealersrdquo ldquoResults of Investor Focus Group Interviews About Proposed Brokerage Account Disclosuresrdquo sponsored by SEC results of the FPA Fiduciary Task Force ldquoFinal Report on Financial Planner Standards of Conductrdquo ldquoUS Investors amp The Fiduciary Standard A National Opinion Surveyrdquo sponsored by AARP the Consumer Federation of America the NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors and the 2009 National Financial Capability Study commissioned by FINRA We determined that the reliability of these studies was sufficient for our purposes In addition we reviewed relevant information on the titles and designations used by financial planners including FINRArsquos Web site that provides the required qualifications and other information about the designations used by securities professionals

We also obtained and reviewed available data on complaints and selected enforcement actions related to financial planners from the Federal Trade Commission Better Business Bureau and SEC We collected from the Federal Trade Commission complaint data from its Consumer Sentinel Network database using a keyword search of the term ldquofinancial plannerrdquo for complaints filed from 2005 to 2010 From the Better Business Bureau we collected the number of complaints about the financial planning industry received in 2009 From SEC we collected complaints from the agencyrsquos Investor Response Information System that had been coded as relating to ldquofinancial plannersrdquo from November 2009 to October 2010 We also reviewed data from SECrsquos Tips Complaints and Referrals database that resulted from a keyword search for the terms ldquofinancial plannerrdquo ldquofinancial adviserrdquo ldquofinancial advisorrdquo ldquofinancial consultantrdquo and ldquofinancial counselorrdquo from March 2010 to October 2010 In addition at our request SEC and NASAA provided us anecdotally with examples of enforcement actions related to individuals who held themselves out as financial planners SEC identified 10 formal enforcement actions between August 2009 and August 2010 and NASAA provided us selected examples of state enforcement actions involving financial planners from 1986 to 2010 from 30 states We gathered information on SEC- and state-registered investment advisers from SECrsquos Investment Adviser Registration Database FINRA did not provide us with data on complaints examination results or

Page 39 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

enforcement actions specific to financial planners FINRA officials told us they do not track these data specific to financial planners

To identify alternative approaches for the regulation of financial planners and their advantages and disadvantages we conducted a search for legislative and regulatory proposals related to financial planners which have been made by Members of Congress consumer groups and representatives of the financial planning securities and insurance industries We identified and reviewed position papers studies public comment letters congressional testimonies and other documentary sources that address the advantages and disadvantages of these approaches In addition we solicited views on these approaches from representatives of the wide range of organizations listed above including organizations that represent financial planners financial services companies and consumers as well as state and federal government agencies and associations and selected academic experts

We conducted this performance audit from June 2010 through January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Page 40 GAO-11-235 Consumer Finance

Appendix II Comments from the National

Association of Insurance Commissioners

Appendix II Comments from the National Association of Insurance Commissioners

Page 41 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Appendix III Comments from the North American Securities Administrators Association

Page 42 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 43 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 44 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 45 GAO-11-235 Consumer Finance

Appendix IV

A

GAO Contact and Staff

cknowledgments

Appendix IV GAO Contact and Staff Acknowledgments

Alicia Puente Cackley (202) 512-8678 or cackleyagaogov GAO Contact

In addition to the contact named above Jason Bromberg (Assistant Staff Director) Sonja J Bensen Jessica Bull Emily Chalmers Patrick Dynes

Acknowledgments Ronald Ito Sarah Kaczmarek Marc Molino Linda Rego and Andrew Stavisky made key contributions to this report

(250550) Page 46 GAO-11-235 Consumer Finance

The Government Accountability Office the audit evaluation and GAOrsquos Mission investigative arm of Congress exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people GAO examines the use of public funds evaluates federal programs and policies and provides analyses recommendations and other assistance to help Congress make informed oversight policy and funding decisions GAOrsquos commitment to good government is reflected in its core values of accountability integrity and reliability

The fastest and easiest way to obtain copies of GAO documents at no cost Obtaining Copies of is through GAOrsquos Web site (wwwgaogov) Each weekday afternoon GAO GAO Reports and posts on its Web site newly released reports testimony and

correspondence To have GAO e-mail you a list of newly posted products Testimony go to wwwgaogov and select ldquoE-mail Updatesrdquo

Order by Phone The price of each GAO publication reflects GAOrsquos actual cost of production and distribution and depends on the number of pages in the publication and whether the publication is printed in color or black and white Pricing and ordering information is posted on GAOrsquos Web site httpwwwgaogovorderinghtm

Place orders by calling (202) 512-6000 toll free (866) 801-7077 or TDD (202) 512-2537

Orders may be paid for using American Express Discover Card MasterCard Visa check or money order Call for additional information

ContactTo Report Fraud Web site wwwgaogovfraudnetfraudnethtm Waste and Abuse in E-mail fraudnetgaogov

Federal Programs Automated answering system (800) 424-5454 or (202) 512-7470

Ralph Dawn Managing Director dawnrgaogov (202) 512-4400 Congressional US Government Accountability Office 441 G Street NW Room 7125 Relations Washington DC 20548

Chuck Young Managing Director youngc1gaogov (202) 512-4800 Public Affairs US Government Accountability Office 441 G Street NW Room 7149 Washington DC 20548

Please Print on Recycled Paper

  • GAO Doc d11235pdf
    • Letter
    • Background
    • Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities
      • Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws
      • Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities
      • Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations
        • Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited
          • Existing Regulation Covers Most Financial Planning Services
          • Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products
          • Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public
          • Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners
            • Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed
              • Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners
                • Creation of a Board to Oversee Financial Planners
                • Augmenting Oversight of Investment Advisers with an SRO
                • Extending Coverage of the Fiduciary Standard
                • Clarifying Financial Plannersrsquo Credentials and Standards
                  • Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners
                    • Conclusions
                    • Recommendations
                    • Agency Comments
                      • Appendix I Scope and Methodology
                      • Appendix II Comments from the National Association of Insurance Commissioners
                      • Appendix III Comments from the North American Securities Administrators Association
                      • Appendix IV GAO Contact and Staff Acknowledgments
                        • GAO Contact
                        • Staff Acknowledgments
                        • Obtaining Copies of GAO Reports and Testimony
                          • Order by Phone

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 ESP 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 ETI 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 FRA 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 GRE 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 HEB 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 HRV (Za stvaranje Adobe PDF dokumenata najpogodnijih za visokokvalitetni ispis prije tiskanja koristite ove postavke Stvoreni PDF dokumenti mogu se otvoriti Acrobat i Adobe Reader 50 i kasnijim verzijama) HUN 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 ITA 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 JPN ltFEFF9ad854c18cea306a30d730ea30d730ec30b951fa529b7528002000410064006f0062006500200050004400460020658766f8306e4f5c6210306b4f7f75283057307e305930023053306e8a2d5b9a30674f5c62103055308c305f0020005000440046002030d530a130a430eb306f3001004100630072006f0062006100740020304a30883073002000410064006f00620065002000520065006100640065007200200035002e003000204ee5964d3067958b304f30533068304c3067304d307e305930023053306e8a2d5b9a306b306f30d530a930f330c8306e57cb30818fbc307f304c5fc59808306730593002gt KOR ltFEFFc7740020c124c815c7440020c0acc6a9d558c5ec0020ace0d488c9c80020c2dcd5d80020c778c1c4c5d00020ac00c7a50020c801d569d55c002000410064006f0062006500200050004400460020bb38c11cb97c0020c791c131d569b2c8b2e4002e0020c774b807ac8c0020c791c131b41c00200050004400460020bb38c11cb2940020004100630072006f0062006100740020bc0f002000410064006f00620065002000520065006100640065007200200035002e00300020c774c0c1c5d0c11c0020c5f40020c2180020c788c2b5b2c8b2e4002egt LTH 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 LVI 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 NLD (Gebruik deze instellingen om Adobe PDF-documenten te maken die zijn geoptimaliseerd voor prepress-afdrukken van hoge kwaliteit De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 50 en hoger) NOR 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 POL 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 PTB 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 RUM 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 RUS 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 SKY ltFEFF0054006900650074006f0020006e006100730074006100760065006e0069006100200070006f0075017e0069007400650020006e00610020007600790074007600e100720061006e0069006500200064006f006b0075006d0065006e0074006f0076002000410064006f006200650020005000440046002c0020006b0074006f007200e90020007300610020006e0061006a006c0065007001610069006500200068006f0064006900610020006e00610020006b00760061006c00690074006e00fa00200074006c0061010d00200061002000700072006500700072006500730073002e00200056007900740076006f00720065006e00e900200064006f006b0075006d0065006e007400790020005000440046002000620075006400650020006d006f017e006e00e90020006f00740076006f00720069016500200076002000700072006f006700720061006d006f006300680020004100630072006f00620061007400200061002000410064006f00620065002000520065006100640065007200200035002e0030002000610020006e006f0076016100ed00630068002egt SLV ltFEFF005400650020006e006100730074006100760069007400760065002000750070006f0072006100620069007400650020007a00610020007500730074007600610072006a0061006e006a006500200064006f006b0075006d0065006e0074006f0076002000410064006f006200650020005000440046002c0020006b006900200073006f0020006e0061006a007000720069006d00650072006e0065006a016100690020007a00610020006b0061006b006f0076006f00730074006e006f0020007400690073006b0061006e006a00650020007300200070007200690070007200610076006f0020006e00610020007400690073006b002e00200020005500730074007600610072006a0065006e006500200064006f006b0075006d0065006e0074006500200050004400460020006a00650020006d006f0067006f010d00650020006f0064007000720065007400690020007a0020004100630072006f00620061007400200069006e002000410064006f00620065002000520065006100640065007200200035002e003000200069006e0020006e006f00760065006a01610069006d002egt SUO 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 SVE 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 TUR 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 UKR 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 ENU (Use these settings to create Adobe PDF documents best suited for high-quality prepress printing Created PDF documents can be opened with Acrobat and Adobe Reader 50 and later) gtgt Namespace [ (Adobe) (Common) (10) ] OtherNamespaces [ ltlt AsReaderSpreads false CropImagesToFrames true ErrorControl WarnAndContinue FlattenerIgnoreSpreadOverrides false IncludeGuidesGrids false IncludeNonPrinting false IncludeSlug false Namespace [ (Adobe) (InDesign) (40) ] OmitPlacedBitmaps false OmitPlacedEPS false OmitPlacedPDF false SimulateOverprint Legacy gtgt ltlt AddBleedMarks false AddColorBars false AddCropMarks false AddPageInfo false AddRegMarks false ConvertColors ConvertToCMYK DestinationProfileName () DestinationProfileSelector DocumentCMYK Downsample16BitImages true FlattenerPreset ltlt PresetSelector MediumResolution gtgt FormElements false GenerateStructure false IncludeBookmarks false IncludeHyperlinks false IncludeInteractive false IncludeLayers false IncludeProfiles false MultimediaHandling UseObjectSettings Namespace [ (Adobe) (CreativeSuite) (20) ] PDFXOutputIntentProfileSelector DocumentCMYK PreserveEditing true UntaggedCMYKHandling LeaveUntagged UntaggedRGBHandling UseDocumentProfile UseDocumentBleed false gtgt ]gtgt setdistillerparamsltlt HWResolution [2400 2400] PageSize [612000 792000]gtgt setpagedevice

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Page 4: Input on the Report to Congress on How To Modernize and Improve

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67F3270)+F1+lt-3F32lt3237875)+F1+lt-3678927(+2+)+3D+B+7(+82+8lt378O+32)+89lt+2A8373=3875A598752=8)3)35398lt23A57BU77(lt777BV8+2A(+80)()7(95++8+lt777B08+73275+5+2 lt777B-^3+A+20)+58lt2gt758(3892+803A+28B)7589lt+2A837=37B)38+lt23+88378)3U)35398V77(lt77+2808+7325A832832+Xlt+288)9B+- 46$+B8+2+5+lt2+8+7A+82+83=+)2+82(+5797B)++2=77(lt77+2325A+287BU77(lt777BV8+2A(+8Ogt)+2O23P+25++28O+(98+)+2 _3O5+8(2lt373lt23A57B7A+8=+75A(+78+(92+8))+937389()+2=83957+(+88+2+B823787A+8=+75A8+22+lt2+8+7A+83)+2=- ^3+A+203A+28B)7589lt+2A837)+c23P+21++2+A+83+A+8=9()3O+5+82+50758B7(753(9=+737(7O+lt23A5+53+B83288)37B)+gtlt+83O98+(3789=+2889+2)+)758397+)(759789lt+2A8+52+B8+2+52+lt2+8+7A+87578927(+B+78-68)39583O+32(+9gt(37A+gt+53+B8328

)]78927(+(3=lt7+8537389lt+2A8+09503A+28++32+X=7+)+5A+287B328+8lt2((+83)+2B+78- F327[889+8(377)3lt++8880)())+O3A+7B9B+395X-F922+7gt0)+F1+lt3F32lt323787+2lt2+8)+689++2gt05+2+7+8O+++7)++2=77(Ult77+2V7577(Ult777BV75B732+87gt75A59322=)33+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67 )+MJ8-F+792gt0)7+75+X(++57Bgt(3=lt+Xlt2359(80)()(7+8gt=8+5lt+283773O++A7B)+gt2+8+(92+8lt2(92gt)+7)+gt2+5A+28+575 =2P++58)A7B3)+9lt85+3)+83(P=2P+)737+3)+53785+V0)8395+5=35+32+B937=P+8738+78+)83+A+2- 6=P+88+78+321+lt3F32lt32378+X=7+28389lt+2A8+09575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt77A+8=+75A832gt2=)+7)+gtlt(+++27+5Ogt59(2gt5A8+28O+++7jM0NNNRj0NNN32lt77A3A7BjbNN0NNN-NN388+80)+7892+gt=P+8+A+7=32+8+78+39575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt737R59(2gt78927(+B+7)3(=833+2)+U8=++A+V3 +Xlt+277(02+2+=+775+8+lt777B8+2A(+8)++277B7A+2B+3 jb0NNN-NN3787B+jbNN0NNN75+X779gt278(37053+873T +2+=+7G777B0W8+G777B0XG777B08Pamp7B+=+775)+lt2+lt23737+32)0(8)375O95B+7B8+=+788lt237gt77(lt72+Z92+8 8B7(7+Xlt+28+0737+3)()8(922+7gt(377+5)7)+8+2+8l32db3278927(+(+787B(922(99=-33lt+2837398+)++U77(lt77+2V3+2)+8+8+2A(+838+78Ogt322++752+((3=lt+37)59(2gt7A+8=+75A8+2875+7BB+7U77(75+5+2lt777BV)3989lt+2A837Ogt)+F1+lt3F32lt323788=ltgtO+(98+)+gt(=7333+25A(+78+(92+88877+7553+8 73+7(392B++)((3759(0O92)+20(9gt2+258)38+)33lt39355372+B937089lt+2A8377595)+882+8lt378Ogt75Ogt32)+2(378- )+2B+879=O+23(3=lt7837B)239B)2+B93287bN8+8)8=+72+B2583X+57575+X779+875+lt2359(88++=3O+35B+5B7878927(+B+78)3)35398+Xlt+28777(02+2+=+775+8+lt777B75)39++=3378O8+58+7B+()7Z9+89B)U)+779gtC7A+28gtVI=37B3)+28L3U7A+8V7X+575WZ9gt675+X779+875+lt2359(8-67)+(8+3+Z9gt75+Xlt2359(80)()2+732+B9+588+(92+80(=82+3+7=5+)89()lt2359(8 3+2)+9lt85+3)+83(P=2P+)737+3)+53785+-B+782+9B)3lt7lt238lt+(873(327+27532)+lt238lt+(3O+B32Z95373)+2 8+(92+8lt32337A3237779gt-cgt537B830)+97(+78+5B+7A3587gt 59(2gtOgt37)+U2+(3==+753738+V75)+2+87359(2gtOgt3289lt+2A83772+(3==+757B)+lt92()8+3775+X779gt32778927(+B+7073

<777BV>Hh99amp()amp6=amp)+amp6384<)amp4quotampY)<$+44)ZS67>mailto3+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67

+5)46$2=-67F327+80lt295+7+Xlt+287525(7O+88+2+5B7877(lt777B()278975+2D+(37aalM3)+FA(35+-^3+A+20353830)+5=B+5lt2gt7++58389+7(A(39275)+Z9+837gt88P+580)8)++X+73)+5=B+875)lt78)38+B++X(++58lNRebgt+287=7gt(8+80)3=7gtgt+28lt238+(9+)+(8+0lt2(92gt87(+)+2+8 75537++=+73(3785+2h S)++Z9gt75+X779+8)JJgt+283lt+7+8=gtO+3gt7ltlt23lt2+32=7gt8+732(+78lt2(92gt)+2B+95+7(+33A+2lbgt+2358=7gtB+788++P 390)+((397A9+8O+32+8922+75+2()2B+882++()+77A+8=+7-C7)+(3789=+2+X8)+(372()+2+2+735=B+8-67)8(8+0822+)gt+2P+89()(8+37(377B+7(gt75)+(383B3732lt3325A(+23=737R59(2gt77(lt77+2Q78927(+B+78lt23)OA+BA+7)+Ult+2(+A+5V(P35=B+8-)+D+327+gti+7+2[83(+753(582(327+gt82+3)+3lt238+(9+89()(8+8O+(98+)+8+7+7(+8)+gt(7+Xlt+(3()+A+23=89((+889lt238+(937789())B)ltlt+2(2=+2+lt2gt75)+2O95B+82+O++28lt+737=32+8+2398(2=+8-5537gt0gt+282+3+7O+33O72+8(883737)+(372(75)+2+927397583)+(+7)7389+50O98373(3=lt7+5B78)+UB+7V0)3=gt(3779+8+7Blt2359(97O+5- W+(A+gt0)+8+3(+283)+(392(+)+(2=+8lt+2lt+2+5Ogt97+)(lt77+28)239B)7(3775)+(P389lt+2A837753A+28B)389()23B9+lt77+28 Ogt)+1+lt3F32lt32378751+lt3678927(++A+8=38(3789=+283)+2375+A(+8O+(98+)+2+2+73++(A+5=782A+2+=+5+8AO+750)++B8gt8+=+7892+)+(3759((3779+8O+(98+)+(+778)+2=37+gtO(P)393=9()988- (378O+7BP+778+875Ogt46$38+=)+5+397+)(lt2((+87)875982gt-amp382+(+7gt046$889+52+B93782+Z927Bc23P+21++2889lt+2A8+8+83+Z9gt75+X779+8=5+Ogt)+22+B8+2+52+lt2+8+7A+8-82+890=7gt3)++88+)(2+lt2+8+7A+82++A7BO23P+25++280523ltlt7B)+2 8+(92+8(+78+83+X(98A+gt3+275+Xlt2359(83985+346$[889lt+2A832gt829(92+-C73297+gt0)+33lt)3+87F327[8875(P32+B9373UV 77(lt77+280+A+8F327[8(3789=+28)+=+2(gt3)+8+97+)(75A598- 5537gt0F6FD+(37MJKM-a+8)+839)+(922+77+(+88gt3(+7892+758lt+83977+(+882gt5+0)(3789+8U5A(+7)+O987+88378927(+V073)+2(37+7398889+=37B77(lt77+280)()O839+gt7++583O+552+88+5075(395O++5+2+A+3=P+)+2+B9379732=(2388bN8+8-)8O27B8 =+3 amp

1()amp$4)ampamp4$+6lt)amp4ampamp63)X$6)=amp3)4)3Iamp c+32+Y1()ampA$4)ampVamp$+6lt)Z(7O+++(A+gt75+(+7gt2+B9+5 7375+0=9828O+5+Z9+gt5+7+57=7gtD+8- +5+2((395(2++9732=5+737832U83(37V0U7+B337V0U278(37V7505537gt0U7+(+88gt3(+7892+Q2+B8237V3275A598)353737+753 U8+V78927(+8B+783)+7892+20O92)+207+753lt23A5+5A(+327+B3+5++75Q32389lt+2A8+75ltlt23A+)+(3783(+78+578927(+B+7 )=99(+7O+(98+37+X87B2+378)lt75+2+7(lt(gt-IWX=lt+87(95+83(PO23P+28077(lt77+2807A+8=+75A8+2875FG[8L7+X(983723= 2+B8237395O+gt+280)3=gt5A8+378lt+(83(372(75)3 lt+28378)395)35+388+8- 6758(98837ltlt+25+5D+lt+=O+2Mb0JKKe0)+F327G2359(+2E(+787B S32P7Bi239lt2+(3==+75+55+77BU83(37V7)+337B=77+2 A5amp+PC+252lt20+$0(0+2(0QRS(307+)02$+90102 320amp527+102)02$+amp+)-2$-+1062$)02$+T$-12+9 320amp+92amp+25UQESlt1amp1$0(0+$(30lt110+0++25050660amp6 )24+9320amp52+320amp5920amp)0+T$+020$+)0+55)-2amp1$++ +$-2+amp0)23-amp8 )8+32+57)+F327+B892+- F327832+(+7gt+4)3amp$amp64=)3amp3+7(D+(37MJKM-aR$+(+88gt3E(+78+ gt10655lt+amp40$20+00()62(5amp0+$-20-+302HCM+$-2+amp0H30 A0amp+RVWR970amp-$01020320amp520503$5amp+9+0+920660amp+ 10$506+$-2+amp0P XY)5++$93$amp-$$+$92+02)20+$69+36602+6)++$2 20amp((0+3+$+9+$-2+amp0amp4020$90)$-20$95($9)20(-($920$9 303-amp750$9)(0+)5+$92+102+$-2+amp0amp+2amp92)0+5+$-2+amp0 amp+2amp902($8 XZ0amp((0+3++3[234$+92-2+))5amp+$[)0+5))5amp+$[ )5amp15302$))5amp+$62+$-2+amp0amp40209)0+5))5amp+$62+$-2+amp0 amp402092)5amp15302$7-)2amp-52+$-2+amp0)5amp0$2+$-20lt1 )2amp-52amp()+0$2+$-202$8 X+3+6+$-2+amp0amp4020$8

D9()7B9B+395O+97+Z9A3(75(395O+7(32lt32+5734+5+2(-6 lt+7+8+2+8+739B)039532(+)38+lt23A57B+B5A(+7)+O987+883 78927(+32++389O=3D+32+5+2=75+5(+787B0+X=73775 (37797B+59(37)78(+27O+875255+A+3lt+5Ogt)+D+324+5+2+B932- )+2+87553737B37Blt23O+=)78927(+=2P+7BB+7(+8(+78+57 =9lt+8+83+27B29875+8+lt777B8+2A(+80I298amp8L)()(3789+8 )+979lt2((+30327)++2A+0)+9798)27B3+B++8)737Rgt+28-67+28+298=80=7gt3)+=3(+57$+A5)8=+07583=+297 Ogt32B73782+5gt7+532(+7892+573)+28+83lt+7gt83(78927(+B+78 75+7(392B+)+=398+O(PR53328+7B+()7Z9+87325+23B78+732(+78 298)+B)+27B8B7(777(732=37)+2O+98+538+ 779+832+78927(+lt2359(8-)8lt2((+82=lt775(3779+85+8lt+)+ 72359(3732+B937878+889()8F327-+5+2()8+287(37875lt+7+832A3378(3952+59(+32+=7+)+8+lt2((+8- 9)lt4$amp)=3)+)6)amp=64-amp3)4-64I )+2+8)395O+O23575(3=lt2+)+78A+lt23)O37378lt+(398+5+275+8+lt777B5+8B73780))+72359(3732+B93788=23)38+7F327-87F3270D+1+lt2=+7[83678927(+395lt2+lt2+83ltlt23A+5 5+8B7378753955+A+3ltA+7Blt23(+8837(95++X=7373+59(37 ++=+7802+A+7B)+)+2)++X=737lt23(+888lt23(32+5323lt+7O33P0)+)+2D+ltlt23A+5(37797B+59(3782+Z92+53=77322+7+7gt89()5+8B7370)+)+27gt5A(+BA+78537+837)+(lt(gt359(2gt075) lt3(+875lt23(+592+82+7lt(+3((+lt(3=lt7803258(lt7+)35+2837gt89()(+2(37875)+77+(+882gtlt23(+592+8322+A3(37752+lt327B358(lt72gtlt23(+592+83)+9)32+8-)8=75+(395O+=lt38+5)+5+2- C46lt46=ampD=6)+ampampC46lt46=ampD=64-Iamp 678927(+B+782+lt2+A+7+523=97B8lt+(398+5+275+8+lt777B5+8B73787325+23O2(+)+ltlt+27(+3+Xlt+28+08P+gt)+gt9273 )+37gt3)+2+AO+3)+=0)377(lt77+2-75)803(3928+0O27B8=+9(2(+3=gtlt2+A398(3==+7837)+7+(+88gt3()7B+7)+C732=67A+8=+75A8+28(-ID9lt2L)+2+32+6lt23lt38+))++2=77(lt77+27577(lt777BO+2+82(+5755+7+5975+2+5+203O+7(32lt32+5738+ 75)7gtlt+2837)3)35839877(lt77+2323+2877(lt777B8+2A(+8I833O+5+7+5LO+2+Z92+532+B8+2877A+8=+75A8+275lt23A5+ 89()5A(+859(2gt22+8lt+(A+3)+)+2)+gt833+27gt5A(+83)+A9+

37A+87B72+B9+58+(92+8-7+X+78A+895gt8lt+232=+52+5gtOgt)+i3A+27=+7((397Ogt(+37)+3lt(377(lt77+287577(lt777B I2+lt32()+5L750)+65373B2++))+2(37(983780)+gt=P+A+2gt89+3O8+2A3780)+7(+)+7(983732(37+X9lt92lt38+8087()=+73)82+lt32- 6O+)ltltgt3+Xlt75377gt3)+8+3lt(875lt23A5+5537732=3775 2+R++X=lt+8757+(53+89lt372+Z9+8-

+8lt+(9gtD9O=+50

gt32o883(+8 aJN-MdN-JJMd

$B+cgt320F4GH

Illegal Practices OfFee-Only Financial PlannersIn The Business Of Insurance

(Problems amp Solutions)

Prepared ByNigel Brian Taylor CFPreg

Santa Monica CA(Copyright copy2002 - 2009 Nigel Brian Taylor CFPreg All Rights Reserved)

Tel 310 260 1126 Website wwwiamafiduciarycom

Illegal Activities in the Business Of Insurance By Fee-Only Financial Planners (Problems And Solutions)

Prepared by Nigel Brian Taylor CFPreg

Santa Monica CA CA Insurance License Nr 0716446

INTRODUCTION

Overwhelming media focus on ldquomethods of compensationrdquo for financial services in the recent past rather than competence and regulatory compliance has fueled an ever increasing consumer-driven demand for FEE-ONLY advice in insurance planning Media and marketing hype has influenced the consumerrsquos perception and led many to conclude that ldquofee-only plannersrdquo are the only planners capable of giving objective unbiased advice relating to insurance matters because they receive no compensation from third parties are not affiliated with represent or take compensation from insurers and therefore have no conflicts of interest and loyalty that could impair their ability to provide objective and unbiased information Unfortunately however many fee-only financial planners in California and 38 other States with similar regulations are operating outside the law in order to provide this ldquoobjective and untaintedrdquo advice This discussion will highlight these illegal insurance activities and provide potential solutions (initially for California although the suggested solutions could be used as a model for other States) to increase compliance with current California insurance law It will also discuss developing trends in the business of offering insurance advice in California particularly in relation with the provision of insurance advice as a component of a ldquoComprehensive Financial Planrdquo All Statutes herein are California statutes unless otherwise indicated

INSURANCE LICENSING

The three most widely held insurance licenses issued to individuals who provide general advice to families and consumers on general insurance matters in California are The Life Agent License(LX) the Fire and Casualty Broker-Agent (FX) and to a negligible degree the Life and Disability Analyst License(LA) A full list of other licenses is available at wwwinsurancecagov

Life Agent (LX)

The licensing requirements for a Life Agent license are set forth in Chapter 5 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit I A Life Agent (LX) is defined as a person authorized by and on behalf of a life or disability or life and disability insurer to transact life disability or life and disability insurance1

Generally a life agent advises consumers as to the benefits and disadvantages of life health disability and long term care insurance etc and transact business on behalf of one or more insurance companies offering products to consumers A Life Agent must be compensated

Confidential Page 1 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

by the insurer on the sale of product in the form of commissions and cannot accept fees for service from the consumer There are approximately 154664 resident and non-resident LX agents serving Californians2

Fire amp Casualty Broker-Agent (FX)

A fire and casualty licensee is a person authorized to act as an insurance agent broker or solicitor and a fire and casualty broker-agent license is a license so to act The FX licenseersquos authority to act is determined by which documents are initially submitted

bull A $10000 Bond of Insurance Broker form 417-5 authorizes the licensee to act as an insurance broker An insurance broker is a person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurer

bull An Action Notice of Appointment form 447-54 authorizes the licensee to act as an insurance agent An insurance agent is a person authorized by and on behalf of an insurer to transact all classes of insurance except life insurance

bull An Action Notice of Solicitor form 417-31 authorizes the licensee to act as an insurance solicitor An insurance solicitor is a natural person employed to aid an insurance agent or insurance broker in transacting insurance other than life

There are approximately 88300 resident and non-resident FX agents serving Californians3

Life amp Disability Analyst (LA)

The licensing requirements for a Life and Disability Analyst license are set forth in Chapter 8 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit II A Life and Disability Insurance Analyst is defined as a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto4

Generally a LA is trained to a significantly higher level than a LX and can advise a consumer not only as to the advantages and disadvantages of all forms of insurance but can also provide competent unbiased comparative analysis of various policies for a fee as well as interpret the rights of consumers under any insurance contract The LA must among other things

bull Have been licensed as a Life Agent (LX) for a period of at least 5 years preceding a LA application5 and

bull Must complete a comprehensive course of education covering significantly more topics than the LX and

bull Pass a rigorous examination before obtaining the LA license

Confidential Page 2 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

It should be noted that the LA license currently authorizes a person to provide advice for a fee on all insurance related matters but does not currently require any training or examination in Long-Term Care insurance or require a minimum number of hours of continuing education credit in each licensing period In the past ten years the number of CA Life And Disability Analysts has remained stable at approximately 44 (forty four) for the entire Statersquos population6

ldquoFINANCIAL PLANNERSrdquo OFFERING INSURANCE ADVICE

There are over 34000 (thirty four thousand) Registered Investment Advisors and Investment Advisor Representatives in California7 An Investment Advisor in California is authorized under sect25009(b) California Corporations Code8 to utilize the title of ldquofinancial plannerrdquo (without any statutory requirement to substantiate his her competence to perform the tasks of a financial planner) and perform comprehensive financial planning services on a fee-only basis The examination and qualification requirements for the Series 65 (Uniform Investment Adviser Law Examination) are attached hereto as Exhibit III NO knowledge of insurance products or the business of insurance is required in order to register as an Investment Advisor ldquoFinancial Planningrdquo and ldquoFinancial Plannersrdquo are having an ever increasing and significant impact on the provision of insurance services in California It is important that State Agencies and boards such as the CA Dept of Insurance (CDI) Agent and Broker Advisory Committee (ABAC) provide input to regulators and legislators alike regarding allied ldquoprofessionsrdquo impacting the business of insurance to ensure that consumers are properly protected A copy of this discussion will therefore be forwarded to both the CDI and the ABAC for their consideration

Many fee-only planners offer ldquocomprehensiverdquo financial planning services that by definition include risk management analysis and recommendations as part of the planning process These recommendations include calculations regarding the amounts and types of life insurance recommendations with regard to the benefits and disadvantages of various individual and or group health insurance plans disability and long term care plans etc In some cases advice is provided on a fee basis regarding homeowners auto and other types of property casualty and general liability coverage

To avoid real and ldquoperceivedrdquo conflicts of interest many fee-only financial planners choose not to maintain affiliations or representation agreements with any insurer and therefore are unable to license themselves as LXrsquos or FXrsquos Some let their LX or FX licenses lapse when they transition to fee-only planning In both these cases California law is clear Any person accepting fees for insurance related matters from any third party other than an insurer unless otherwise exempt must be licensed as a LA9 In an attempt to circumvent the law other planners obtain a LX and or FX license to create the appearance of legal compliance but never have any intention of actually ldquotransacting businessrdquo or utilizing the license for the purpose for which it was originally issued or intended This practice is prohibited under CA law10 because it is the fee-only plannerrsquos true intention to charge the consumer for

Confidential Page 3 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance advice rather than to be compensated by an ldquoinsurerrdquo as CA Insurance Code Sections 32 amp 1622 (supra) require

Many fee-only planners quote an often-abused section of Californias Insurance code Section 1831(e) which provides a limited exemption from insurance licensing for Registered Investment Advisers to justify their unlawful behavior The following is an excerpt from a letter originally addressed to Errold Moody CFPtrade (A California Life amp Disability Analyst who has concerned himself with the illegal activities of fee-only financial planners in insurance matters for over 10 years in California) on July 27 1995 by Patricia Staggs the then Assistant General Counsel and Chief Compliance Bureau of the Legal Division Compliance Bureau of the California Department of Insurance who wrote regarding the Investment Adviser exemption

That exemption appears at Insurance Code Section 1831(e) and provides an exemption to the chapter regarding life and disability analysts for an investment adviser as defined in section 25009 of the Corporations Code when acting in that capacity (Emphasis added) Section 25009 of the Corporations Code provides as follows

Investment adviser means any 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 regular business publishes analyzes or reports concerning securities Investment Adviser does not include (a) a bank trust company or savings and loan association (b) an attorney law accountant engineer or teacher whose performance of these services is solely incidental to the practice of his profession (c) a broker-dealer whose performance of the services is solely incidental to the conduct of his business as a broker-dealer and who receives no special compensation for them or (d) a publisher of any bona fide newspaper news magazine or business or financial publication of general regular and paid circulation and the agents and servants thereof but this clause (d) does not exclude any person who engages in any other activity which would constitute him as an investment adviser within meaning of this section

A life and disability insurance analyst is defined in insurance code 325 as follows

Life and disability insurance analyst means a person who for a fee or compensation paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as a beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The Departments view to that exemption set forth in insurance code 1831(e) is that an investment adviser need not submit to regulation by the Department of Insurance so long as the activities engaged in by the investment adviser fall within the defined activities of an investment advisor as set forth in Corporations Code section 25009 It is noteworthy that the definition of an investment adviser contains no reference to insurance related activities

Confidential Page 4 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Emphasis Added) Therefore any activities included within the definition of life and disability analyst such as advising as the life insurance products are clearly outside the capacity of an investment adviser and would subject the person to the provisions of law relating to life and disability insurance analysts

Very Truly Yours Patricia Staggs

Since as early as 1995 the CDI has taken the documented position that the Investment Advisor exemption applies ONLY when a Registered Investment Advisor acts ldquoin that capacityrdquo and as defined in section 25009 of the Corporations code It is the authorrsquos conclusion based on conversations with CDI staff counsel Jody Miller therefore that the only time a Registered Investment Advisor in the State of California may lawfully provide ldquoinsurancerdquo related advice to a consumer for a fee would be for example if he were advising a client as to the allocation of sub accounts containing regulated securities within an already existing variable life insurance or variable annuity policy

This exemption does NOT however permit a Registered Investment Advisor to discuss the merits or disadvantages of any type of insurance including Life Health Disability Long Term Care Property Casualty Homeowners General Liability Auto insurance etc that do not contain any elements related to the provision of investment advisory services Under current law then any Registered Investment Advisor who provides such advice and is compensated directly by the consumer without having first obtained a LA license is guilty of a misdemeanor11

The position of the CDI was illuminated in a letter addressed to representatives of the financial services sector who attended a series of meetings held with the Dept of Insurance in late 1997 In as letter dated February 3 1998 Assistant Ombudsman and Legislative Liaison Jeffrey Kenny wrote

February 3 1998

On July 30 1997 a discussion concerning the life and disability insurance analyst license was held between the California Department of Insurance (CDI) and members of the financial planning industry As you participated in this dialog I am writing to communicate CDIs policy on this matter

The focal point for this issue is consumer protection not the interests of the individual factions With all parties based in customer service it is sad that this detail has been lost in much of the discussion As defined by insurance code Section 325 a life and disability insurance analyst is

a person who for a fee or compensation of any kind paid by or derived from any person or source other than the insurer advises purports to advise or offers to advise any person

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

insured under named as beneficiary of or have any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The fact that there are only 46 life and disability analyst in California is not a valid argument for repealing this code In fact the limited number of licensees and population in noncompliance begs for increased education and enforcement While the easy solution for those in noncompliance may be to repeal this law consumers who pay for fee advise on insurance matters deserve an analyst educated in insurance per CDI standards The current licensing requirements ensure that relationship Any legislative effort to repeal this law will likely be opposed on the basis that such action is harmful to consumers by consumer groups insurers agents and brokers and the California Department of Insurance

At the July 30 1997 meeting representatives from the financial planning industry raised two additional suggestions concerning CDIs examination requirement The first seeks to allow issuance of a Life and Disability Analyst license to Certified Financial Planners and Certified Public Accountants following the successful completion of their own professional examinations Again this is an idea that requires legislation and will certainly face opposition CDIs position remains at only those individuals who pass CDIs exam are to be issued a life and disability analyst license CDI is the agency charged with enforcing this license and will remain via its examination and related or regulatory functions the authorizing agency for this license

The final suggestion request a waiver of the requirement than an examinee must have five (5) years experience as a life licensee or employment experience under said licensee to sit for CDIs examination Again this is an idea that requires legislation CDI will reserve judgment until the full breadth of this proposal has been introduced to the state legislature

Despite some groups interest in changing current law there is an existing law which is and has always been quite clear While a financial planner may be illegally engaging in insurance analyst activities and may not be aware of their violation it is my hope that this the explanation of policy will provide them with the impetus to come into compliance or cease the illegal activity immediately Per insurance code Section 1844 any person who acts offers to acts assumes to act as a life and disability insurance analyst when not licensed by the commissioner per this article is guilty of a misdemeanor Consistent with current practice information obtained on individuals in noncompliance will be aggressively pursued

Sincerely

Jeffrey Kenny Assistant Ombudsman and Legislative Liaison

However successful criminal prosecutions for a violation of CIC sect1844 are apparently rare because the CDI must turn these matters over to local district attorneyrsquos offices Statewide Their failure to enforce the law is probably attributable to a lack of funding to prosecute

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

non-violent misdemeanor counts of this nature where no victim can be produced Unfortunately and to the detriment of Californiarsquos consumers this lack of enforcement has had the effect of creating a Cavalier attitude towards compliance with State law that essentially seems to tolerate this unlawful activity permitting fee-only planners to operate almost with impunity

There are a number of fee-only financial planners who claim in their firms disclosure form that they have no affiliations or representation agreements with any insurance carriers and that they do not represent or offer for sale any kind of insurance products However in reality they maintain LX or FX licenses and have contracts with life insurance carriers who do not require a minimum annual production level without any intention of ldquotransactingrdquo on behalf of an insurer (a violation of CA Insurance code section 1668 sub (c) amp (g) supra) while making no disclosures anywhere on their disclosure statements or advertising materials as to their active insurance licenses which is in and of itself a violation of Section 17255 of the Insurance Code12

Other fee-only financial planners claim that any insurance advice given by them to their clients as part of a comprehensive financial plan is given ldquofree of chargerdquo They claim that a fee is charged for all the other elements (investment tax retirement amp estate planning) but not for the risk management portion of the plan They point to the fact that they never ldquoact in any of the capacities defined in Article 1 (commencing with Section 1621)rdquo because they do not appoint themselves with or represent an insurance company or any particular insurance product and do not actually ldquotransactrdquo insurance business (Thereby avoiding in their minds a licensing requirement under CIC Sections 32 amp 1622) Furthermore they claim they do not charge the consumer a fee for the advice they provide regardless of the complexity of that advice (Charging a fee would trigger a licensing requirement under section 325 Insurance Code) The result if the courts upheld this logic would be that the Dept of Insurance would lose all control and authority for the provision of insurance advice to consumers by fee-only financial planners in California to the California Dept of Corporations Worse still the only recourse damaged consumers would then have against fee-only financial planners in the business of insurance would be the California Dept of Corporations a state agency woefully equipped to enforce state insurance laws

One problem that requires statutory revision is the lack of a suitable definition for ldquotransactingrdquo in the business of insurance While the Dept of Insurance has considerable leeway in determining what constitutes ldquotransactingrdquo the code itself provides little or no useful information or guidance for fee-only planners who often feel based on the wording of the current definition that they acting inside the law when performing certain services Transaction is defined under sect35 of the Insurance code as

35 Transact as applied to insurance includes any of the following a) Solicitation b) Negotiations preliminary to execution c) Execution of a contract of insurance d) Transaction of matters subsequent to execution of the contract and arising out of it

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

While the requirements under sub(s) b c amp d is self-explanatory ldquoSolicitationrdquo (sub A) Is not defined and the legislature has to date been loathe to define it leaving the interpretation to the CDI and creating a ldquofact at issuerdquo that requires administrative or judicial interpretation and determination in cases where fee-only planners dispute their activities as ldquotransactingrdquo This is not the first time the issue of defining ldquosolicitationrdquo has been brought to the attention of the Department of Insurance In a discussion paper dated September 25 1998 the Producer Licensing Working Group recommended defining ldquosolicitationrdquo in the following manner

Solicitation Any oral or written statement or image (1) made by any person either directly or by another person acting pursuant to the first persons authorization direction or control (2) which statement is made with the intention or likely effect of provoking directly or indirectly a recipients interest in potentially purchasing an insurance product

This author believes a clarification of what constitutes Solicitation under the Insurance Code will assist Registered Investment Advisors fee-only financial planners and others in assessing which license if any would be appropriate given their particular facts and circumstances If the legislature decides not to act the Dept of Insurance should issue authoritative guidelines or advisory opinions similar to those of other regulatory agencies such the SEC NASD and IRS in an effort to bolster compliance This is extremely important given recent trends and developments in the delivery methods and current practices of individuals providing insurance services in California

The issue of ldquotransactingrdquo and what constitutes ldquosolicitationrdquo aside and with regard to the practice of giving advice in insurance for free CIC Section 1631 does not mention compensation as a criteria for triggering a licensing requirement13 Even setting aside the current CDI determination of what constitutes ldquotransactingrdquo which is ambiguous Californiarsquos Insurance code for purposes of interpretation is also governed by Section 1858 of the California code of Civil Procedure (CCCP)14 There is voluminous precedent under CCCP section 1858 supporting the authorrsquos opinion that the interpretation of a statute that produces an absurd or anomalous result will not prevail when used as a defense In interpreting a statute Supreme Court avoids any construction that would produce absurd consequences15 In construing statute state Supreme Court will not parse each literal phrase of statute if doing so contravenes obvious underlying intent or leads to absurd or anomalous result16

Since it is already well settled in law that ldquoThe business of Insurance is a business affected with a public interestrdquo17 this author believes the circumvention of State Insurance licensing laws by fee-only financial planners in any manner irrespective of compensation or level of competence presents a clear and present danger to Californiarsquos consumers and is contrary to the public interest The intent and desire of the Legislature to require State licensure for insurance professionals is clearly set forth in CA Insurance Code Sections 1631 1633 amp 1633518 and is unambiguous in the authorrsquos opinion

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UNLICENSED INSURANCE ADVICE CURRENT REMEDIES

CA Insurance Code Section 1668 applies in the case of fee only planners who maintain a license but do not intend to actively transact business as LXrsquos The sole remedy for such conduct is that under this section ldquo the commissioner may deny an application for any license issued pursuant to this chapter if

helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this staterdquo

CA Insurance Code Section 1668 is problematic in that it is difficult if not impossible to enforce unless insurers are ldquorequiredrdquo to terminate all LXrsquos amp FXrsquos not actively ldquotransactingrdquo insurance business and unless the Dept of Insurance requires proof be provided to the department by the insurer that a LX or FX is in fact actively transacting business The code could require insurers to review commissions paid to appointed agents on an annual basis and terminate the appointments of all agents who do not ldquotransactrdquo over a period of 12 months unless valid cause can be shown Exceptions could be made for salaried employee of insurers and persons engaged in the regulation of insurance business in whatever form

CA Insurance Code Section 1844 is applicable to fee only planners who provide insurance advice for a fee or ldquofor freerdquo and provides that any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

Again this is difficult if not impossible to enforce because the Dept of Insurance must rely on local district attorneyrsquos offices most of which have no funds to prosecute non-violent misdemeanor counts particularly when most DArsquos offices consider this a matter for the Insurance Commissioner in the first place Therefore rather than seek prosecution under this section the Dept of Insurance should actively enforce State law against violators under the recently introduced CIC section 129218 (discussed below) It makes no sense for the Dept to refer these cases to local district attorneyrsquos offices if their decision to prosecute under the Statersquos criminal statutes is based on ldquofinancial considerationsrdquo rather than the evidence of malfeasance

There are two other remedies available to the Dept of Insurance The first is California Insurance Code (CIC) 790 et Seq The Unfair and Deceptive Trade Practices Act The second is the aforementioned and recently introduced CIC Section 129218

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Prosecution under CIC 790 et Seq does not require compensation because under section 79001 the Insurance Code applies to all persons engaged in the ldquobusinessrdquo of insurance19

Under section 79004 the Dept of Insurance is authorized to investigate any person engaged in the business of Insurance in California20 Transacting in the business of insurance without a valid license with or without compensation is clearly an unfair and deceptive competitive practice because violators seek to avoid and evade ascertainable standards in training examination licensing and continuing education required by the State for agents and brokers appointed by insurers who are performing essentially the same tasks while at the same time claiming to take the ldquoethical high groundrdquo in terms of the advice given State licensing places the agent at a competitive disadvantage because a licensed agent can only accept compensation from an insurer unless that agent is also a Life and disability Analyst Section 790035 provides substantial administrative penalties including fines and restraining orders for persons violating this Act21 The provision of unlicensed insurance advice whether for a fee or ldquofree of chargerdquo by fee-only planners is detrimental to the consumers of California because there is no ascertainable standard of education or requirement to keep current present unless such planners are subjected to the licensing requirements of the CA Dept of Insurance

The second remedy available is authorized under CIC Section 12921822 which provides for greater administrative remedies against those individuals who transact the business of insurance without proper licensure A CA Life amp Disability analyst whose business has been severely impacted filed complaints in early 2002 against prominent California fee-only planners who are flagrantly violating the law To date the CDI has taken no action against these planners and it remains unclear whether these new powers will be utilized on a proactive basis to seek out fee-only financial planners offering insurance advice or whether the Dept of Insurance will remain reactive to ldquoconsumerrdquo complaint only in the enforcement of Californiarsquos insurance laws

On a final note the CDI is considering proposed regulations pursuant to the authority granted to the Insurance Commissioner under the provisions of in SEC 8 of Assembly Bill 393 Chapter 321 Statutes of 2000 that among other things address the necessity for licensing These new regulations include a proposed section 21923

Draft

Section 21923 - Necessity of License

The following activities are not exempt from licensure under CIC Insurance Code Section 1631 because they are directly related to solicitation negotiation or effecting the sale of insurance

(a) Explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

limits premiums rates deductibles payment plans or any other insurance contract or potential insurance contract terms

(b) Recommending andor advising or urging applicantspotential applicantspolicyholders applicants for insurance coverage potential applicants for insurance coverage or policyholders to buy particular insurance policies or to insure with particular companies or insurers

(c) Binding of insurance coverages

Note Authority cited Section 8 of AB 393 Chapter 321 States of 2000 Reference Insurance Code Section 1631 of the Insurance Code

Should section 21923 be enacted any perceived ambiguities associated with the giving of ldquounlawfulrdquo advice by fee-only planners would be eliminated While the author applauds all these efforts to increase compliance through enforcement and regulation the consumerrsquos total ignorance of California Insurance law and the reactive nature of insurance enforcement will bring few if any real-world changes for consumers There have to date been few complaints regarding the illegal practices of fee-only financial planners by consumers because a) a licensed life insurance agent is always eventually involved in the ldquosalerdquo of a specific product to the consumer and b) the client has already received a written affirmation from the fee-only planner that he is acting in a fiduciary capacity as their trusted advisor The client therefore places greater value on the fee advice given by a fee-only planner than the advice of a licensed life agent ldquosellingrdquo the same product the fee-only planner recommends simply because the licensed individual is an agent of the insurer

Of course the consumer is paying twice for the same advice once in the form of fees and a second time in the form of commissions to a licensed ldquoagentrdquo Providing there is no relationship between the fee-only planner and the insurance agent and no referral fee is payable by the agent to the planner this fact is never disclosed to the client It is the authorrsquos personal experience that many fee-only financial planners refer these clients to out-of-state insurance agencies who have declared themselves willing to provide substantial discounts from their commissions While the author views these discounts are ldquoonly fair in light of the circumstancesrdquo it does not excuse the illegal conduct and the fact that the client is not receiving any favorable contractual benefits on their insurance policy such as shorter exclusion periods shorter surrender penalties lower mortality and expense fees or lower percentage monetary penalties for early termination of the product

The already established fiduciary relationship between a fee-only financial planner and his her client creates a bond of trust that implies by its very nature that the planner is fully complying with all federal and state laws In fact many fee-only planners subscribe to written codes of ethics established by credentialing bodies and professional membership organizations such as the CFP Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) which demand their members comply with all federal and state licensing laws However the aforementioned

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

professional membership and regulatory bodies are conflicted in their response to the problem of illegal activity because both organizations as mentioned previously on page 5 amp 6 of this report are lobbying for a change in the law that will allow such fee-only planners particularly those holding the CFPreg Certificate to qualify for a waiver from licensing These professional membership and regulatory bodies refuse to investigate or discipline such planners unless the State first prosecutes them The State of California for reasons stated elsewhere in this report have been loathe to take action against these fee-only planners despite repeated complaint filings by life and disability analysts over the most recent ten year period whose income is being severely impacted by such illegal activities

From a consumerrsquos perspective there would be absolutely no reason to question the integrity of their fee-only financial planner In fact organizations such as the National Association of Personal Financial Advisors (NAPFA) have marketed their fee-only planner members as the ldquoonlyrdquo planners capable of providing clear untainted unbiased advice on all financial matters including insurance and have disseminated brochures since the 1980rsquos claiming that commissioned based advice is somehow tainted and a totally flawed delivery method that could harm consumers NAPFArsquos position has been supported and publicized to a great extent by the media including magazines such as Bloomberg and Money to newspapers such as the Los Angeles Times which requires ldquofee-onlyrdquo as a pre-requisite ldquomethod of compensationrdquo for any planner participating in itrsquos popular ldquoMoney Makeoverrdquo series of consumer assistance feature articles It has also been supported by non-profit organizations such as the Consumer Federation of America Negative consumer perceptions of insurance licensed individuals has to a great extent been unfairly tainted by such media hype and marketing tactics

The recent introduction of section 12921822 coupled with an acceptance of proposed section 21923 would absolutely provide the CDI with additional needed powers to regulate the business of insurance It will not in the authorrsquos opinion however increase compliance in any meaningful manner Continued consumer ignorance of State insurance laws and reactive rather than pro-active enforcement by the CDI will almost certainly maintain the current status quo

This author applauds the sentiment of the recently introduced statute but believes it has no real-world practical value This license requirement will continue to be ignored by most fee-only planners because of the incredible burden it places on them in terms of initial compliance and qualification In addition the statute to date remains un-enforced because the CDI lacks the manpower and funding within the civil enforcement division to even begin to attack this widespread problem Simply stated this recently introduced legislation demands aggressive investigation large fines and numerous prosecutions to achieve even partial compliance The CA Department of Insurance has instigated a consumer-complaint driven ldquoreactiverdquo role rather than a consumer-protective ldquoproactiverdquo enforcement campaign even after the introduction of CIC section 129218

One major reason for continued non-compliance is the requirement that applicants be registered as LX agents for five years preceding their examination and licensure as LArsquos

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Fee-only planners view this as being forced to move back into a house they have already sold) Secondary reasons include fee-only planners view the LA license as an over-qualification to perform the tasks they desire to perform there are no schools or colleges currently teaching the course work required to become LArsquos because a total lack of enforcement by the CDI of this statute has created a total lack of interest on the part of fee-only planners Also there are no teaching materials or publications available for purchase to prepare for the examination These problems and potential solutions are discussed in more detail in the section below

Finally it is fascinating and significant to note that while many fee-only planners firmly believe State and SEC investment adviser regulations are outdated irrelevant and sorely in need of a complete revision and overhaul if they permit planners to ldquoperform comprehensive financial planningrdquo few if any fee-only financial planners actually violate the Investment advisory statutes One major reason for this almost total compliance is because of the rigorous enforcement efforts of the Dept of Corporations the NASD and the SEC in regards to the Investment Adviser Act of 1940 and the severe penalties including imprisonment it imposes for offenders

In light of the foregoing this author has concluded that the only way consumers will be substantially protected from unlicensed insurance activities is if (a) meaningful reforms are enacted that make statutory compliance desirable and (b) cooperation is sought with other State agencies such as the Dept of Corporations and private professional regulatory organizations such as the CFP Board of Standards (discussed later) who regulate activities in related financial service categories to facilitate the sharing of information crucial in establishing which activities fee-only financial planners are engaging in

RECOGNIZING NEW DELIVERY METHODS IN THE BUSINESS OF INSURANCE

It is the authorrsquos belief that licensing compliance in the business of insurance will only become a reality when States recognize the recent rapid developments in the ldquomethods of deliveryrdquo of insurance advice nationwide particularly those associated with the emerging profession of financial planning More and more consumers have recognized the advantages of employing one trusted advisor for all their financial affairs and view insurance advice as part of an overall financial plan Californiarsquos consumers are cognizant that conflicts of interest exist in insurance planning because LX amp FX agents are only compensated by insurers and represent the insurerrsquos interests to the client not the clientrsquos interests to the insurer Such agency relationships impact the fee-only plannerrsquos ability to honor hisher fiduciary obligation to act in the clientrsquos best interests at all times

Fee-only planners desire to perform the tasks and functions of an LX amp FX licensee Few if any desire to perform the more complex tasks and analysis normally expected of a Life and Disability Analyst Fee-only planners are committed to eliminating the conflicts of interests associated with representing an insurer and many consumers in California desire to employ one fee-only planner to handle all their affairs including the insurance planning portion of their financial plan rather than multiple professionals The net effect of this is that many

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consumers seek out fee-only planners to reduce conflicts while ostensibly obtaining objective and untainted advice Unfortunately they are instead often given incompetent advice by unlicensed individuals In order then to benefit and protect consumers substantial but beneficial reform is necessary

Fee-only planners with established financial planning credentials equate obtaining the LA license with ldquomoving back into a house they are trying to sellrdquo They feel competent and qualified to assist consumers in insurance planning and may have held insurance licenses for years prior to allowing them to lapse State law however demands they be licensed for five years preceding their application for licensing as Analysts and during that time they would need to ldquotransactrdquo insurance as a licensed LX agent something they do not feel they can do

As the author sees it the State has two choices in this matter It can either crack down on fee-only planners and others offering unlicensed insurance advice for a fee (hardly feasible based on lack of funding staffing or voluminous consumer complaints) or seek ways to legalize regulate and supervise these plannerrsquos activities Currently financial planners are regulated at the state level under Section 25009(b) of Californiarsquos Corporations Code Which states

Section 25009 (b) (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part of another 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 publishes analyses or reports concerning securitieshelliphelliphelliphelliphelliphelliphelliprdquo

While consumers nationwide have embraced the concept of comprehensive financial planning California along with most other States has been slow to recognize that financial planning has developed far beyond the simple giving of ldquoinvestmentrdquo advice Financial planners in California are still regulated supervised and audited by the Dept of Corporations which while skilled in terms of overseeing regulated securities transactions is woefully under equipped to supervise the activities of a planner engaging in insurance investment tax retirement estate and asset protection planning The Series 65 Investment Advisor Examination is the only legal requirement for those who desire to use the term ldquofinancial plannerrdquo in California However as the Series 65 training and education requirements23 illustrate the current State educational requirements for ldquofinancial plannersrdquo are far removed from the level of competency actually required to practice ldquofinancial planningrdquo

RECOGNITION OF ldquoFINANCIAL PLANNINGrdquo AS A PROFESSION

The State of California is well known for its innovative and forward thinking and has a unique opportunity as the bell-weather State of this nation to lead the way for other States to follow It is time for Californiarsquos regulatory and licensing bodies such as the Dept of Insurance and Dept of Corporations to recognize ldquofinancial planningrdquo as an ldquoemerging

Confidential Page 14 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

allied professionrdquo that is having a significant impact on the provision of services traditionally regulated by their agencies Recognizing the emerging profession of financial planning and recommending to the legislature the necessity of developing regulations that will govern professionals who desire to practice the profession of financial planning is the only viable sensible and logical long-term solution for protecting Californiarsquos consumers from harm

As with any other emerging profession the State in developing any such regulations should recognize and seek the counsel of long established national and international organizations that have developed rules guidelines ethics and ascertainable standards of education examination criteria credentialing and continuing education requirements Consideration should also be given as to whether a new or existing State agency should regulate the activities of financial planners or whether these activities should be regulated independent of agencies in allied professions such as those agencies governing insurance and securities As an example lawyers accountants and bank employees etc are provided limited exemptions from registration under insurance and securities laws because the State has concluded that their existing professional State licensing requirements contained in the Business and Professions Code established standards of practice and a written codes of ethics and professional responsibility provide sufficient protection to consumers without requiring multiple State licensure

Regulations governing investment advisers are inadequate to address the multitude of tasks performed by comprehensive financial planners The question therefore arises as to whether a separate state license and new regulations should be developed within the Business amp Professions Code to govern comprehensive financial planners that is separate and distinct from investment advisory services in order to adequately protect Californiarsquos consumers Should the use of the commonly touted investment industry term ldquofinancial plannerrdquo be reserved for individuals who have been State certified as competent to perform comprehensive financial planning The greatest obstacle to the recognition of financial planning as an emerging profession requiring some form of licensure is by what standards should such a profession be measured Many fee-only financial planners have no professional accreditation whatsoever other than the investment adviser registration overseen by the CA Dept of Corporations Have ascertainable and acceptable standards been developed

FINANCIAL PLANNING AND THE CERTIFIED FINANCIAL PLANNERreg

CERTIFICANT

The most widely recognized professional financial planning designation worldwide is the CFPreg Certificate The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS INC24 (Hereafter CFP Board) has licensed its CFPreg and CERTIFIED FINANCIAL PLANNERreg trademarks to over 67000 individuals in 19 countries There are currently 4578 CERTIFIED FINANCIAL PLANNERreg Certificants licensed in California25 Most CFPreg Certificants hold multiple State or federal licenses (insurance securities Registered Investment Advisor etc) and are already supervised in their professional activities by

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

multiple federal and or state agencies Sadly not one auditor of any supervising federal or state agency possesses the knowledge base or skill sets to supervise the overall activities of a comprehensive fee-only financial planner It should be stated that while the CFP Board has established a code of ethics and uniform standards of practice for CFPreg Certificants that could be used as a yardstick by legislators the CFP Board does not currently supervise investigate or audit any CFPreg Certificantrsquos activities unless a formal complaint is filed against a Certificant with the Board

The CFP Board defines a ldquofinancial plannerrdquo as a person ldquowho is capable and qualified to offer objective integrated comprehensive financial advice to or for the benefit of individuals to help them achieve their financial objectivesrdquo A financial planning professional must have the ability to provide competent financial planning services to the client utilizing the ldquofinancial planning processrdquo26 which covers basic ldquofinancial planning subject areasrdquo 27

With specific regard to the business of insurance it is important to understand the benefits provided by the CFPreg Certificate course of education as well as its shortcomings The CFP Board has developed a course curriculum (Attached as Exhibit IV) in insurance planning as an integral part of the CFPreg Certificate examination requirement This educational requirement exceeds the training currently required by the California Department of Insurance on all levels There are however shortcomings to the CFP Boardrsquos program that cannot be overlooked There is no training in State insurance regulations or any Statersquos insurance code provisions governing the business of insurance Furthermore while there is a mandatory requirement that each CFPreg Certificant complete 30 hours of continuing education for each two year certification period there is currently no requirement that all of these hours be approved by the CDI for insurance continuing education credits

The CFP Board of Standards is willing to cooperate with the CDI to address and correct the shortcomings in its program Once these problems have been corrected there are two potential solutions that if implemented could encourage full compliance with State licensing laws certainly on the part of CFPreg Certificant fee-only planners not currently licensed

SOLUTION 1 PROVIDE A FULL EXEMPTION FROM INSURANCE EXAMINATION AND LICENSING TO CFPreg CERTIFICANTS WHO ARE LICENSED AS REGISTERED INVESTMENT ADVISORS

Currently section 1831(e) provides a limited exemption from insurance licensing for Registered Investment Advisors (RIArsquos) but only ldquowhen acting in that capacityrdquo (Discussed in detail earlier) This suggestion would expand the relevant code section and remove any limitation from RIArsquos performing the tasks of a LX or FX agent providing the following conditions are met

1 The person is and remains a licensed Registered Investment Advisor either with the State or by the SEC AND

Confidential Page 16 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

2 The person remains a CFPreg Certificant in good standing AND

3 The person in addition to any continuing education requirements of the CFP Board of Standards in other areas of financial planning completes no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

4 The person provide to the CA Dept of Insurance proof of his current licensing status as a Registered Investment Advisor and CFPreg Certificant together with a list of all approved continuing education courses completed for each two year period or whenever required to do so by the Dept of Insurance AND

5 Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

6 Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS EXEMPTION

As previously illustrated the Registered Investment Advisor license alone does not qualify a person to offer insurance advice for a fee The CFPreg Certificate alone even once enhanced to provide training in statutory law and the regulation of the business of insurance in California would be insufficient because the CFPreg Certificate is not an official State regulated license However a combination of the CFPtrade Certificate and the Registered Investment Advisor license coupled with the other suggestions made above will provide a sound educational basis for any person desiring to offer insurance advice for a fee while protecting the public from harm to a far greater degree than they are protected under current law In addition this proposed exemption would alleviate the need for fee-only CFPreg Certificants to become licensed LArsquos in order to be compensated by the consumer thereby eliminating the requirement that they license themselves as LXrsquos for 5 years before meeting licensing qualification requirements By NOT forcing fee-only planners to move into a house theyrsquove already moved out of BUT RATHER demanding competence in return for a waiver from LA licensing requirements the CA Dept of Insurance would protect the consumer while facilitating an opportunity for immediate compliance without expensive investigation of illegal activities prosecution and supervision of future activities Compliance would go up the cost of supervision investigation and prosecution would go down

It is important to note that any advice given would be limited under this proposed change to the typical advice offered by LX or FX licensees who generally provide explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures limits premiums rates deductibles payment plans and

Confidential Page 17 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance contract or potential insurance contract terms as well as recommending andor advising potential applicantspolicyholders on insurance coverage to buy particular insurance policies or to insure with particular companies or insurers The advice given should not be allowed to encroach on the more complex tasks a Life amp Disability Analyst provides

This exemption will

bull Permit Registered Investment Advisors with a CFPreg Certificate to offer insurance advice without the need for appointment by an insurer and allow them to be compensated by a third party other than the insurer for that advice (A Variant of this model already exists in Connecticut and New Hampshire A very POORLY structured derivative (that this author does NOT support) has just been signed into law in Idaho The Idaho statute gives a Registered Investment Advisor carte blanche to offer insurance advice for a fee without any training examination or continuing education requirement in insurance planning a clear violation of the public trust In addition CFPreg Certificants will shortly be given an exemption from registration as Insurance Counselors (LA equivalent license for Texas) in Texas The author finds this unacceptable because again no instruction will be mandatory in insurance regulation and insurance law)

bull Require the candidate to complete a comprehensive course of education in among other things all aspects of insurance planning and demand state licensing (as an investment adviser) before qualifying for the exemption

bull Require continuing education of 30 hours in insurance planning a significant improvement over the LA license which requires NO continuing education currently

bull Leaves intact the State Insurance Commissionerrsquos authority (under CICsect790 et Seq And CICsect129218 (supra)) to supervise audit fine punish and bar from the business of insurance in CA any person who violates the publicrsquos trust

COMPARISON OF THE ldquoCFPreg PLUS REGISTERED INVESTMENT ADVISORrdquo EXEMPTION TO THE LIFE AND DISABILITY ANALYST LICENSE REQUIREMENT

There will still be a need for the Life amp Disability Analyst license in California LArsquos provide a valuable service to the public by

bull Offering expert testimony in court regarding all insurance related matters

bull Providing complex expert comparative analysis and interpretation of the terms and conditions of various insurance contracts to consumers accountants and lawyers

Confidential Page 18 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

bull Explanation of the rights of the parties under an insurance contract a service otherwise reserved exclusively to members of the Bar

The proposed exemption would not obviate the need for LA licensees It will provide a means for fee-only Registered Investment Advisor financial planners who have earned the CFPreg Certificate a professional financial planning credential that has course work superior to the current minimum standard requirement by the CA Dept of Insurance (with the noted exceptions listed above which must be addressed before an exemption would be granted) to serve their clients basic insurance needs without appointment by an insurer and the inherent conflicts of interest this may represent

EFFECT OF THIS PROPOSED EXEMPTION ON CONSUMERS

This proposed exemption would have a substantially positive effect on consumers with no negative impact whatsoever They will be able to seek out a professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education It will further provide greatly enhanced protections for the public against wrongdoing by requiring a bond in the amount of $100000 (one hundred thousand dollars) and mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CA Department of Insurance (It should however be noted that most if not all CFPreg Certificants meet all the above criteria already in terms of EampO insurance etc and obtaining a $100000 bond would not place an undue burden on any fee-only CFPreg Certificant planner) Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their insurance matters

POTENTIAL PROBLEMS ASSOCIATED WITH THE GRANTING OF AN EXEMPTION FOR CFPreg CERTIFICANTS MEETING THE ABOVE CRITERIA

One possible problem would of course be that other financial service professionals with professional insurance or financial planning credentials would seek to block any such legislation unless their credential were to be included Some other designations worthy of exemption would be

The Chartered Life Underwriter (CLU) The Chartered Financial Consultant (ChFC)

The author based on the knowledge and skill sets required to hold such designations has no objections to the inclusion of these designations for purposes of the aforementioned suggested exemption providing these professionals meet ALL the other criteria

SOLUTION 2 PERMIT STATE LICENSING AS A LX OR FX WITHOUT INSURANCE COMPANY APPOINTMENT AND AUTHORIZE PLANNERS TO BILL CLIENTS DIRECTLY

Confidential Page 19 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Under California law a person who ldquofor a fee or compensation of any kind paid by or derived from any person or source other than an insurerrdquo(emphasis added) must register a Life and Disability Insurance Analyst under CIC Section 325 As previously illustrated in this discussion however Life and Disability Insurance Analysts are required to

bull Pass an antiquated examination that has not been substantially revised since 1983 bull Self-Study in some cases already repealed statutes because no examination

revisions have been undertaken since 1983 Furthermore no educational courses are available from any college school or professional educational institution because there is simply no demand for the license due to a complete lack of enforcement of LA laws by the CDI

bull Self Study to familiarize themselves with many topics including Long Term Care and other more recently introduced exotic and hybrid insurance products because candidates are not tested on these products due to lack of LA examination revision

Oddly once licensed Life and Disability Insurance Analysts are NOT required to complete any continuing education requirements of any kind There is no requirement other than one imposed by ldquopotential liabilityrdquo through civil action for a LA to ldquoremain currentrdquo as a LA licensee

In light of the foregoing a far more sensible alternative and second potential solution would be to allow all LX amp FX agents to be licensed with the CDI without the requirement for appointment to transact on behalf of an insurer LX or FX agents desiring to be compensated directly from the consumer (for purposes of this discussion the author will refer to such agents as FLX amp FFX agents) would subject themselves to the same CDI licensing and examination requirements as traditional LX amp FX agents FLX amp FFX agents would also be subject to the same continuing education requirements as traditional LX amp FX agents The function of FLX amp FFX licensed individuals would be to act ldquoquasirdquo in the capacity of a personal representative of the client with the authority to negotiate and effect all insurance coverages on their behalf at the best possible terms with any company they choose (As fiduciaries such FLX ampFFX licensees would be subject to regulations similar to the NASDrsquos ldquobest executionrdquo rules They would be required to perform extensive due diligence and seek the best coverages at the most reasonable prices on behalf of their clients)

Currently such activities allowed under CIC sect33 are restricted to ldquoa person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurerrdquo (Emphasis added) In essence then a similar but new and distinct section would be created expanding the role of an ldquoinsurance brokerrdquo as defined under CIC sect33 to that of a FLX amp FFX who would be authorized to solicit and negotiate all forms of insurance including property casualty life health disability long-term-care and other forms of insurance

Confidential Page 20 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

This new Code section would make additional demands on any person seeking to license himherself as a FLX amp FFX licensee to protect consumers from harm Among other things such licensees would be required to

bull Complete BOTH LX and FX courses of education and the appropriate licensing examinations (Based on the CFP Boardrsquos program of education in insurance planning fee-only comprehensive financial planners provide information regarding all aspects of a consumerrsquos risk management needs

bull Be a licensed Registered Investment Advisor with the State AND

bull Complete no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

bull Provide to the CA Dept of Insurance proof of current licensing status as a Registered Investment Advisor together with a list of all approved continuing education courses completed each two year period or whenever required to do so by the Dept of Insurance AND

bull Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

bull Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS NEW LICENSE

This proposed license would have a substantially positive effect on consumers with no negative impact whatsoever Consumers will be able to seek out a ldquolicensedrdquo professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education The examination requirement supports the CDIrsquos position as stated in the February 8 1998 letter written by Jeffrey Kenny (Supra) that only those individuals who pass CDIrsquos exams are to be issued licenses and that the CDI will remain ldquovia its examination and related or regulatory functions the authorizing agencyhelliphelliprdquo in the business of insurance It will further provide greatly enhanced protections for consumers against wrongdoing by requiring a California surety bond in the amount of $100000 (one hundred thousand dollars) in addition to mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CDI Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their basic insurance needs on a fee-only basis

Confidential Page 21 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

SUMMARY AND CONCLUSIONS

The California Dept of Insurance has essentially four choices

1 Maintain a Status Quo approach do nothing to address the illegal activities of fee-only financial planners remaining a reactive rather than proactive regulator of the business of insurance

2 Implement a program of rigorous investigation and enforcement of illegal activities in the business of insurance utilizing current and newly introduced sections of the California Insurance Code to stamp out the widespread and growing problem of illegal activities on the part of fee-only financial planners offering advice in insurance matters for a fee in California

3 Consider implementation of one or more of the solutions suggested in this discussion

4 Develop meaningful initiatives such as those suggested herein to combat andor provide solutions to illegal activities in the business of insurance

Maintaining the status quo and doing nothing to address the illegal activities of fee-only planners will eventually cause the CDI to lose control and regulatory authority over the business of providing insurance advice to consumers to other state agencies such as the Dept of Corporations an agency ill equipped and hardly qualified to supervise and monitor such activities More and more broker-dealer registered financial planners and life agents are transitioning to the more profitable fee-only model Without aggressive enforcement of the law many of these planners may eventually surrender their insurance licenses to avoid multiple state licensure layering of regulation supervision and audit The current lack of any enforcement by the CDI against prominent planners who have already been reported to CDIrsquos investigations division by Errold Moody CFPreg and others over the past ten years is an encouragement to other transitioning planners to ignore and violate State law Inaction equates to state condoned tolerance and silent approval in the eyes and minds of many fee-only financial planners

Rigorous investigation and enforcement while preferable is also the most difficult policy to enforce The CDI has neither the manpower nor the consumer driven complaints necessary to actively enforce insurance laws against fee-only planners violating state law Simply put these planners are ldquooff the radarrdquo and rarely generate complaints Since they are not licensed they do not fall under the authority of the CDI and unless they are brought to the attention of the CDI by virtue of consumer complaints these planners will continue to remain extremely difficult to find Additionally the CDI lacks proper funding and manpower to effectively enforce Insurance laws in California at this time Therefore any consideration for rigorous investigation and enforcement must be viewed as impractical given the current budget deficit and the apparent lack of will on the part of the CDI and local district attorneyrsquos offices to prosecute violators when they are reported

Confidential Page 22 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

By implementing one or more of the suggestions contained in this discussion the CDI will facilitate voluntary and willing compliance with state law while ensuring that their mandate to protect consumers from harm by insisting that CDI established examination licensing and continuing education requirements would be met Fee-only planners would be able to offer the advice they desire to offer on a fee basis with direct client billing the CDI would be in a far better position to supervise control audit and discipline these planners if and when the need arises More importantly consumers would be able to turn to the CDI for assistance without hearing the phrase ldquoIrsquom sorry that individual is not licensed and does not fall under our jurisdictionrdquo

In conclusion the CDI has the opportunity to solicit opinions and suggestions from state sponsored agencies and boards such as the CA Agent and Broker Advisory Commission to the Dept of Insurance Some members of the CDI Agent and Broker Advisory committee are fee-only CFPreg Certificants and have an understanding of the issues involved These professionals and other insurance professionals whose livelihoods also depend in part on ethical conduct in the business of insurance are in a position to provide valuable input to the CDI regarding these suggestions

It is hoped that this discussion will generate concern and renewed scrutiny of the illegal activities of fee-only planners in California and that this in turn will lead to a necessary beneficial and long overdue overhaul of Californiarsquos insurance licensing laws for the benefit of not only Californiarsquos consumers but eventually Consumers nationwide who reside in States with similar insurance advisory statutes

Respectfully submitted

Nigel B Taylor is a Certified Financial Plannerreg Certificant General Securities Principal and CA Life Agent associated with Royal Alliance Securities Inc He is a former President of the Award Winning Institute of Certified Financial Planners Los Angeles Society (1999) and Former Chairman of the Financial Planners Association ndash Los Angeles Chapter (2000) Mr Taylor has published numerous articles regarding proposed regulation compliance ethics and professionalism for financial planners and CFPreg Certificants He is based in Santa Monica California

1 CA Insurance Code Sections 32 amp 1622 2 Source Dept of Insurance Annual Report 2000 3 Source Dept of Insurance Annual Report 2000 4 CA Insurance Code Section 325 5 CA Insurance Code Sections 1849 6 Source CA Dept of Insurance March 2002 7 Source CA Dept of Corporations March 2002 8 25009 (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part

Confidential Page 23 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

of another business of advising others either directly or through publications or writings as to the value of securitieshelliphellip(Excerpt) 9 CA Insurance Code Section 325 10 CA Insurance Code Section 1668 The commissioner may deny an application for any license issued pursuant to this chapter if helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this state 11 CA Insurance Code Section 1844 Any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

12 CA Insurance Code 17255 (a) For purposes of Sections 325 1625 1626 17245 17581 1765 1800 14020 14021 and 15006 every licensee shall prominently affix type or cause to be printed on business cards written price quotations for insurance products and print advertisements distributed exclusively in this state for insurance products its license number in type the same size as any indicated telephone number address or fax number

CIC 17255 (c) Any person in violation of this section shall be subject to a fine levied by the commissioner in the amount of two hundred dollars ($200) for the first offense five hundred dollars ($500) for the second offense and one thousand dollars ($1000) for the third and subsequent offenses The penalty shall not exceed one thousand dollars ($1000) for any one offense These fines shall be deposited into the Insurance Fund

13 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the commissioner authorizing the person to act in that capacity 14 1858 In the construction of a statute or instrument the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein not to insert what has been omitted or to omit what has been inserted and where there are several provisions or particulars such a construction is if possible to be adopted as will give effect to all 15 Flannery v Prentice (2001) 110CalRptr2d 809 26Cal 4th 572 28P3d 860 16 People v Martinez (1995) 45CalRptr2d 905 11Cal4th 434 903P2d 1037 17 Caminetti v State Mut Life Ins Co (1942) 126P2d80926Cal 4th 572 28P3d 860 18 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the

Confidential Page 24 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

commissioner authorizing the person to act in that capacity The issuance of a certificate of authority to an insurer does not exempt an insurer from complying with this article

1633 Any person who acts offers to act or assumes to act in a capacity for which a license is required without a valid license so to act is guilty of a misdemeanor

16335 It is hereby declared to be the intent of the Legislature in enacting this chapter that the regulations prescribed herein be the exclusive regulations relating to the conduct of insurance business by persons licensed to act in any of the capacities defined hereunder any local regulations or ordinances notwithstanding 19 79001 This article applies to reciprocal and interinsurance exchanges Lloyds insurers fraternal benefit societies fraternal fire insurers grants and annuities societies insurers holding certificates of exemptions motor clubs nonprofit hospital associations life agents broker-agents surplus line brokers and special lines surplus line brokers as well as all other persons engaged in the business of insurance (color amp emphasis added)

20 79004 The commissioner shall have power to examine and investigate into the affairs of every person engaged in the business of insurance in the State in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 79003 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance Such investigation may be conducted pursuant to Article 2 (commencing at Section 11180) of Chapter 2 Part 1 Division 3 Title 2 of the Government Code

21 790035 (a) Any person who engages in any unfair method of competition or any unfair or deceptive act or practice defined in Section 79003 is liable to the state for a civil penalty to be fixed by the commissioner not to exceed five thousand dollars ($5000) for each act or if the act or practice was willful a civil penalty not to exceed ten thousand dollars ($10000) for each act The commissioner shall have the discretion to establish what constitutes an act However when the issuance amendment or servicing of a policy or endorsement is inadvertent all of those acts shall be a single act for the purpose of this section

22 129218 (a) The commissioner shall have the authority to issue a cease and desist order against any person acting as or holding himself herself or itself out as an insurance agent or broker without being so licensed and against any person holding out that person as transacting or transacting the business of insurance without having been issued a certificate of authority The commissioner may issue a cease and desist order without holding a hearing prior to issuance of the order The commissioner may impose a fine of up to five thousand dollars ($5000) for each day the order is violated

22 Supra 23 See Exhibit III of this memorandum

Confidential Page 25 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

24 CFP Board a 501(c)(3) certifying organization fosters professional standards in

personal financial planning so that the public values has access to and benefits from competent financial planning CFP Board owns the certification marks CFPtrade CERTIFIED FINANCIAL PLANNERtrade and federally registered CFP (with flame) logo which it awards to individuals who successfully complete initial and ongoing certification requirements CFP Board has currently authorized more than 39214 individuals to use these marks in the United States and 27343 individuals outside the United States For more about CFP Board visit wwwCFPnet 25 Source CFP Board of Standards Inc Colorado 26 Financial Planning Process denotes the process which typically includes but is not limited to the six elements of establishing and defining the client-planner relationship gathering client data including goals analyzing and evaluating the clientrsquos financial status developing and presenting financial planning recommendations and monitoring the financial planning recommendations (CFPtrade Board Code of Ethics ndash Definitions) 27 Financial planning subject areas denotes the basic subject fields covered in the financial planning process which typically include but are not limited to financial statement preparation and analysis (including cash flow analysis planning and budgeting) investment planning (Including portfolio design ie asset allocation and portfolio management) income tax planning education planning Risk Management (emphasis added) retirement planning and estate planning (CFPtrade Board Code of Ethics ndash Definitions)

Confidential Page 26 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

EXHIBIT I

Confidential Page 27 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life Agent License Information

LIFE AGENT (LX) Licensing Information

TABLE OF CONTENTS

Authorizing acts and with definitions Qualifications Filing Requirements

Individual -- Residents Organization -- Residents Individual -- Non-Residents Organization -- Non-Residents

License Term Renewal of License Additional Information

APPLICABLE FORMS

Individual Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Action Notice of Appointment (Form 447-54) Organization Endorsement (Form 411-8A) Non-Resident Insurance License Stipulation and Agreement (Form 447-68)

These forms are also included in the Individual and Business Entity applications

AUTHORIZING ACT

California State Insurance Code Chapter 5 Part 2 Division 1

A life agent (LX) is a person authorized by and on behalf of a life disability or life and disability insurer to transact life disability or life and disability insurance

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

Prelicensing ExperienceEducation

1) Require a minimum of 40 hours of approved prelicensing classroom study A new California resident applicant who had a current life license in another state and completed 40 hours of prelicensing education for life insurance in order to obtain that license or an applicant holding either a Life Underwriter Training Council Fellowship (LUTCF) or Chartered Life Underwriter (CLU) designation is exempt from the 40 hours of prelicensing education

2) Require 12 hours of approved prelicensing classroom study on ethics and the California Insurance Code Where an applicant seeks both the Fire and Casualty broker-agent license and the Life agent license the applicant shall only be required to complete one 12-hour course on ethics and the California Insurance Code

Continuing Education

1) During each of the first four 12-month periods following the date of original issue of license satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to a minimum of 25 hours

2) Any licensee who has complied with the above or was licensed as of 123191 shall satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to 30 hours of instruction during each two-year license period

3) Any agent that markets long-term care insurance must complete an 8-hour California specific long-term care continuing education course Check with your insurer regarding long-term care insurance requirements

4) Effective January 01 1998 any person who is 70 years of age or older and who has been licensed for 30 continuous years as a licensee in good standing in this state may be exempt from continuing education requirement Any licensee that markets individual long-term care contracts is still required to meet the specific education requirements for marketing such contracts

The agent who is limited by the terms of a written agreement with the insurer to transact only specific life insurance policies or annuities having an initial face amount of $10000 or less that are designated by the purchaser for the payment of funeral or burial expenses will be exempted from the prelicensing and continuing education requirements The commissioner may require the insurer appointing those life agents to certify as to the limitation of the agents representations

FILING REQUIREMENTS INDIVIDUAL - RESIDENTS

Application Application for Insurance License form 441-9

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to CaliforniaThis form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants If an examination is required fingerprint impressions will be taken at the California examination sites

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Prelicensing Certificate Of Completion Original certificate(s) of completion signed by both classroom instructorprovider director and applicant for life agent course andor Ethics and Code course

Examination Applicants who do not hold an active Life (LX) California resident license and whose eligibility for that license without examination has expired must pass the written examination prepared and administered by the Department

Fees - Individual Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice or an Organization Endorsement $21 per notice Examination $35 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 all applicants must appear at the designated exam site with a check in the amount of $74 made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal Fee $124 (2-year term)

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 1

Life Agent License Information

FILING REQUIREMENTS ORGANIZATION - RESIDENTS

Organization Application

Corporation partnership unincorporated association limited liability company or nonprofit corporation applicants must submit the Application for Organization License form 441-11

NOTE The organization must have at least one California resident LX endorsee to establish and maintain the license

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each endorsee who holds an active California non-resident LX license Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Fees - Organization Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS INDIVIDUAL - NON-RESIDENTS

Application Application for Insurance License form 441-9 must be completed by applicants who do not hold an active California LX license

NOTE Licensed non-resident agents whose state of residence does not have continuing education must meet the same requirements as a California resident in order to renew their license Licensed non-resident agents who comply with the continuing education requirements of their state of residence are exempt from California continuing education requirements If licensees transact long term care products they must meet California specific long term care education requirements

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California This form is also included in the Individual and Business Entity applications

Stipulation and Agreement Non-resident Insurance Licensee Stipulation and Agreement form 447-68

Certification Of License Status From Resident State

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Examination Not required except if the applicants state commonwealth or Canadian province of residence has no reciprocal agreement for waiving of examination

Fees - Individual Non-Resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS ORGANIZATION - NON-RESIDENTS

Organization Application

Corporation partnership unincorporated association or nonprofit corporation applicants must submit the Application for Business Entity License form 441-11

Note A California resident cannot be endorsed on a non-resident organization

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each natural person who holds an active California non-resident LX license This form is also included in the Individual and Business Entity applications Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Stipulation and Agreement Non-resident Insurance License Stipulation and Agreement as required by law form 447-68 signed by an officer or partner of the organization

Certification Of License Status From Resident State Must be in the organization name

Fees - Organization Non-resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 2

Life Agent License Information

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed to the mailing address of record approximately 90 days prior to the expiration date of the license Individuals will receive a renewal application showing total fees due for all license types held and the total number of continuing education hours completed at the time the renewal form is printed If the continuing education requirement has not been met the renewal will indicate how many hours are needed If renewal application is not received refer to the back of the permanent license for renewal instructions

All licensees that renew their licenses late will be required to file new company appointments organization endorsements or solicitor appointments Late is defined as any renewal for which the requirements to renew (this includes completing the continuing education hours) are not met until after the expiration date of the previous license term

ADDITIONAL INFORMATION

The Commissioner may grant authority to transact variable contracts to a person or an organization licensed as a Life Agent which is appointed by an admitted insurer which is required to register itself or to register a separate account or fund with the United States Securities and Exchange Commission or to register its variable policies or contracts with the Securities and Exchange Commission The person must submit acceptable proof of registration with NASD or SECO before authority to transact variable contracts can be granted

If currently licensed as a resident of another state upon becoming a California resident a clearance letter from the former state of residence is required

Limited liability company applicants are required to submit the following information to demonstrate compliance with Section 16475 of the California Insurance Code

1 A statement as to the number of licensees rendering professional services on behalf of the Limited Liability Company

2 The aggregate dollar amount of E amp O Liability Insurance Cash Bonds Bank Certificates of Deposit US Treasury obligations etc held to provide security for claims against the Limited Liability Company (The amount required over the minimum of $500000 is at least $100000 multiplied by the number of licensees rendering professional services on behalf of the company however the maximum amount is not required to exceed $5000000)

3 For purposes of satisfying the security requirements of California Insurance Code Section 16475 we will require one or more of the following

(A) A copy of the declaration page for each liability insurance policy used to satisfy the minimum security requirement

(B) Verification by the bank or escrow holder listing the type and current dollar value of the assets used to satisfy the minimum security requirements

Limited liability company licensees must file at least once each year an annual confirmation with the commissioner in the above format to demonstrate continuing compliance with the financial security requirements of Section 16475 of the California Insurance Code

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 644A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - January 16 2002 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 3

EXHIBIT II

Confidential Page 31 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life and Disability Insurance Analyst License Information

LIFE AND DISABILITY INSURANCE ANALYST (LA) License Information

APPLICABLE FORMS

Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Organization Endorsement (Form 441-8A) Request For Live Scan Service (form 442-39A)

This form is also included in the Individual and Business Entity applications

AUTHORIZING ACT California State Insurance Code Chapter 8 Part 2 Division 1

A Life and Disability Insurance Analyst is a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is required

Prelicensing ExperienceEducation Must have worked as a life licensee as defined under Chapter 5 Part 2 Division 1 of the Insurance Code for five years preceding the date of the examination or as an employee of such a licensee

Continuing Education

Not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

FILING REQUIREMENTS - INDIVIDUAL

Application Application for Insurance License form 441-9

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants You must call SYLVANIDENTIX at 1-(800) 315-4507 to schedule an appointment to have your fingerprint impressions taken prior to submitting your application Fingerprint impressions will not be accepted from any other source A copy of your Request For Live Scan Service (form 442-39A) must be submitted with your application verifying your prints were taken by SYLVANIDENTIX

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

FEES - Individual

License Filing $418 (2-year term) Examination $103 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 this fee must be paid at the designated site when the fingerprint impressions are taken You may pay by check made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal $418 (2-year term )

EXAMINATION

The applicant must pass the written examination prepared and administered by the Department

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 1

Life and Disability Insurance Analyst License Information

STUDY MATERIAL

Although the Department does not recommend any particular text method or course of study listed below is a study guide to assist in the preparation for the examination 1) The life and disability laws of this state are contained in the California Insurance Code Those sections on which an applicant might be tested are

General Provisions Sections 1 - 46 Division 1 Part 1 Chapter 1 Sections 100 - 123 Division 1 Part 1 Chapter 2 Article 1 Sections 150 - 151 Division 1 Part 1 Chapter 2 Article 3 Sections 250 - 252 Division 1 Part 1 Chapter 2 Article 4 Sections 280 - 287 Division 1 Part 1 Chapter 2 Article 5 Sections 300 - 305 Division 1 Part 1 Chapter 3 Article 1 Sections 330 - 339 Division 1 Part 1 Chapter 3 Article 2 Sections 350 - 361 Division 1 Part 1 Chapter 4 Article 1 Sections 380 - 393 Division 1 Part 1 Chapter 4 Article 3 Section 430 Division 1 Part 1 Chapter 4 Article 4 Sections 440 - 449 Division 1 Part 1 Chapter 4 Article 5 Section 460 Division 1 Part 1 Chapter 5 Sections 480 - 489 Division 1 Part 1 Chapter 6 Article 3 Sections 550 - 5575 Division 1 Part 2 Chapter 1 Article 1 Section 680 Division 1 Part 2 Chapter 1 Article 3 Sections 669 - 726 Division 1 Part 2 Chapter 1 Article 5 Sections 750 - 767 Division 1 Part 2 Chapter 1 Article 55 Sections 770 - 776 Division 1 Part 2 Chapter 1 Article 57 Sections 7771 - 7773 Division 1 Part 2 Chapter 1 Article 6 Sections 780 - 784 Division 1 Part 2 Chapter 1 Article 65 Sections 790 - 79010 Division 1 Part 2 Chapter 1 Article 75 Sections 815 - 816 Division 1 Part 2 Chapter 2 Article 5 Sections 1220 - 1221 Division 1 Part 2 Chapter 4 Article 2 Sections 1580 - 1599 Division 1 Part 2 Chapter 5 Sections 1621 - 17585 Division 1 Part 2 Chapter 5A Sections 1759 - 175910 Division 1 Part 2 Chapter 8 Sections 1831 - 1849 Division 2 Part 2 Chapters 1-13 Sections 10110 - 11533 Division 2 Part 61 Sections 12670 - 12691 Division 3 Chapters 1 and 2 Sections 12900 - 12977

2) The provisions terms and conditions of a life and disability insurance contract that might be tested are but not limited to the following Life Insurance Disability Insurance

Insuring Agreement Insurance Clause Reinstatement Schedule Incontestability Renewal Provisions Settlement Options Benefit Provisions Dividend Options Co-Insurance Ownership Provisions Waiting Periods Nonforfeiture Provisions Elimination Periods Grace Periods Deductibles Loan Provisions Waivers Suicide Exclusions Assignments of Transfers Restrictions Aviation Clause Pre-existing Conditions Beneficiaries Provisions Other Insurance

Additionally the applicants are expected to be thoroughly familiar with the types of contracts being issued in this state including but not necessarily limited to Life Disability

Individual Contracts Individual ContractsGroup Contracts Group ContractsIndustrial Contracts Blanket ContractsOrdinary Life Basic Hospital ExpenseLimited Payment Life Basic Medical-Surgical ExpenseModified and Graded Premium Basic Hospital and Medical-Surgical ExpenseEndowment Insurance Hospital Confinement IndemnityImmediate Annuities Major Medical ExpenseDeferred Annuities Comprehensive Major Medical ExpenseVariable Annuities Disability Income ProtectionLevel Term Life Accident OnlyIncreasing Term Life Specified DiseaseDecreasing Term Life Specified AccidentRe-entry Term Life Medicare SupplementUniversal Life 3) A thorough and complete knowledge of life and disability insurance may include

a Application and consequences of various policies b Applications and consequences of federal and estate taxes c Interrelationship with other investment vehicles d Interrelationship with other regulatory agencies including but not limited to SEC RIA etc e Interrelationship with contract business probate and investment laws in California f Insurance companys financial and organization analysis g Rate calculations and risk transfer

FILING REQUIREMENTS - ORGANIZATION

Organization Application

Corporation partnership nonprofit corporation or unincorporated association applicants must submit the Application for Business Entity License form 441-11

Natural Person Named On Organization

Application for insurance license form 441-9 and Organization Endorsement form 411-8A must be completed by each natural person who does not hold an active California LX license (individual filing requirements must be met)

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 2

Life and Disability Insurance Analyst License Information

Organization Endorsement form 441-8A (this form is also included in the Business Entity application) must be completed for each natural person who holds an active California LX license

FEES - ORGANIZATION

Fees are not required for the organization license Each natural person named on the organization must pay individual fees

License filing $418 (2-year term) Renewal Fee $418 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed approximately 60 days prior to the expiration date of the license and will show total fees due for all license types held If this application is not received refer to the back of the permanent license for renewal instructions

ADDITIONAL INFORMATION

The following persons are exempt from the requirements of this license

a Active members of the State Bar of California

b Any person who has passed all of the qualifying examinations necessary to become an Associate of the Society of Actuaries

c An officer or employee of any bank or trust company who receives no compensation from sources other than the bank or trust company for activities connected with his employment which would otherwise subject him to licensing requirements

d Any person employed by an employer who on behalf of his or her employer or any employee of his or her employer transacts life or disability insurance with but not on behalf of an insurer or advises his or her employer or any employee of his or her employer in any manner concerning life or disability insurance if

1 the employer receives no compensation by reason of such transactions or advice and 2 such person receives no compensation from any source other than his or her employer for such transactions or advice

e An investment advisor as defined in Section 25009 of the Corporations Code when acting in that capacity

NOTE An employee or officer of any insurer is not eligible for a license as a Life and Disability Insurance Analyst

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 765A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - December 18 2000 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 3

EXHIBIT III

Confidential Page 35 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Series 65 Exam

The Uniform Investment Adviser Law Examination and the available study outline were developed by the North American Securities Administrators Association Inc (NASAA) The examination called the Series 65 exam is designed to qualify candidates as investment adviser representatives The exam covers topics that have been determined to be necessary to understand in order to provide investment advice to clients The study outline is designed to provide an overview of the exams general content and format

The study outline is divided into corresponding sections to aid in preparing for the examination

The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline Applicants are allowed 180 minutes to complete the examination At least 89 (685) of the questions must be answered correctly for an individual to pass the Series 65 exam

The examination is conducted as a closed book test Upon completion of the examination the score for each section and the overall test score will immediately be made available to the candidate

The examination is administered by the National Association of Securities Dealers Inc (NASD) To schedule a candidate for the examination an individuals firm should file a Form U-4 or the individual should file a Form U-10 and pay the $11000 examination fee to the NASD at the following address

NASD Regulation Inc Attention Exams Dept 9509 Key West Avenue Rockville MD 20850 301590-6500

Once registered NASD will open a 120-day window within which an individual may schedule the exam A link to the NASD Forms can be found at httpwwwnasdrcom3400asp More information on exam sites can be found at httpwwwnasdrcom2630asp

The questions in the examination the examination study outline and the method by which the examination is administered have been designed by Chauncey Group International for NASAA and approved by NASAA and the Competency Exam Project Group In addition each examination question is statistically analyzed to insure reliability

Any attempt to compromise the examination may serve to destroy its validity and usefulness Therefore NASAA intends to bring appropriate action against persons who attempt to compromise the examination in whole or in part In addition such conduct may subject a candidate to further action by state administrators

Successful completion of the Uniform Investment Adviser Law Examination does not relieve a candidate of the personal responsibility to know and to abide by the specific requirements of the securities laws and regulations of the states in which the candidate transacts business Furthermore although successful completion of the examination may satisfy a portion of the requirements of a particular state it does not convey the right to transact business prior to being granted a license or registration by that state

NASAA believes that the Uniform Investment Adviser Law Examination will significantly benefit the industry and state regulators alike by such uniformity The investing public will be afforded a greater degree of protection through enhanced uniform qualification standards

NASAA Uniform Investment Adviser Law Exam (Series 65)

Exam Specifications

CONTENT AREA

OF ITEMS

I Economics and Analysis

20

A B Understand basic economic concepts

1 Inflationdeflation a Definitions b Causes of inflationdeflation

2 Interest rates and yield curves a Graphs b Definitions c Interest rate = cost of money

3 Basic economic indicators a GDP b Employment indicators c Trade deficit d Balance of payments e CPI

A

determine investment merits A Income statement

a Revenues b Cost of goods sold c Pre-tax margins d Cash flow

B Balance sheet a Assets b Liabilities c Working capital d Owners equity e Footnotes

A

C Demonstrate understanding of quantitative methods to evaluate investments

A Time value of money B Expected return C Net present value D Internal rate of return E Inflation-adjusted return (real return) F After-tax returnyield G Risk-adjusted return H Total return I Holding period return J Yield-to-maturity K Yield-to-call L Current yield M Risk measurements (eg Beta standard deviation duration) N Valuation ratios (eg PE price-to-book) O Benchmark portfolios P Annualized return

D E Identify risks (ie definitions impact on the market companies

and personal investments) D Business E Market F Interest rate G Inflation H Regulatory (eg tax law changes) I Liquidity

J Opportunity cost

II Investment Vehicles

26

A B Evaluate cash and cash equivalents

A Types and characteristics of cash and cash equivalents a Certificates of deposit b Money market funds c Treasury bills

B Benefitsrisks of owning cash and cash equivalents

B C Evaluate fixed income securities

B Types and characteristics of fixed income securities a US government and agency securities b Mortgage-backed securities c Corporate bonds (ie investment grade and high yield) d Convertible bonds e Municipal bonds f Zero-coupon bonds

C Benefitsrisks of owning fixed income securities

C D Evaluate equity securities

C Types and characteristics of equity securities a Common stock (eg voting rights etc) b Preferred stock c Convertible preferred stock

D Methods used to determine the value of equity securities (eg technical and fundamental analyses dividend discount)

E Benefitsrisks of owning equity securities

D E Evaluate investment company securities

D Types and characteristics of investment companies a Open-end investment companies

(mutual funds)

b Closed-end investment companies c Classes of shareholders expense ratios sales load

breakpoints 12b-1 fees E Benefitsrisks of owning investment company securities

E Recognize derivative securities and their benefitsrisks

F G Understand unique aspects of international investing

F Emerging vs developed markets G American Depository Receipts (ADRs) H Currency influences (concept of risk)

G H Understand real estate partnerships and investment trusts

(REITs) and variable annuities G Definitions H Benefitsrisks

III Investment Recommendations and Strategies

39

A B Determine and analyze the financial profile of the client to

develop a suitable investment policy and strategy A Type of client

a Individual b Sole proprietorship c General partnership d Limited partnership (including family limited

partnership) e Limited liability company f C corporation g S corporation h Trust i Estate

B Financial goals C Current financial status (eg cash flow balance sheet) D Capital needs (eg current retirement death disability)

E Current investments and strategies F Time horizon G Non-financial investment considerations (eg values

attitudes experience demographic characteristics) H Risk tolerance I Tax situation

B C Understand portfolio management strategies styles and

techniques (fixed income and equities) B Portfolio management styles and strategies

a Strategic and tactical asset allocation (eg style asset class rebalancing)

b Active vs passive c Growth vs value d Market capitalization (micro small mid large) e Buyhold f Indexing g Diversification

C Funding techniques a Dollar-cost averaging b Income reinvestment (eg dividend interest cap gain)

C D Recognize fundamental taxation issues

C Individual income tax (eg capital gains tax basis retirement distribution alternative minimum tax)

D Corporate trust and estate income tax E Estate and gift tax

D E Recognize types of retirement plans and related issues

D Retirement plans a Individual Retirement Arrangements (IRA) b 403(b) plans c Qualified retirement plans (eg pension and profit

sharing 401(k)) d Nonqualified retirement plans

E Important ERISA issues a Fiduciary responsibility (eg 404(c)) b Investment policy statement

c Prohibited transactions

E F Define the fundamental terms and concepts of trading securities

E Terminology (eg bids offers quotes) F Role of broker-dealers specialists market-makers G Types of orders (eg market limit stop short sale) H Types of accounts (eg cash margin option) I Commissions markups spread

F G Calculate performance

F Calculate performance a Total return (ie yield plus growth) b Inflation-adjusted return c After-tax returnyield d Current yield

IV Ethics and Legal Guidelines

45

A B Understand relevant aspects of securities acts and other rules and

regulations in order to comply as an investment adviser representative

A Investment Company Act of 1940 B Investment Advisers Act of 1940 C Securities Act of 1933 and Securities Exchange Act of 1934

(as applicable to investment adviser issues) D SEC Release No IA-1092 (applicability of the Investment

Advisers Act to financial planners and others) E State securities laws (ie Blue Sky) F NASAA rules prohibiting dishonest and unethical business

practices G Limitations on permissible practice (ie technical licensing

requirements)

B C Demonstrate ability to apply ethical practices

B Fiduciary responsibility C Conflict of interest D Prudent Investor standards E Limitations on advice and activities (ie when to consult other

professionals)

EXHIBIT IV

Confidential Page 44 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

CFP Required subject matter for ldquoInsurance Planning and Risk Managementrdquo

CFPreg Candidates must complete comprehensive training in the following subject areas at a college or university whose program has been inspected and approved by the CFP Board This course represents approximately 20 of the educational requirement for CFP Candidates Other courses include ldquoFinancial Planning Fundamentalsrdquo ldquoInvestment Planningrdquo ldquoTax Planningrdquo ldquoRetirement Planning amp Qualified Plansrdquo and ldquoEstate Planningrdquo

Principles of insurance

A Definit ions and application of

principles

1) Risk

2) Peril

3) Hazard

4) Law of large numbers

5) Adverse selection

B Response to risk

1) Retain

2) Transfer

3) Control

4) Reduce

5) Avoid

C Mortality vs morbidity

Analysis and evaluation of risk

exposures

A Personal Insurance l ines

1) Death

2) Disability

3) Poor health

4) Unemployment

5) Outliving onersquos capital

B Property Insurance l ines

1) Real

2) Personal

3) Auto

C Liability Issues

1) Negligence

2) Libel

3) Slander

4) Malpractice

D Business-related risks

E Calculation of benefits

23 Legal aspects of insurance

A Indemnity

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Insurable interest

C Contract requirements

D Contract characterist ics

Property and casualty insurance

(individual and business)

A Real property

B Automobile and recreational

vehicles

C Business

D Business activity

E Personal property

F Umbrella liability

General business liability

A Professional l iabili ty

B Errors and omissions

D Product liability

Health insurance (individual)

A Hospital-surgical

B Major medical

C Traditional indemnity

D Preferred Provider Organization

(PPO)

E Health Maintenance Organization

(HMO)

F Medicare supplemental insurance

G Other

Disability income insurance

(individual)

A Occupational definit ions and

application

1) Total

2) Partial

3) Residual

C Directors and officers

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Benefit period

C Elimination period

D Benefit amount

E Riders

F Taxation of benefits

Long-term care insurance (individual

and joint)

A Basic provisions

B Eligibility

C Benefit amount and period

D Elimination period

E Inflation protection

F Nursing home and in-home care

G Comparing and selecting policies

H Tax implications and qualification

I Appropriateness of coverage

Life insurance

A Fundamentals

B Types

C Contractual provisions

D Dividend options

E Non-forfeiture and other options

F Settlement options

G Policy replacement

H Tax issues and strategies

I Policy ownership issues and

strategies including split-dollar

Viatical settlements

A Legal principles

B Requirements

C Tax implications

D Planning

E Ethical concepts and planning

Insurance needs analysis and

rationale

A Life insurance amount required

1) Liquidity and survivor income needs

2) Human life value

3) Capital retention

B Disabili ty insurance

C Long-term care insurance

D Health insurance

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

E Property insurance E Reinsurance

F Liabili ty insurance F Investments

Taxation of l ife disability and long- G Underwriting

term care insurance H Federal and state law

A Income

B Gift

C Estate

D Generation-Skipping Transfer

Tax (GSTT)

E Ownership issues

F Beneficiary issues

G Withdrawals

Insurance policy selection

A Purpose of coverage

B Length of t ime required

C Risk tolerance

D Cash flow constraints

Insurance company selection and due

diligence

A Financials

B Ratios

C Ratings

D Mutual vs stock

Source CFP Board of Standards Inc Denver CO

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

CURRENT ISSUE

PAST ISSUES

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ADVISOR SERVICES Broker-Dealers

CustodianFee-Only

Technology

ADVICE 401(k) plans

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ComplianceFraud

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Practice Management

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Social Media

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Women in Planning

INVESTING Alternative Investments

Analysis

Commodities

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Mutual Funds

Free Site RegistrationgtgtLogin Logout

SEARCH GO December 10 2011

HOME CE CENTER WEBCASTS CONFERENCES EVENTS SUBSCRIBE

November 23 2011

SEC OFFICIAL SCRUTINIZED FOR lsquoCRASH-PROOF RETIREMENTrsquo INTERVIEW WITH ADVISOR

(Bloomberg News) The US Securities and Exchange Commissionrsquos internal watchdog has come under scrutiny for comments he made in a 75-minute videotaped interview about the agency and the stock market to a man who markets a ldquocrash-proof retirementrdquo plan through the Internet and a paid radio program

SEC Inspector General H David Kotz has been contacted about the matter by the agencyrsquos general counselrsquos office which also has briefed the SECrsquos commissioners over concerns the interview could be construed as investment advice or an endorsement of financial services

Phillip Cannella III chief executive officer of First Senior Financial Group in King of Prussia Pennsylvania edited the interview he conducted at SEC headquarters in late July into more than a dozen video segments He posted them on YouTube and his website wwwcrashproofretirementcom and plays them on the radio as well as during his seminars about insurance products for retirees

The SEC doesnrsquot ban its employees from interviews with people connected to commercial ventures Kotz said he cleared the matter in advance with the SECrsquos internal ethics counsel He told SEC officials he would ask an outside group the Council of Inspectors General on Integrity and Efficiency to look into whether he said or did anything improper in the interview according to two people briefed on the situation

The Federal Bureau of Investigation which oversees the panel within the inspector generalrsquos group that deals with integrity matters doesnrsquot comment on its inquiries said William Carter an FBI spokesman

lsquoAppropriate Caveatsrsquo

Kotz said in an e-mailed statement to Bloomberg News that he provided ldquoall the appropriate caveats and disclaimersrdquo to Cannella and ldquospecifically stated in the radio interview that I was not in a position to nor was I providing investment advicerdquo

SEC Chairman Mary Schapiro said in a statement that she appreciated that Kotz requested an independent review

ldquoDavid Kotz is an experienced professional with expertise in the ethics rules who I

believe would not intentionally create an appearance issuerdquo Schapiro said

The SEC didnrsquot say if it was taking further action on the matter The agencyrsquos ethics counsel Shira Pavis Minton didnrsquot respond to a request for comment

In the interview segments posted on the website Kotz discusses issues ranging from the Bernard Madoff fraud to the difficulties the SEC faces policing Wall Street A press release issued by Cannellarsquos company headlined Kotzrsquos suggestion that retirees consider cutting their investments in stocks

lsquoTurbulent Timesrsquo

ldquoSo much money is in the stock market where peoplersquos lives are so affected by it that sometimes it may make sense to take things out in turbulent times to ensure that yoursquore not living and dying so to speak by the Dow Jones going up and downrdquo Kotz told Cannella as the two sat in the agencyrsquos Washington offices in front of the SEC seal ldquoParticularly with whatrsquos occurred over the last several yearsrdquo

Kotz also discusses the SECrsquos past shortcomings and says the agency has improved being a ldquofundamentally different place now than when I first started at the SEC and before we issued our Madoff reportrdquo

FINANCIAL ADVISOR BLOGS

Evan Simonoffs Blog

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Tips on how to create stronger bonds with clients capped off IMCAs Winter Specialty Conference in Vail Colowith speaker Jamie Ziegler founder of AUMPartners telling attendees ldquoTrust is the single most important factor in building lasting relationshipsrdquo Read more

Business Growth Through Referrals

BOOKSTORE

httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 1 of 2

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

Real EstateREITs

US Equity

RESEARCH BD Ranking

RIA Ranking

SMA Ranking

MORE SERVICES BD Profiles 2011

BD Recruitment Center

RIA Services

White Papers

Cannella said in a phone interview that he was contacted by an SEC attorney several weeks ago asking that he put a disclaimer on the videos to make clear that neither the agency nor Kotz endorse sponsor or promote his firm Cannella said he quickly complied Kotz said he supported efforts by the SECrsquos general counselrsquos office ldquoto ensure that my interview is not being used to endorse any productrdquo

lsquoNot a Journalistrsquo

Cannella said he was pleased to be able to interview a high-level government official like Kotz -- a man he said he greatly respects While it costs him $12000 a week to air the radio show on two Philadelphia area stations Cannella said he treats it like a consumer advocacy program not an infomercial

ldquoI canrsquot believe myselfrdquo Cannella said ldquoIrsquom not a journalist and I got over a 75-minute interview with Kotz inside the SEC buildingrdquo

Besides the radio program Cannella said he holds ldquoeducational eventsrdquo in restaurants where he teaches people in their 50s and older about ldquosafe investment alternatives in the insurance industryrdquo His website has clips of prospective clients being asked about their reaction to watching the Kotz interview

One woman who wasnrsquot identified in the video said that Cannellarsquos interview with the inspector general shows that the host is ldquostanding up for the little people and very admirable and thatrsquos one of the reasons that Irsquom very anxious to proceed with Philrdquo

Probes

In another clip an unidentified man said ldquoIt was incredible to find out that the SEC feels like it canrsquot police the securities industry because it doesnrsquot have the funding or the manpowerrdquo

The fracas adds a new chapter to Kotzrsquos contentious four-year tenure at the SEC In recent months current and former officials have spoken out about what they say are his overly aggressive probes and their negative impact on the agencyrsquos ability to police the markets Earlier this month the Justice Department declined to open an investigation into Kotzrsquos allegations that former SEC General Counsel David Becker violated ethics laws

Kotz and his supporters have dismissed the complaints saying his oversight has done much to help the SEC burnish its image after it was widely attacked for missing massive frauds like Madoffrsquos and the alleged Ponzi scheme run by R Allen Stanford

Commissions

In his interview with Cannella Kotz said victims of investment schemes ldquodeserve a strong vibrant effective aggressive SEC that goes after those people gets their money back as possible and puts them in jailrdquo

Because he doesnrsquot sell securities Cannella isnrsquot regulated by the SEC He said he is licensed to sell insurance in over 40 states His company puts together individual plans for clients and then earns commission on products they buy from an insurance company He described the investments as ldquoguaranteed tax-deferred contractual agreements with income options from a statutory corporationrdquo

The investments are ldquooutside of the securities industryrdquo and ldquomany of them have outperformed the markets since their inception with no market risk no market fees no upfront commissions or sales costsrdquo he added

The trade magazine Senior Market Advisor in January 2008 reported that Cannella said he wrote about $25 million in premiums in 2007 for fixed index annuities Cannella said he didnrsquot want to put a specific name on the investments he sells because he thinks the media has misreported on the products

ldquoIrsquom not well-liked among securities guys because I am speaking truth and logic to a deceptive industryrdquo Cannella said ldquoYou canrsquot beat the sword of truthrdquo

Comments

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Techniques for gaining more business through client referrals were among the topics broached at the IMCA 2011 Winter Specialty Conference in Vail Colo Read more

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MARKETECONOMIC COMMENTARY

Raise Taxes On Rich To Reward True Job Creators In this opinion piece a venture capitalist makes a case for raising taxes on the rich to benefit the true job creators the middle class Read more

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ON THE MOVE

Atlanta Capital Group Continues Expansion

Birmingham Ala office will be third for Atlanta Capital Group Read more

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 2 of 2

United States Government Accountability Office

Report to Congressional AddresseesGAO

January 2011 CONSUMER FINANCE

Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

GAO-11-235

January 2011

CONSUMER FINANCE Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

Accountability bull Integrity bull Reliability

Highlights of GAO-11-235 a report to congressional addressees

Why GAO Did This Study

Consumers are increasingly turning for help to financial plannersmdash individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products and managing tax and estate planning The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners This report examines (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of this regulation and (3) the advantages and disadvantages of alternative regulatory approaches To address these objectives GAO reviewed federal and state statutes and regulations analyzed complaint and enforcement activity and interviewed federal and state government entities and organizations representing financial planners various other arms of the financial services industry and consumers

What GAO Recommends

GAO recommends that (1) NAIC assess consumersrsquo understanding of the standards of care associated with the sale of insurance products (2) SEC assess investorsrsquo understanding of financial plannersrsquo titles and designations and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers NAIC said it would consider GAOrsquos recommendation and SEC provided no comments

View GAO-11-235 or key components For more information contact Alicia Puente Cackley at (202) 512-8678 or cackleyagaogov

What GAO Found

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level but various laws and regulations apply to most of the services they provide Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners

The regulatory structure applicable to financial planners covers the great majority of their services but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain First consumers may be unclear about when a financial planner is required to serve the clientrsquos best interest particularly when the same financial planner provides multiple services associated with different standards of care SEC is studying these issues with regard to securities transactions but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products Second financial planners can adopt numerous titles and designations which vary greatly in the expertise or training that they signify but consumers may not understand or be able to distinguish among them SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed Finally the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole A regulatory system should have data to identify risks and problem areas and given that financial planning is a growing industry that has raised certain consumer protection issues regulators could benefit from better information on the extent of problems specifically involving financial planning services

A number of stakeholders have proposed different approaches to the regulation of financial planners including (1) creation of a federally chartered board overseeing financial planners as a distinct profession (2) augmenting oversight of investment advisers with a self-regulatory organization (3) extending the fiduciary standard of care to more financial services professionals and (4) specifying standards for financial planners and the designations that they use While the views of stakeholder interests vary a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities Given available information an additional layer of regulation specific to financial planners does not appear to be warranted at this time

United States Government Accountability Office

Contents

Letter 1

Background 2 Various Federal and State Laws and Regulations Apply to Financial

Planners and Their Activities 3 Regulatory Structure for Financial Planners Covers Most Activities

but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited 11

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed 28

Conclusions 33 Recommendations 34 Agency Comments 35

Appendix I Scope and Methodology

Appendix II Comments from the National Association of

Insurance Commissioners

Appendix III Comments from the North American Securities

Administrators Association

Appendix IV GAO Contact and Staff Acknowledgments

Figures

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act 5

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners 12

Figure 3 Differences in the Standards of Care Required of Financial Planners 17

Page i GAO-11-235 Consumer Finance

37

41

42

46

Abbreviations

Advisers Act Investment Advisers Act of 1940 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer

Protection Act FINRA Financial Industry Regulatory Authority Form ADV Uniform Application for Investment Adviser

Registration FTC Federal Trade Commission NAIC National Association of Insurance Commissioners NASAA North American Securities Administrators Association SEC Securities and Exchange Commission

This is a work of the US government and is not subject to copyright protection in the United States The published product may be reproduced and distributed in its entirety without further permission from GAO However because this work may contain copyrighted images or other material permission from the copyright holder may be necessary if you wish to reproduce this material separately

Page ii GAO-11-235 Consumer Finance

United States Government Accountability Office

Washington DC 20548

January 18 2011

Congressional Addressees

Consumers are increasingly turning for help to professionals who describe themselves as financial planners for assistance with a broad range of services such as selecting the right balance of stocks and bonds for an investment portfolio choosing among insurance products and tax and estate planning Although there is no statutory or single definition of financial planning it can be broadly defined as a systematic process that individuals use to achieve their financial goals Between 2000 and 2008 the number of financial planners more than doubled and may continue to climb as more individuals are asked to take responsibility for their retirement savings and must choose among a growing array of investment options

Some financial planning organizations have raised concerns that no single law governs providers of financial planning services broadly describing this situation as a regulatory gap Concerns also exist that financial planners may have an inherent conflict of interest in recommending products they may stand to benefit from selling In addition some consumer advocates believe consumers may be confused by the numerous titles and designations that financial planners can use This report responds to a mandate included in Section 919C of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that directed GAO to conduct a study on the oversight and regulation of financial planners Our objectives are to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

To address these objectives we reviewed federal and selected state statutes and regulations applicable to financial planners We also reviewed regulations issued by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) and model laws developed by the National Association of Insurance Commissioners (NAIC) and by the North American Securities Administrators Association (NASAA) In addition we reviewed applicable securities and insurance laws and regulations of five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texas We also interviewed representatives of and

Page 1 GAO-11-235 Consumer Finance

gathered documentation from SEC FINRA the Federal Trade Commission (FTC) NAIC and organizations representing the interests of consumers financial planners and various arms of the financial services industry In addition we gathered information on complaints and enforcement activity as available from SEC FINRA FTC and selected state regulators and organizations A more extensive discussion of our scope and methodology appears in appendix I

We conducted this performance audit from June 2010 to January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Background Financial planning typically involves a variety of services including preparing financial plans for clients based on their financial circumstances and objectives and making recommendations for specific actions clients may take In many cases financial planners also help implement these recommendations by for example providing insurance products securities or other investments Individuals who provide financial planning services may call themselves a variety of different titles such as financial planner financial consultant financial adviser trust advisor or wealth manager In addition many financial planners have privately conferred professional designations or certifications such as Certified Financial Plannerreg Chartered Financial Consultantreg or Personal Financial Specialist

The number of financial planners in the United States rose from approximately 94000 in 2000 to 208400 in 2008 according to the Bureau of Labor Statistics The bureau projects the number will rise to 271200 by 2018 because of the need for advisers to assist the millions of workers expected to retire in the next 10 years1 According to the bureau 29 percent of financial planners are self-employed and the remaining 71

1While the Bureau of Labor Statistics reports these statistics using the term ldquofinancial adviserrdquo bureau officials said that this term could be used interchangeably with financial planner The bureau broadly defined a ldquopersonal financial adviserrdquo as an individual who provides financial planning services and that private bankers or wealth managers would also be categorized as financial advisers

Page 2 GAO-11-235 Consumer Finance

percent are employees of firms some of them large entities with offices nationwide that provide a variety of financial services The median annual wage for financial planners was $68200 in May 2009

According to an analysis of the 2007 Survey of Consumer Finances the most recent year for which survey results are available in 2007 about 22 percent of US households used a financial planner for investment and saving decisions and about 12 percent of US households used a financial planner for making credit and borrowing decisions Those households most likely to use a financial planner were those with higher incomes For example 37 percent of households in the top income quartile used a financial planner to make investment and saving decisions compared to 10 percent of households in the bottom quartile2

Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities

Financial planners are primarily regulated by federal and state investment adviser laws because planners typically provide advice about securities as part of their business In addition financial planners that sell securities or insurance products are subject to applicable laws governing broker-dealers and insurance agents Certain laws and regulations can also apply to the use of the titles designations and marketing materials that financial planners use

Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level However the activities of financial planners are primarily regulated under federal and state laws and regulations governing investment advisersmdashthat is individuals or firms that provide investment advice about securities for compensation According to SEC staff financial planning normally includes making general or specific recommendations about securities insurance savings and anticipated retirement3 SEC has issued guidance that broadly interprets the Investment Advisers Act of 1940 (Advisers Act) to apply to most financial planners because the advisory services they offer clients typically include

2Our percentage estimates based on the 2007 Survey of Consumer Finances have 95 percent confidence intervals of +- 25 percentage points or less For example we are 95 percent confident that between 82 and 118 percent of households in the bottom quartile used financial planners for investment decisions See appendix I for additional information

3Investment Adviser Act Release No 1092 52 Fed Reg 38400 38401 (Oct 16 1987) (IA Rel No 1092)

Page 3 GAO-11-235 Consumer Finance

providing advice about securities for compensation4 Similarly NASAA representatives told us that states take a similar approach on the application of investment adviser laws to financial planners and as a result generally register and oversee financial planners as investment advisers As investment advisers financial planners are subject to a fiduciary standard of care when they provide advisory services so that the planner ldquo[is] held to the highest standards of conduct and must act in the best interest of [the adviserrsquos] clientsrdquo5

SEC and state securities departments share responsibility for the oversight of investment advisers in accordance with the Advisers Act6 Under that act SEC generally oversees investment adviser firms that manage $25 million or more in client assets and the states that require registration oversee those firms that manage less7 However as a result of section 410 of the Dodd-Frank Act as of July 2011 the states generally will have registration and oversight responsibilities for investment adviser firms that manage less than $100 million in client assets instead of firms that manage less than $25 million in assets as under current law8 This will result in the states gaining responsibility for firms with assets under management between $25 million and $100 million As shown in figure 1 as of October 2010 of the approximately 16000 investment adviser firms providing

4The Advisers Act defines an investment adviser as any person (ie individual or firm) who is in the business of providing advice or issuing reports or analyses regarding securities for compensation 15 USC sect 80b-2(a)(11) IA Rel No 1092 In addition to applicable securities law investment advice related to a retirement savings plan such as a 401(k) plan may also be subject to the Employee Retirement Income Security Act The requirements under that act are outside the scope of this study A forthcoming GAO report GAO-11-119 will provide more information on investment advice in 401(k) plans

5In SEC v Capital Gains Research Bureau Inc 375 US 180 189-192 (1963) the US Supreme Court recognized that the Advisers Act imposes a fiduciary duty on investment advisers This standard imposes an affirmative duty to act solely in the best interests of the client The investment adviser also must eliminate or disclose all conflicts of interest

615 USC sect 80b-3a The term investment adviser can refer to a person or firm Investment adviser firms generally register with SEC or state securities departments as registered investment advisers According to NASAA certain natural persons that are employed by firms generally register with the state securities departments as investment adviser representatives

7Id Under 17 CFR sect 275203A-1 SEC registration has been optional for certain

investment advisers having assets under management between $25 and $30 million Firms also may have a different basis for registering with SEC (other than the amount of client assets the firm has under management) such as whether the principal office and place of business are within a state that has no registration requirement

8Pub L No 111-203 sect 410 124 Stat 1376 1576-77 (2010)

Page 4 GAO-11-235 Consumer Finance

financial planning services the states were overseeing about 11100 firms and SEC was overseeing about 4900 such firms9 However in July 2011 about 2400 of investment adviser firms that provided financial planning services (15 percent of the 16000 firms) may shift from SEC to state oversight10

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act

SECrsquos supervision of investment adviser firms includes evaluating their compliance with federal securities laws by conducting examinations of firmsmdashincluding reviewing disclosures made to customersmdashand investigating and imposing sanctions for violations of securities laws According to SEC staff in its examinations the agency takes specific steps to review the financial planning services of investment advisers For example SEC may review a sample of financial plans that the firm prepared for its customers to check whether the firmrsquos advice and investment recommendations are consistent with customersrsquo goals the contract with the firm and the firmrsquos disclosures

9In registering with SEC or a state investment adviser firms are required to report whether they provide financial planning services in Part 1A of the Uniform Application for Investment Adviser Registration Item 5 G(1) SEC does not provide a definition of financial planning services for firms to use when completing the registration form The total number of investment adviser firms overseenmdashincluding both those that do and do not provide financial planning servicesmdashis 15016 for the states and 11873 for SEC For data on investment adviser firms firms that were registered with both SEC and the states were counted with SEC-registered investment adviser firms

10See 75 Fed Reg 77052 (Dec 10 2010) (SEC proposed rule which if finalized would give advisers until August 20 2011 to report the market value of their assets under management to the SEC as the first step in the process)

Page 5 GAO-11-235 Consumer Finance

However the frequency with which SEC conducts these examinations varies largely because of resource constraints faced by the agency11 SEC staff told us that the agency examined only about 10 percent of the investment advisers it supervises in 2009 In addition they noted that generally an investment adviser is examined on average every 12 to 15 years although firms considered to be of higher risk are examined more frequently In 2007 we noted that harmful practices could go undetected because investment adviser firms rated lower-risk are unlikely to undergo routine examinations within a reasonable period of time if at all12

According to NASAA state oversight of investment adviser firms generally includes activities similar to those undertaken by SEC including taking specific steps to review a firmrsquos financial planning services According to NASAA states generally register not just investment adviser firms but also investment adviser representativesmdashthat is individuals who provide investment advice and work for a state- or federally registered investment adviser firm13

Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities

In addition to providing advisory services such as developing a financial plan financial planners generally help clients implement the plan by making specific recommendations and by selling securities insurance products and other investments SEC data show that as of October 2010 19 percent of investment adviser firms that provided financial planning

11GAO Securities and Exchange Commission Steps Being Taken to Make Examination

Program More Risk-Based and Transparent GAO-07-1053 (Washington DC Aug 14 2007) As we noted since the detection of mutual fund trading abuses in late 2003 in light of limited resources SEC has shifted its approach to examinations of investment advisers from one that focused on routinely examining all registered firms regardless of risk to one that focuses on more frequently examining those firms and industry practices at higher risk for compliance issues

12GAO-07-1053 SEC reported in February 2010 that it is now placing a greater emphasis on fraud detection in addition to identifying potential violations of securities laws and rules strengthening procedures and internal controls to maximize limited resources recruiting examiners with specialized skills and increasing expertise through enhanced training

13According to NASAA New York Minnesota and Wyoming do not register investment adviser representatives although New York and Minnesota do have certain examination and other requirements that must be met

Page 6 GAO-11-235 Consumer Finance

services also provided brokerage services and 27 percent provided insurance14

Financial planners that provide brokerage services such as buying or selling stocks bonds or mutual fund shares are subject to broker-dealer regulation at the federal and state levels At the federal level SEC oversees US broker-dealers and SECrsquos oversight is supplemented by self-regulatory organizations (SRO)15 The primary SRO for broker-dealers is FINRA State securities offices work in conjunction with SEC and FINRA to regulate securities firms Salespersons working for broker-dealers are subject to state registration requirements including examinations About half of broker-dealers were examined in 2009 by SEC and SROs Under broker-dealer regulation financial planners are held to a suitability standard of care when making a recommendation to a client to buy or sell a security meaning that they must recommend those securities that they reasonably believe are suitable for the customer16

Financial planners that sell insurance products such as life insurance or annuities must be licensed by the states to sell these products and are subject to state insurance regulation In contrast to securities entities (other than national banks) that are subject to dual federal and state oversight the states are generally responsible for regulating the business of insurance When acting as insurance agents financial planners are

14The brokerage and insurance services provided by these investment adviser firms are not necessarily a part of their financial planning services In addition many financial planners may sell securities- or insurance-related products through affiliated brokers or agents

15The primary law for regulating broker-dealers is the Securities Exchange Act of 1934 codified at 15 USC sectsect 78a-78oo Brokers effect transactions for the account of others while dealers buy and sell securities for their own accounts 15 USC sect 78c The term registered representative is generally used to refer to certain employees of a broker-dealer firm who are engaged in providing securities recommendations Broker-dealers must be members of a qualifying self-regulatory organization (either a national exchange or a registered securities association) 15 USC sect 78o(b)(8)

16Under NASD Conduct Rule 2310 a FINRA member making an investment recommendation to a customer must have grounds for believing that the recommendation is suitable for that customerrsquos financial situation and needs In November 2010 SEC approved FINRArsquos proposed new consolidated rules governing the suitability obligations of its members 75 Fed Reg 71479 (Nov 23 2010) This rule proposed FINRA Rule 2111 requires salespersons to have a reasonable basis for believing based on adequate due diligence that a recommendation of a transaction or strategy is suitable for at least some investors that the recommendation is suitable for a specific customer based on that customerrsquos profile and that a series of recommended transactions is not excessive and unsuitable for the customer

Page 7 GAO-11-235 Consumer Finance

subject to state standard of care requirements which can vary by product and by state As of October 2010 32 states had adopted a previous version of the NAIC Suitability in Annuities Transactions Model Regulation according to NAIC17 In general this regulation requires insurance agents to appropriately address consumersrsquo insurance needs and financial objectives at the time of an annuity transaction18 Thirty-four states had also adopted the Life Insurance Disclosure Model Regulation in a uniform and substantially similar manner as of July 2010 according to NAIC This regulation does not include a suitability requirement although it does require insurers to provide customers with information that will improve their ability to select the most appropriate life insurance plan for their needs and improve their understanding of the policyrsquos basic features

Financial planners that sell variable insurance products such as variable life insurance or variable annuities are subject to both state insurance regulation and broker-dealer regulation because these products are regulated as both securities and insurance products When selling variable insurance financial planners are subject to FINRA sales practice standards requiring that such sales be subject to suitability standards19 In addition other FINRA rules and guidance such as those governing standards for communication with the public apply to the sale of variable insurance products20 In addition as previously discussed 32 states also generally require insurance agents and companies to appropriately address a consumerrsquos insurance needs and financial objectives at the time of an annuity transaction However in the past we have reported that the effectiveness of market conduct regulationmdashthat is examination of the sales practices and behavior of insurersmdashmay be limited by a lack of

17NAIC amended this model regulation in March 2010 according to NAIC one state has adopted the updated model and additional states are expected to do so

18According to NAIC in 4 of these 32 states the regulation applies only when the consumers are senior citizens

19NASD Notice to Members 96-86 outlines that variable contracts for insurance products are subject to suitability requirements

20NASD Interpretive Material 2210-2 outlines guidance concerning communications with the public about variable life insurance and variable annuities FINRA has proposed that this guidance be replaced by a separate new FINRA Rule 2211 See FINRA Rule Filing No SR-FINRA-2009-070

Page 8 GAO-11-235 Consumer Finance

reciprocity and uniformity which may lead to uneven consumer protection across states21

Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations

At the federal level SEC and FINRA have regulations on advertising and standards of communication that apply to the strategies investment adviser firms and broker-dealers use to market their financial planning services For example SEC-registered investment advisers must follow SEC regulations on advertising and other communications which prohibit false or misleading advertisements and these regulations apply to investment advisersrsquo marketing of financial planning services22 FINRA regulations on standards for communication with the public similarly prohibit false exaggerated unwarranted or misleading statements or claims by broker-dealers and broker-dealer advertisements are subject to additional approval filing and recordkeeping requirements and review procedures23 According to many company officials we spoke with their companies responded to these requirements by putting procedures in place to determine which designations and titles their registered representatives may use in their marketing materials such as business cards

SEC and state securities regulators also regulate information that investment advisers are required to disclose to their clients In the Uniform Application for Investment Adviser Registration (Form ADV) regulators have typically required investment adviser firms to provide new and prospective clients with background information such as the basis of the advisory fees types of services provided (such as financial planning services) and strategies for addressing conflicts of interest that may arise

21GAO Insurance Reciprocity and Uniformity NAIC and State Regulators Have Made

Progress in Producer Licensing Product Approval and Market Conduct Regulation but

Challenges Remain GAO-09-372 (Washington DC Apr 6 2009) Reciprocity refers to the extent to which state regulators accept other statesrsquo regulatory actions Uniformity refers to the extent to which states have implemented either the same or substantially similar regulatory standards and procedures

2217 CFR sect 275206(4)-1

23NASD Rule 2210

Page 9 GAO-11-235 Consumer Finance

from their business activities24 Recent changes to Form ADV are designed to improve the disclosures that firms provide to clients For example firms must now provide clients with information about the advisory personnel on whom they rely for investment advice including the requirements and applicability of any professional designations or certifications advisers may choose to include in their background information

Most states regulate the use of the title ldquofinancial plannerrdquo and state securities and insurance laws can apply to the misuse of this title and other titles For example according to NASAA at least 29 states specifically include financial planners in their definition of investment adviser25 According to NAIC in many states regulators can use unfair trade practice laws to prohibit insurance agents from holding themselves out as financial planners when in fact they are only engaged in the sale of life or annuity insurance products However as noted earlier the effectiveness of the regulation of insurersrsquo market conduct varies across states In particular in 2010 we noted inconsistencies in the state regulation of life settlements a potentially high-risk transaction in which financial planners may participate26

In addition we were told some states had adopted regulations limiting the use of ldquosenior-specific designationsrdquomdashthat is designations that imply expertise or special training in advising senior citizen or elderly investors According to NAIC as of December 2010 25 states had adopted in a uniform and substantially similar manner the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities which limits the use of senior-specific designations by insurance agents According to NASAA as of December 2010 31 states had adoptedmdashand at least 9 other states were

24SEC and the states use Form ADV to register investment adviser firms and collect information from them Part 2 of Form ADV provides information about the investment adviser and its business for use of the clients and is publicly available on the Investment Adviser Public Depository Web site The SEC adopted amendments to Form ADV that were effective October 12 2010 requiring Part 2 of Form ADV be written in a plain English narrative format See Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (to be codified at 17 CFR pt 275 and 279)

25The District of Columbia and Puerto Rico also include financial planners in their definitions of investment adviser according to NASAA

26GAO Life Insurance Settlements Regulatory Inconsistencies May Pose a Number of

Challenges GAO-10-775 (Washington DC July 9 2010)

Page 10 GAO-11-235 Consumer Finance

planning to adoptmdashthe NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations which prohibits the misleading use of senior-specific designations by investment adviser representatives and other financial professionals

Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited

The regulatory system for financial planners covers most activities in which they engage However enforcement of regulation may be inconsistent and some questions exist about consumersrsquo understanding of the roles standards of care and titles and designations that a financial planner may have The ability of regulators to identify potential problems is limited because they do not specifically track complaints inspections and enforcement actions specific to financial planning services

Existing Regulation Covers Most Financial Planning Services

Although there is no single stand-alone regulatory body with oversight of financial planners the regulatory structure for financial planners covers most activities in which they engage As discussed earlier and summarized in figure 2 the primary activities a financial planner performs are subject to existing regulation at the federal or state level primarily through regulation pertaining to investment advisers broker-dealers and insurance agents As such SEC FINRA and NASAA staff a majority of state securities regulators financial industry representatives consumer groups and academic and subject matter experts with whom we spoke said that in general they believe the regulatory structure for financial planners is comprehensive although as discussed below the attention paid to enforcing existing regulation has varied

Page 11 GAO-11-235 Consumer Finance

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners

Financial planner

Capacity Investment adviser Broker-dealer Insurance agent

Applicable federal and state laws

Federal bull Investment Advisers Act of 1940 and rules from SEC

State bull State securities laws

Federal bull Securities and Exchange Act of 1934 and rules of SEC and FINRA

State bull State securities laws

State bull State insurance laws

Financial planning service covered by regulation

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for specific securities products bull Purchase or sale of securities products

bull Recommendations for insurance products

bull Sale of insurance products

bull Sale of variable insurance (variable annuities variable life insurance) bull

Federal and state regulators enforcing laws

Federal bull SEC

State bull State securities agencies

Federal bull SEC and FINRA

State bull State securities agencies

State bull State insurance agencies

Customer

Source GAO

Note This figure highlights three major areas of regulatory oversight but is not comprehensive and does not include other regulatory regimes or practice standards that may be applicable to financial planners In addition not all investment advisers broker-dealers or insurance agents are financial planners

As noted earlier the activities a financial planner normally engages in generally include advice related to securitiesmdashand such activities make financial planners subject to regulation under the Advisers Act One industry association and an academic expert noted that it would be very difficult to provide financial planning services without offering investment

Page 12 GAO-11-235 Consumer Finance

advice or considering securities SEC staff told us that financial planners holding even broad discussions of securitiesmdashfor example what proportion of a portfolio should be invested in stocksmdashwould be required to register as investment advisers or investment adviser representatives In theory a financial planner could offer only services that do not fall under existing regulatory regimesmdashfor example advice on household budgetingmdashbut such an example is likely hypothetical and such a business model may be hard to sustain SEC and NASAA staff a majority of the state securities regulators we spoke with and many representatives of the financial services industry told us that they were not aware of any individuals serving as financial planners who were not regulated as investment advisers or regulated under another regulatory regime Some regulators and industry representatives also said that to the extent that financial planners offered services that did not fall under such regulation the new Bureau of Consumer Financial Protection potentially could have jurisdiction over such services27

However not everyone agreed that regulation of financial planners was comprehensive One group the Financial Planning Coalition has argued that a regulatory gap exists because no single law governs the delivery of the broad array of financial advice to the public28 According to the coalition the provision of integrated financial advicemdashwhich would cover topics such as selecting and managing investments income taxes saving for college home ownership retirement insurance and estate planningmdash is unregulated Instead the coalition says that there is patchwork regulation of financial planning advice and it views having two sets of lawsmdashone regulating the provision of investment advice and another regulating the sale of productsmdashas problematic

27Section 1011 of the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate ldquothe offering and provision of consumer financial products or services under the Federal consumer financial lawsrdquo A financial product or service is defined in section 1002(15)(A)(viii) of the act to include financial advisory services to consumers on individual financial matters with the exception of advisory services related to securities provided by a person regulated by SEC or a state securities commission to the extent that such person acts in a regulated capacity Accordingly it appears that the bureau may have jurisdiction over financial planners to the extent that they may offer services that would not be under the jurisdiction of SEC or a state securities commission

28The members of this coalition include the Certified Financial Planner Board of Standards Inc the Financial Planning Association and the National Association of Personal Financial Advisors

Page 13 GAO-11-235 Consumer Finance

In addition although the regulatory structure itself for financial planners may generally be comprehensive attention paid to enforcing existing statute and regulation has varied For example as noted earlier due to resource constraints the examination of SEC-supervised investment advisers is infrequent Further as also noted earlier market conduct regulation of insurersmdashwhich would include the examination of the sales practices and behavior of financial planners selling insurance productsmdash has been inconsistent Some representatives of industry associations told us that they believed that a better alternative to additional regulation of financial planners would be increased enforcement of existing law and regulation particularly related to fraud and unfair trade practices

Certain professionalsmdashincluding attorneys certified public accountants broker-dealers and teachersmdashwho provide financial planning advice are exempt from regulation under the Advisers Act if such advice is ldquosolely incidentalrdquo to their other business activities29 According to an SEC staff interpretation this exemption would not apply to individuals who held themselves out to the public as providing financial planning services and would apply only to individuals who provided specific investment advice on anything other than ldquorare isolated and non-periodic instancesrdquo30 Banks and bank employees are also excluded from the Advisers Act and are subject to separate banking regulation31 The American Bankers Association told us that the financial planning activities of bank employees such as trust advisors or wealth managers were typically utilized by clients with more than $5 million in investable assets The association noted that these activities were subject to a fiduciary standard and the applicable supervision of federal and state banking regulators

Most regulators and academic experts and many financial services industry representatives we spoke with told us that there is some overlap in the regulation of individuals who serve as financial planners because

2915 USC sect 80b-2(a)(11) IA Rel No 1092(II)(B) at 38403 Under 15 USC sect 80bshy2(a)(11)(C) brokers and dealers also cannot receive any special compensation for their services in order to be exempt from registration as an investment adviser

30Id

31Id The Advisers Act excludes bank and bank holding companies from the definition of

investment adviser Further a bank and a bank holding company is an investment adviser under the act to the extent that the bank or bank holding company serves or acts as an adviser to a registered investment company If such services are performed in a separate department or division of a bank the department or division and not the bank itself is the investment adviser

Page 14 GAO-11-235 Consumer Finance

such individuals might be subject to oversight by different regulatory bodies for the different services they provide For example a financial planner who recommends and sells variable annuities as part of a financial plan is regulated as a registered representative of a broker-dealer as well as an insurance agent under applicable federal and state laws However some state regulators we spoke with told us that such overlap may be appropriate since the regulatory regimes cover different functional areas

Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products

As seen in figure 3 financial planners are subject to different standards of care in their capacities as investment advisers broker-dealers and insurance agents

bull Fiduciary Standard of Care As noted earlier investment advisers are subject to a fiduciary standard of caremdashthat is they must act in their clientrsquos best interest ensure that recommended investments are suitable for the client and disclose to the client any material conflicts of interest32

According to SEC and NASAA representatives the fiduciary standard applies even when investment advisers provide advice or recommendations about products other than securities such as insurance in conjunction with advice about securities

bull Suitability Standard of Care When Recommending Security Products FINRA regulation requires broker-dealers to adhere to a suitability standard when rendering investment recommendationsmdashthat is they must recommend only those securities that they reasonably believe are suitable for the customer33 Unlike the fiduciary standard suitability rules do not necessarily require that the clientrsquos best interest be served According to FINRA staff up-front general disclosure of a broker-dealerrsquos business activities and relationships that may cause conflicts of interest is not

32The SEC has in effect established rules of conduct for investment advisers including requirements for disclosing conflicts of interest obtaining the best execution on behalf of clients allocating investments among clients fairly ensuring that investments are suitable for clients and ensuring that there is a reasonable basis for recommendations SEC also requires investment advisers to maintain records pertaining to client accounts and business operations

33A broker-dealer must have an adequate and reasonable basis for any recommendation and must make recommendations based on a customerrsquos financial situation needs and other securities holdings

Page 15 GAO-11-235 Consumer Finance

required34 However according to SEC broker-dealers are subject to many FINRA rules that require disclosure of conflicts in certain situations although SEC staff also note that those rules may not cover every possible conflict of interest and disclosure may occur after conflicted advice has already been given35

bull Suitability Standard of Care When Recommending Insurance Products Standards of care for the recommendation and sale of insurance products vary by product and by state For example as seen earlier NAICrsquos model regulations on the suitability standard for annuity transactions adopted by some states but not others require consideration of the insurance needs and financial objectives of the customer while NAICrsquos model regulation for life insurance does not include a suitability requirement per se

34Letter from Marc Menchel Executive Vice President and General Counsel FINRA to Elizabeth M Murphy Secretary SEC 4 (Aug 25 2010) available at httpwwwfinraorgwebgroupsindustryipregguidedocumentsindustryp121983p df

35The standards of conduct for broker-dealers may also be based on antifraud provisions of the securities law and agency principles Broker-dealers also have a duty of fairness in their contracts with a customer which requires them to disclose material information that the customer would consider important as an investor In addition broker-dealers that handle discretionary accounts are generally thought to owe fiduciary obligations to their customers

Page 16 GAO-11-235 Consumer Finance

Figure 3 Differences in the Standards of Care Required of Financial Planners

Financial planner

Capacity

Investment adviser Broker-dealer Insurance agent

Fiduciary Suitability Varies by product and by state insurance law

Standard of care

bull Person has an affirmative duty to render services solely in the best interests of clients

bull Requires advisers to disclose material conflicts of interest to clients

bull Rules require standard of care that includes among other things rendering

investment recommendations that are suitable for customers

bull Requires insurance agents to follow suitability standards when state has adopted such standards for products

Financial planning service covered by standard of care

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for the purchase or sale of specific securities products

bull Recommendations for the purchase of insurance products

bull Recommendations for the purchase of variable insurance (variable annuities variable life insurance)

Customer

Source GAO

Note This figure is illustrative and is not comprehensive financial planners may serve in capacities other than those shown here and not all investment advisers broker-dealers and insurance agents serve as financial planners

Conflicts of interest can exist when for example a financial services professional earns a commission on a product sold to a client Under the fiduciary standard applicable to investment advisers financial planners must mitigate any potential conflicts of interest and disclose any that remain But under a suitability standard applicable to broker-dealers conflicts of interest may exist and generally may not need to be disclosed

Page 17 GAO-11-235 Consumer Finance

up-front36 For example as confirmed by FINRA financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission as long as the product is suitable and the broker-dealer complies with other requirements Because the same individual or firm can offer a variety of services to a clientmdasha practice sometimes referred to as ldquohat switchingrdquomdashthese services could be subject to different standards of care As such representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care if any applies to a financial professional As shown above the standards of caremdashand the extent to which conflicts of interest must be disclosedmdashcan vary depending on the capacity in which the individual serves37 A 2007 report by the Financial Planning Association stated that ldquoit would be difficult if not impossible for an individual investor to discern when the adviser was acting in a fiduciary capacity or in a non-fiduciary capacityrdquo38 A 2008 SEC study conducted by the RAND Corporation consisting of a national household survey and six focus group discussions with investors found that consumers generally did not understand not only the distinction between a suitability and fiduciary standard of care but also the differences between broker-dealers and investment advisers39 Similarly a 2010 national study of investors found that most were confused about which financial professionals are required to operate under a fiduciary standard that requires professionals to put their clientrsquos interest ahead of their own40

36FINRA officials have stated that they believe that the regulation of broker-dealersmdashwhile lacking an express fiduciary dutymdashprescribes in great detail the conduct and supervision of broker-dealers who provide investment advice to retail customers

37Blackrsquos Law Dictionary (9th ed 2009) defines the term ldquoconflict of interestrdquo as a ldquoreal or seeming incompatibility between onersquos private interests and onersquos public or fiduciary dutiesrdquo

38Final Report on Financial Planner Standards of Conduct FPA Fiduciary Task Force

June 2007

39Angela A Hung et al RAND Institute for Civil Justice Investor and Industry

Perspectives on Investment Advisers and Broker-Dealers (2008)

40Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010 The survey was conducted among a sample of 2012 adults living in the continental United States including 1319 who identified themselves as investors The survey was sponsored by AARP the Consumer Federation of America NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors

Page 18 GAO-11-235 Consumer Finance

Representatives of financial services firms that provide financial planning told us they believe that clients are sufficiently informed about the differing roles and accompanying standards of care that a firm representative may have They noted that when they provide both advisory and transactional services to the same customer each servicemdashsuch as planning brokerage or insurance salesmdashis accompanied by a separate contract or agreement with the customer These agreements disclose that the firmrsquos representatives have different obligations to the customer depending on their role In addition once a financial plan has been provided some companies told us that they have customers sign an additional agreement stating that the financial planning relationship with the firm has ended

Recent revisions by SEC to Form ADV disclosure requirements were designed to address among other things consumer understanding of potential conflicts of interest by investment advisers and their representatives Effective October 12 2010 SEC revised Form ADV Part 2 which financial service firms must provide to new and prospective clients41 The new form which must be written in plain English is intended to help consumers better understand the activities and affiliations of their investment adviser It requires additional disclosu res about a firmrsquos conflicts of interest compensation business activities and disciplinary information that is material to an evaluation of the adviser rsquos integrity Similarly in October 2010 FINRA issued a regulatory notice requesting comments on a concept proposal regarding possible new disclosure requirements that would among other things detail for consumers in plain English the conflicts of interest that broker-dealers may have associated with their services42

Section 913 of the Dodd-Frank Act requires SEC to study the substantive differences between the applicable standards of care for broker-dealers and investment advisers the effectiveness of the existing legal or regulatory standards of care for brokers dealers and investment advisers and consumersrsquo ability to understand the different standards of care SEC

41Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (requires investment advisers registered with SEC to provide new and prospective clients with a brochure and brochure supplements clearly setting forth a meaningful current disclosure of the business practices conflicts of interest and background of the investment adviser and its advisory personnel and requires the brochures to be filed with SEC electronically which will make them available to the public through its Web site)

42FINRA Regulatory Notice 10-54

Page 19 GAO-11-235 Consumer Finance

will also consider the potential impact on retail customers of imposing the same fiduciary standard that now applies to investment advisers on broker-dealers when they provide personalized investment advice Under the act SEC may promulgate rules to address these issues and is specifically authorized to establish a uniform fiduciary duty for broker-dealers and investment advisers that provide personalized investment advice about securities to customers As a result further clarification of these standards may be forthcoming FINRA officials told us that they support a fiduciary standard of care for broker-dealers when they provide personalized investment advice to retail customers

Consumer confusion on standards of care may also be a source of concern with regard to the sale of some insurance products A 2010 national survey of investors found that 60 percent mistakenly believed that insurance agents had a fiduciary duty to their clients43 Some insurance products such as annuities are complex and can be difficult to understand and annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators as well as SEC and FINRA for many years44 According to NAIC many states have requirements that insurance salespersons sell annuities only if the product is suitable for the customer However NAIC notes that some states do not have a suitability requirement for annuities Consumer groups and others have stated that high sales commissions on certain insurance products including annuities may provide salespersons with a substantial financial incentive to sell these products which may or may not be in the consumerrsquos best interest As a result of section 989J of the Dodd-Frank Act one type of annuitymdashthe indexed annuitymdashis to be regulated by states as an insurance product rather than regulated by SEC as a security under certain conditions45

SECrsquos pending study related to the applicable standards of care for broker-dealers and investment advisers will not look at issues of insurance that

43Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010

44See for example Securities and Exchange Commission Rule 151A and Annuities Issues and Legislation CRS Report for Congress 7-7500 (July 29 2010)

45State regulation applies so long as a state has adopted NAICrsquos Suitability in Annuity Transactions model regulation or if an insurance company adopts and implements practices on a nationwide basis that meet or exceed the minimum requirements established by NAICrsquos model regulation Indexed annuities are products that guarantee a purchaserrsquos principal and a certain rate of return and offer a chance for additional returns linked to a securities index or indices

Page 20 GAO-11-235 Consumer Finance

fall outside of SECrsquos jurisdiction NAIC has not undertaken a similar study regarding consumer understanding of the standard of care for insurance agents As we reported in the past financial markets function best when consumers understand how financial service providers and products work and know how to choose among them46 Given the evidence of consumer confusion about differing standards of care and given the increased risks that certain insurance products can pose there could be benefits to an NAIC review of consumersrsquo understanding of standards of care for high-risk insurance products

Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public

Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public including financial planner financial consultant and financial adviser among many others However evidence suggests that the different titles financial professionals use can be confusing to consumers The 2008 RAND study found that even experienced investors were confused about the titles used by broker-dealers and investment advisers including financial planner and financial adviser Similarly in consumer focus groups of investors conducted by SEC in 2005 as part of a rulemaking process participants were generally unclear about the distinctions among titles including broker investment adviser and financial planner47 In addition a representative of one consumer advocacy group has expressed concern that some financial professionals may use as a marketing tool titles suggesting that they provide financial planning services when in fact they are only selling products One industry group the Financial Planning Coalition also has noted that some individuals may hold themselves out as financial planners without meeting minimum training or ethical requirements Federal and state regulators told us they generally focused their oversight and enforcement actions on financial plannersrsquo activities rather than the titles they use Moreover NASAA has said that no matter what title financial planners use most are required to register as investment adviser representatives and must satisfy certain competency requirements

46GAO Financial Regulation A Framework for Crafting and Assessing Proposals to

Modernize the Outdated US Financial Regulatory System GAO-09-216 (Washington DC Jan 8 2009)

47Results of Investor Focus Group Interviews About Proposed Brokerage Account

Disclosures Report to the Securities and Exchange Commission by Siegel amp Gale LLC and Gelb Consulting Group Inc Mar 10 2005

Page 21 GAO-11-235 Consumer Finance

including passing an examination or obtaining a recognized professional designation48

Financial plannersrsquo professional designations are typically conferred by a professional or trade organization These designations may indicate that a planner has passed an examination met certain educational requirements or had related professional experience Some of these designations require extensive classroom training and examination requirements and include codes of ethics with the ability to remove the designation in the event of violations State securities regulators view five specific designations as meeting or exceeding the registration requirements for investment adviser representatives according to NASAA and allow these professional designations to satisfy necessary competency requirements for prospective investment adviser representatives49 For example one of these five designations requires a bachelorrsquos degree from an accredited college or university 3 years of full-time personal financial planning experience a certification examination and 30 hours of continuing education every 2 years

The criteria used by organizations that grant professional designations for financial professionals vary greatly FINRA has stated that while some designations require formal certification procedures including examinations and continuing professional education credits others may merely signify that membership dues have been paid The Financial Planning Coalition and The American College a nonprofit educational institution that confers several financial designations similarly told us that privately conferred designations range from those with rigorous competency practice and ethical standards and enforcement to those that can be obtained with minimal effort and no ongoing evaluation

48According to NASAA all but three statesmdashNew York Minnesota and Wyomingmdashregister investment adviser representatives and require that they pass either the Series 65 (Uniform Investment Adviser Law Examination) or the Series 66 (Uniform Combined State Law Examination) or obtain a recognized professional designation While New York and Minnesota do not register individual investment adviser representatives their state laws require that the representatives meet other requirements such as passing certain examinations or obtaining a professional designation accepted by the state

49The five designations recognized as such are Certified Financial Plannerreg Chartered Financial Consultantreg Personal Financial Specialist Chartered Financial Analyst and Chartered Investment Counselor

Page 22 GAO-11-235 Consumer Finance

As noted earlier designations that imply expertise or special training in advising senior citizen or elderly investors have received particular attention from regulators A joint report of SEC FINRA and NASAA described cases in which financial professionals targeted seniors by using senior-specific designations that implied that they had a particular expertise for senior investors when in fact they did not as noted earlier NASAA and NAIC have developed a model rule to address the issue50 The report also noted these professionals targeted seniors through the use of so-called free-lunch seminars where free meals are offered in exchange for attendance of a financial education seminar However the focus of the seminars was actually on the sale of products rather than the provision of financial advice

Given the large number of designations financial planners may use concerns exist that consumers may have difficulty distinguishing among them To alleviate customer confusion FINRA has developed a Web site for consumers that provides the required qualifications and other information about the designations used by securities professionals The site lists more than 100 professional designations 5 of which include the term ldquofinancial plannerrdquo and 24 of which contain comparable terms such as financial consultant or counselor51 The American College told us that it had identified 270 financial services designations Officials from NASAA NAIC and a consumer advocacy organization told us that consumers might have difficulty distinguishing among the various designations Officials from The American College told us that the number of designations itself was not necessarily a cause for concern but rather consumersrsquo broadly held misperception that all designations or credentials are equal

To help address these concerns FINRA plans to expand its Web site on professional designations to include several dozen additional designations related to insurance However FINRA officials noted that consumersrsquo use of this tool has been limited For example in 2009 the site received only 55765 visits A recent national study of the financial capability of American adults sponsored by FINRA found that only 15 percent of adults

50Protecting Senior Investors Report of Examinations of Securities Firms Providing

ldquoFree Lunchrdquo Sales Seminars by the Office of Compliance Inspections and Examination Securities and Exchange Commission North American Securities Administrators Association and the Financial Industry Regulatory Authority September 2007

51See httpappsfinraorgDataDirectory1prodesignationsaspx

Page 23 GAO-11-235 Consumer Finance

who had used a financial professional in the last 5 years claimed to have checked the background registration or license of a financial professional52 In addition SEC staff acknowledged that there have been concerns about confusing designations and SECrsquos October 2010 changes to investment adviser disclosure requirements mandate that investment adviser representatives who list professional designations and certifications in their background information also provide the qualifications needed for these designations so that the consumer can understand the value of the designation for the services being provided

Section 917 of the Dodd-Frank Act includes a requirement that SEC conduct a study identifying the existing level of financial literacy among retail investors including the most useful and understandable relevant information that they need to make informed financial decisions before engaging a financial intermediary While the section does not specifically mention the issue of financial plannersrsquo titles and designations the confusion we found to exist could potentially be addressed or mitigated if SEC incorporated this issue into its overall review of financial literacy among investors SEC staff told us that at this time its review would not likely address this issue although it would address such things as the need for conducting background checks on financial professionals Financial markets function best when consumers have information sufficient to understand and assess financial service providers and products53

Including financial plannersrsquo use of titles and designations in SECrsquos financial literacy review could provide useful information on the implications of consumersrsquo confusion on this issue

Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners

Available data do not show a large number of consumer complaints and enforcement actions involving financial planners but the exact extent to which financial planners may be a source of problems is unknown We were able to find limited information on consumer complaints from various agencies For example representatives of FTC and the Better Business Bureau said that they had received relatively few complaints related to financial planners FTC staff told us that a search in its Consumer Sentinel Network database for the phrase ldquofinancial plannerrdquo

52Applied Research amp Consulting LLC Financial Capability in the United States Initial

Report of the Research Findings from the 2009 National Survey prepared for the FINRA Investor Education Foundation (New York December 2009)

53GAO-09-216

Page 24 GAO-11-235 Consumer Finance

found 141 complaints in the 5-year period from 2005 through 2010 but that only a handful of these appeared to actually involve activity connected to the financial planning profession54 The staff added that additional searches on other titles possibly used by financial planners such as financial consultant and personal financial adviser did not yield significant additional complaints In addition a representative of the Better Business Bureau told us that it had received relatively few complaints related to financial planners although the representative noted that additional complaints might exist in broader categories such as ldquofinancial servicesrdquo

Consumer complaint data may not be an accurate gauge of the extent of problems Complaints may represent only a small portion of potential problems and complaints related to ldquofinancial plannersrdquo may not always be recorded as such As we have previously reported consumers also may not always know where they can report complaints55 At the same time some complaints that are made may not always be valid

SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm The agency does record and track whether federally and state-registered investment adviser firms provide financial planning services but its data tracking systems for complaints examination results and enforcement actions are not programmed to readily determine and track whether the complaint result or action was specifically related to a financial planner or financial planning service For example SEC staff told us the number of complaints about financial planners would be undercounted in their data system that receives and tracks public inquiries known as the Investor Response Information System because this code would likely be used only if it could not be identified whether the person (or firm) was an investment adviser or broker-dealer In addition the data system that SEC uses to record examination results known as the Super Tracking and Reporting System

54The Consumer Sentinel Network database is a secure online database of millions of consumer complaints available only to law enforcement In addition to storing complaints received by FTC the Consumer Sentinel Network also includes complaints filed with the Internet Crime Complaint Center Better Business Bureaus Canadarsquos PhoneBusters the US Postal Inspection Service the Identity Theft Assistance Center and the National Fraud Information Center among others

55GAO Telecommunications FCC Needs to Improve Oversight of Wireless Phone Service GAO-10-34 (Washington DC November 2009) p 18

Page 25 GAO-11-235 Consumer Finance

does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers

However SEC staff told us that a review of its Investor Response Information System identified 51 complaints or inquiries that had been recorded using their code for issues related to ldquofinancial plannersrdquo between November 2009 and October 2010 SEC staff told us that the complaints most often involved allegations of unsuitable investments or fraud such as misappropriation of funds56 A review of a separate SEC database called Tips Complaints and Referralsmdashan interim system that was implemented in March 2010mdashfound 124 allegations of problems possibly related to financial planners from March 2010 to October 201057

SEC staff told us that they did not have comprehensive data on the extent of enforcement activities related to financial planners per se In addition NASAA said that states generally do not track enforcement data specific to financial planners At our request SEC and NASAA provided us with examples of enforcement actions related to individuals who held themselves out as financial planners Using a keyword search SEC identified 10 such formal enforcement actions between August 2009 and August 2010 According to SEC documents these cases involved allegations of such activities as defrauding clients through marketing schemes receiving kickbacks without making proper disclosures and misappropriation of client funds Although NASAA also did not have comprehensive data on enforcement activities involving financial planners representatives provided us with examples of 36 actions brought by 30 states from 1986 to 2010 These cases involved allegations of such things as the sale of unsuitable products fraudulent misrepresentation of qualifications failure to register as an investment adviser and misuse of client funds for personal expenses

56Of these 51 complaints or inquiries 29 involved allegations of fraud 9 involved allegations of unsuitable investments and the remaining 13 represented questions on a variety of topics

57Of these 124 allegations 13 were coded as ldquofraudulent or unregistered offer or sale of securities including Ponzi schemes high yield investment programs or other investment programsrdquo 12 as ldquomanipulation of a securityrsquos price or volumerdquo 6 as ldquotheft or misappropriation of funds or securitiesrdquo 5 as ldquofalse or misleading statements about a companyrdquo 3 as ldquoproblems with my brokerage or advisory accountrdquo and 2 as ldquoinsider tradingrdquo An additional 14 were coded as ldquoother fraudulent conductrdquo and 69 were coded simply as ldquootherrdquo

Page 26 GAO-11-235 Consumer Finance

Because of limitations in how data are gathered and tracked SEC and state securities regulators are not currently able to readily determine the extent to which financial planning services may be causing consumers harm NASAA officials told us that as with SEC state securities regulators did not typically or routinely track potential problems specific to financial planners SEC and NASAA representatives told us that they had been meeting periodically in recent months to prepare for the transition from federal to state oversight of certain additional investment adviser firms as mandated under the Dodd-Frank Act but they said that oversight of financial planners in particular had not been part of these discussions SEC staff have noted that additional tracking could consume staff time and other resources They also said that because there are no laws that directly require registration recordkeeping and other responsibilities of ldquofinancial plannersrdquo per se tracking such findings relating to those entities would require expenditure of resources on something that SEC does not have direct responsibility to oversee Yet as we have reported in the past while we recognize the need to balance the cost of data collection efforts against the usefulness of the data a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking58 Given the significant growth in the financial planning industry ongoing concerns about potential conflicts of interest and consumer confusion about standards of care regulators may benefit from identifying ways to get better information on the extent of problems specifically involving financial planners and financial planning services

58GAO Managing for Results Using GPRA to Help Congressional Decisionmaking and

Strengthen Oversight GAOT-00-95 (Washington DC March 2000) p 13 GAO Executive

Guide Effectively Implementing the Government Performance and Results Act GAOGGD-96-118 (Washington DC June 1996) p 27

Page 27 GAO-11-235 Consumer Finance

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed

Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners

Creation of a Board to Oversee Financial Planners

Over the past few years a number of stakeholdersmdashincluding consumer groups FINRA and trade associations representing financial planners securities firms and insurance firmsmdashhave proposed different approaches to the regulation of financial planners Following are four of the most prominent approaches each of which has both advantages and disadvantages

In 2009 the Financial Planning Coalitionmdashcomprised of the Certified Financial Planner Board of Standards Financial Planning Association and the National Association of Personal Financial Advisorsmdashproposed that Congress establish a professional standards-setting oversight board for financial planners According to the coalition its proposed legislation would establish federal regulation of financial planners by allowing SEC to recognize a financial planner oversight board that would set professional standards for and oversee the activities of individual financial planners although not financial planning firms For example the board would have the authority to establish baseline competency standards in the areas of education examination and continuing education and would be required to establish ethical standards designed to prevent fraudulent and manipulative acts and practices It would also have the authority to require registration or licensing of financial planners and to perform investigative and disciplinary actions Under the proposal states would retain antifraud authority over financial planners as well as full oversight for financial plannersrsquo investment advisory activity However states would not be allowed to impose additional licensing or registration requirements for financial planners or set separate standards of conduct Supporters of a new oversight board have noted that its structure and governance would be analogous to the Public Company Accounting Oversight Board a private nonprofit organization subject to SEC oversight that in turn oversees the audits of public companies that are subject to securities laws

Page 28 GAO-11-235 Consumer Finance

Augmenting Oversight of Investment Advisers with an SRO

According to the Financial Planning Coalition a potential advantage of this approach is that it would treat financial planning as a distinct profession and would regulate across the full spectrum of activities in which financial planners may engage including activities related to investments taxes education retirement planning estate planning insurance and household budgeting Proponents argue that a financial planning oversight board would also help ensure high standards and consistent regulation for all financial planners by establishing common standards for competency professional practices and ethics

However many securities regulators and financial services trade associations with whom we spoke said that they believe such a board would overlap with and in many ways duplicate existing state and federal regulations which already cover virtually all of the products and services that a financial planner provides Some added that the board would entail unnecessary additional financial costs and administrative burdens for the government and regulated entities In addition some opponents of this approach question whether ldquofinancial planningrdquo should be thought of as a distinct profession that requires its own regulatory structure noting that financial planning is not easily defined and can span multiple professions including accounting insurance investment advice and law One consumer group also noted that the regulation of individuals and professions is typically a state rather than a federal responsibility Finally we note that the analogy to the Public Company Accounting Oversight Board may not be apt That board was created in response to a crisis involving high-profile bankruptcies and investor losses caused in part by inadequacies among public accounting firms In the case of financial planners there is limited evidence of an analogous crisis or as noted earlier of severe harm to consumers

A number of proposals over the years have considered having FINRA or a newly created SRO supplement SEC oversight of investment advisers These proposals date back to at least 1963 when an SEC study recommended that all registered investment advisers be required to be a

Page 29 GAO-11-235 Consumer Finance

member of an SRO59 In 1986 the National Association of Securities Dealers a predecessor to FINRA explored the feasibility of examining the investment advisory activities of members who were also registered as investment advisers The House of Representatives passed a bill in 1993 that would have amended the Advisers Act to authorize the creation of an ldquoinspection onlyrdquo SRO for investment advisers although the bill did not become law60 In 2003 SEC requested comments on whether one or more SROs should be established for investment advisers citing among other reasons concerns that the agencyrsquos own resources were inadequate to address the growing numbers of advisers61 However SEC did not take further action Section 914 of the Dodd-Frank Act required SEC to issue a study in January 2011 on the extent to which one or more SROs for investment advisers would improve the frequency of examinations of investment advisers62

According to FINRA the primary advantage of augmenting investment adviser oversight with an SRO is that doing so would allow for more frequent examinations given the limited resources of states and SEC The Financial Services Institute an advocacy organization for independent broker-dealers and financial advisers has stated that an industry-funded SRO with the resources necessary to appropriately supervise and examine all investment advisers would close the gap that exists between the regulation of broker-dealers and investment advisers FINRA said that it finds this gap troubling given the overlap between the two groups (approximately 88 percent of all registered advisory representatives are also broker-dealer representatives) FINRA adds that any SRO should operate subject to strong SEC oversight and that releasing SEC of some of its responsibilities for investment advisers would free up SEC resources for other regulatory activities

59See Securities and Exchange Commission News Digest Issue No 63-4-3 8 (1963) which describes SECrsquos report to Congress regarding the adequacy of the rules of national securities exchanges and national securities associations pursuant to Pub L No 87-196 75 Stat 465 (1961) wherein SEC points out that the framework of industry self-regulation permitted many broker-dealer firms and registered investment advisers to remain outside of any official self-regulatory group According to the SEC News Digest the report suggested that membership in an SRO should be a prerequisite to registration with SEC as a broker-dealer or investment adviser

60HR 578 103rd Cong (1993)

61Investment Advisers Act Release No 2107 68 Fed Reg 7038 (Feb 11 2003)

62SEC is required to report the results of its study within 180 days of enactment of the Dodd-Frank Act

Page 30 GAO-11-235 Consumer Finance

Extending Coverage of the Fiduciary Standard

However NASAA some state securities regulators and one academic with whom we spoke opposed adding an SRO component to the regulatory authority of investment advisers NASAA said it believed that investment adviser regulation is a governmental function that should not be outsourced to a private third-party organization that lacks the objectivity independence expertise and experience of a government regulator Further NASAA said it is concerned with the lack of transparency associated with regulation by SROs because unlike government regulators they are not subject to open records laws through which the investing public can obtain information Two public interest groups including the Consumer Federation of America have asserted that one SROmdashFINRAmdash has an ldquoindustry mindsetrdquo that has not always put consumer protection at the forefront In addition the Investment Adviser Association and two other organizations we interviewed have noted that funding an SRO and complying with its rules can impose additional costs on a firm63

Proposals have been made to extend coverage of the fiduciary standard of care to all those who provide financial planning services Some consumer groups and others have stated that a fiduciary standard should apply to anyone who provides personalized investment advice about securities to retail customers including insurance agents who recommend securities The Financial Planning Coalition has proposed that the fiduciary standard apply to all those who hold themselves out as financial planners Proponents of extending the fiduciary standard of care which also include consumer groups and NASAA generally maintain that consumers should be able to expect that financial professionals they work with will act in their best interests They say that a fiduciary standard is more protective of consumersrsquo interests than a suitability standard which requires only that a product be suitable for a consumer rather than in the consumerrsquos best interest In addition the Financial Planning Coalition notes that extending a fiduciary standard would somewhat reduce consumer confusion about financial planners that are covered by the fiduciary standard in some capacities (such as providing investment advice) but not in others (such as selling a product)

However some participants in the insurance and broker-dealer industries have argued that a fiduciary standard of care is vague and undefined They say that replacing a suitability standard with a fiduciary standard could

63The Investment Adviser Association is a not-for-profit association that represents the interests of SEC-registered investment adviser firms

Page 31 GAO-11-235 Consumer Finance

Clarifying Financial Plannersrsquo Credentials and Standards

actually weaken consumer protections since the suitability of a product is easier to define and enforce Opponents also have argued that complying with a fiduciary standard would increase compliance costs that in turn would be passed along to consumers or otherwise lead to fewer consumer choices

The American College has proposed clarifying the credentials and standards of financial professionals including financial planners In particular it has proposed creating a working group of existing academic and practice experts to establish voluntary credentialing standards for financial professionals As noted previously consumers may be unable to distinguish among the various financial planning designations that exist and may not understand the requirements that underpin them Clarifying the credentials and standards of financial professionals could conceivably take the form of prohibiting the use of certain designations as has been done for senior-specific designations in some states or establishing minimum education testing or work experience requirements needed to obtain a designation The American College has stated that greater oversight of such credentials and standards could provide a ldquoseal of approvalrdquo that would generally raise the quality and competence of financial professionals including financial planners help consumers distinguish among the various credentials and help screen out less qualified or reputable players

However the ultimate effectiveness of such an approach is not clear since the extent to which consumers take designations into account when selecting or working with financial planners is unknown as is the extent of the harm caused by misleading designations In addition implementation and ongoing monitoring of financial plannersrsquo credentials and standards could be challenging Further the issue of unclear designations has already been addressed to some extentmdashfor example as noted earlier some states regulate the use of certain senior-specific designations and allow five professional designations to satisfy necessary competency requirements for prospective investment adviser representatives State securities regulators also have the authority to pursue the misleading use of credentials through their existing antifraud authority

Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners

In general a majority of the regulatory agencies consumer groups academics trade associations and individual financial services companies with which we spoke did not favor substantial structural change in the regulation of financial planners In particular few supported an additional oversight body which was generally seen as duplicative of existing regulation Some stakeholders in the securities and insurance industries

Page 32 GAO-11-235 Consumer Finance

Conclusions

noted that given the dynamic financial regulatory environment under way as a result of the Dodd-Frank Actmdashsuch as creation of a new Bureau of Consumer Financial Protectionmdashmore time should pass before additional regulatory changes related to financial planning services were considered Several industry associations also noted that opportunities existed for greater enforcement of existing law and regulation as discussed earlier

Existing statutes and regulations appear to cover the great majority of financial planning services and individual financial planners nearly always fall under one or more regulatory regimes depending on their activities While no single law governs the broad array of activities in which financial planners may engage given available information it does not appear that an additional layer of regulation specific to financial planners is warranted at this time At the same time as we have previously reported more robust enforcement of existing laws could strengthen oversight efforts In addition there are some actions that can be taken that may help address consumer protection issues associated with the oversight of financial planners

First as we have reported financial markets function best when consumers understand how financial providers and products work and know how to choose among them Yet consumers may be unclear about standards of care that apply to financial professionals particularly when the same individual or firm offers multiple services that have differing standards of care As such consumers may not always know whether and when a financial planner is required to serve their best interest While SEC is currently addressing the issue of whether the fiduciary standard of care should be extended to broker-dealers when they provide personalized investment advice about securities the agency is not addressing whether this extension should also apply to insurance agents who generally fall outside of SECrsquos jurisdiction Sales practices involving some high-risk insurance products such as annuities have drawn attention from federal and state regulators A review by NAIC of consumersrsquo understanding of the standards of care with regard to the sale of insurance products could provide information on the extent of consumer confusion in the area and actions needed to address the issue

Second we have seen that financial planners can adopt a variety of titles and designations The different designations can imply different types of qualifications but consumers may not understand or distinguish among these designations and thus may be unable to properly assess the qualifications and expertise of financial planners SECrsquos recent changes in this areamdashrequiring investment advisers to disclose additional information

Page 33 GAO-11-235 Consumer Finance

on professional designations and certifications they listmdashshould prove beneficial Another opportunity lies in SECrsquos mandated review of financial literacy among investors Incorporating issues of consumer confusion about financial plannersrsquo titles and designations into that review could assist the agency in assessing whether any further changes are needed in disclosure requirements or other related areas

Finally SEC has limited information about the nature and extent of problems specifically related to financial planners because it does not track complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole However a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking SEC staff have noted that additional tracking could require additional resources but other opportunities may also exist to gather additional information on financial planners Because financial planning is a growing industry and has raised certain consumer protection issues regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services

Recommendations We recommend that the National Association of Insurance Commissioners in concert with state insurance regulators take steps to assess consumersrsquo understanding of the standards of care with regard to the sale of insurance products such as annuities and take actions as appropriate to address problems revealed in this assessment

We also recommend that the Chairman of the Securities and Exchange Commission direct the Office of Investor Education and Advocacy Office of Compliance Inspections and Examinations Division of Enforcement and other offices as appropriate to

bull Incorporate into SECrsquos ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumersrsquo investment decisions and

bull Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services and take actions to address any problems that are identified

Page 34 GAO-11-235 Consumer Finance

Agency Comments We provided a draft of this report for review and comment to FINRA NAIC NASAA and SEC These organizations provided technical comments which we incorporated as appropriate In addition NAIC provided a written response which is reprinted in appendix II NAIC said it generally agreed with the contents of the draft report and would give consideration to our recommendation regarding consumersrsquo understanding of the standards of care with regard to the sale of insurance products

NASAA also provided a written response which is reprinted in appendix III In its response NASAA said it agreed that a specific layer of regulation for financial planners was unnecessary and provided additional information on some aspects of state oversight of investment advisers NASAA also said that it welcomed the opportunity to continue to collaborate with SEC to identify methods to better understand and address problems specifically involving financial planners as we recommended In addition NASAA expanded upon the reasons for its opposition to proposals that would augment oversight of investment advisers with an SRO

We are sending copies of this report to interested congressional committees the Chief Executive Officer of FINRA Chief Executive Officer of NAIC Executive Director of NASAA and the Chairman of SEC In addition the report will be available at no charge on GAOrsquos Web site at httpwwwgaogov

If you or your staffs have any questions about this report please contact me at (202) 512-8678 or cackleyagaogov Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report GAO staff who made major contributions to this report are listed in appendix IV

Alicia Puente Cackley Director Financial Markets

and Community Investment

Page 35 GAO-11-235 Consumer Finance

List of Congressional Addressees

The Honorable Bob Corker The Honorable Tim Johnson The Honorable Herbert Kohl The Honorable Richard C Shelby United States Senate

The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives

Page 36 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

Appendix I Scope and Methodology

Our reporting objectives were to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

For background information we obtained estimates for 2000 and 2008 and projections for 2018 from the Bureau of Labor Statistics on the number of individuals who reported themselves as ldquopersonal financial advisersrdquo a term that the agency said was interchangeable with ldquofinancial plannerrdquo The bureau derived these estimates from the Occupational Employment Statistics survey and the Current Population Survey1

According to the bureau the Occupational Employment Statisticsrsquo estimates for financial planners have a relative standard error of 19 percent and the median wage estimate for May 2009 has a relative standard error of 15 percent Because the overall employment estimates used are developed from multiple surveys it was not feasible for the bureau to provide the relative standard errors for these financial planner employment statistics To estimate the number of households that used financial planners we analyzed 2007 data from the Board of Governors of the Federal Reserversquos Survey of Consumer Finances This survey is conducted every three years to provide detailed information on the finances of US households2 Because the survey is a probability sample based on random selections the sample is only one of a large number of samples that might have been drawn Since each sample could have provided different estimates we express our confidence in the precision of our particular samplersquos results as a 95 percent confidence interval (eg plus or minus 25 percentage points) This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn In this report for this survey all percentage

1As explained by the Bureau of Labor Statistics the Occupational Employment Statistics program produces employment and wage estimates for over 800 occupations These are estimates of the number of people employed in certain occupations and estimates of the wages paid to them Since self-employed persons are not included in the estimates the bureau also considers information from the Current Population Survey a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics to derive its occupation estimates

2Additional information on the sample design and data collected by the Survey of Consumer Finances is available at httpwwwfederalreservegovpubsossoss2abouthtml

Page 37 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

estimates have 95 percent confidence intervals that are within plus or minus 25 percentage points from the estimate itself

To identify how financial planners are regulated and overseen at the federal and state levels we identified and reviewed on the federal level federal laws regulations and guidance applicable to financial planners the activities in which they engage and their marketing materials titles and designations We also reviewed relevant SEC interpretive releases such as IA Rel No 1092 Applicability of the Investment Advisers Act to

Financial Planners Pension Consultants and Other Persons Who

Provide Investment Advisory Services as a Component of Other

Financial Services We also discussed the laws and regulations relevant to financial planners in meetings with staff of the Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) Department of Labor and Internal Revenue Service We also interviewed two legal experts and reviewed a legal compendium on the regulation of financial planners At the state level we interviewed representatives from the North American Securities Administrators Association (NASAA) and the National Association of Insurance Commissioners (NAIC) and reviewed model regulations developed by these agencies In addition we selected five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texasmdashfor a more detailed review We chose these states because they had a large number of registered investment advisers and varying approaches to the regulation of financial planners and represented geographic diversity For each of these states we reviewed selected laws and regulations related to financial planners which included those related to senior-specific designations and insurance transactions and we interviewed staff at each statersquos securities and insurance agencies

To identify what is known about the effectiveness of the regulation of financial planners and what regulatory gaps or overlap may exist we reviewed relevant federal and state laws regulations and guidance In addition we spoke with representatives of the federal and state agencies cited above as well as FINRA and organizations that represent or train financial planners including the Financial Planning Coalition The American College and the CFA Institute organizations that represent the financial services industry including the Financial Services Institute Financial Services Roundtable Securities Industry and Financial Markets Association Investment Advisers Association American Society of Pension amp Professional Actuaries National Association of Insurance and Financial Advisors American Council of Life Insurers Association for Advanced Life Underwriting American Institute of Certified Public Accountants American Bankers Association and organizations

Page 38 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

representing consumer interests including the Consumer Federation of America and AARP We also spoke with selected academic experts knowledgeable about these issues In addition we reviewed relevant studies and other documentary evidence including a 2008 study of the RAND Corporation that was commissioned by SEC ldquoInvestor and Industry Perspectives on Investment Advisers and Broker-Dealersrdquo ldquoResults of Investor Focus Group Interviews About Proposed Brokerage Account Disclosuresrdquo sponsored by SEC results of the FPA Fiduciary Task Force ldquoFinal Report on Financial Planner Standards of Conductrdquo ldquoUS Investors amp The Fiduciary Standard A National Opinion Surveyrdquo sponsored by AARP the Consumer Federation of America the NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors and the 2009 National Financial Capability Study commissioned by FINRA We determined that the reliability of these studies was sufficient for our purposes In addition we reviewed relevant information on the titles and designations used by financial planners including FINRArsquos Web site that provides the required qualifications and other information about the designations used by securities professionals

We also obtained and reviewed available data on complaints and selected enforcement actions related to financial planners from the Federal Trade Commission Better Business Bureau and SEC We collected from the Federal Trade Commission complaint data from its Consumer Sentinel Network database using a keyword search of the term ldquofinancial plannerrdquo for complaints filed from 2005 to 2010 From the Better Business Bureau we collected the number of complaints about the financial planning industry received in 2009 From SEC we collected complaints from the agencyrsquos Investor Response Information System that had been coded as relating to ldquofinancial plannersrdquo from November 2009 to October 2010 We also reviewed data from SECrsquos Tips Complaints and Referrals database that resulted from a keyword search for the terms ldquofinancial plannerrdquo ldquofinancial adviserrdquo ldquofinancial advisorrdquo ldquofinancial consultantrdquo and ldquofinancial counselorrdquo from March 2010 to October 2010 In addition at our request SEC and NASAA provided us anecdotally with examples of enforcement actions related to individuals who held themselves out as financial planners SEC identified 10 formal enforcement actions between August 2009 and August 2010 and NASAA provided us selected examples of state enforcement actions involving financial planners from 1986 to 2010 from 30 states We gathered information on SEC- and state-registered investment advisers from SECrsquos Investment Adviser Registration Database FINRA did not provide us with data on complaints examination results or

Page 39 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

enforcement actions specific to financial planners FINRA officials told us they do not track these data specific to financial planners

To identify alternative approaches for the regulation of financial planners and their advantages and disadvantages we conducted a search for legislative and regulatory proposals related to financial planners which have been made by Members of Congress consumer groups and representatives of the financial planning securities and insurance industries We identified and reviewed position papers studies public comment letters congressional testimonies and other documentary sources that address the advantages and disadvantages of these approaches In addition we solicited views on these approaches from representatives of the wide range of organizations listed above including organizations that represent financial planners financial services companies and consumers as well as state and federal government agencies and associations and selected academic experts

We conducted this performance audit from June 2010 through January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Page 40 GAO-11-235 Consumer Finance

Appendix II Comments from the National

Association of Insurance Commissioners

Appendix II Comments from the National Association of Insurance Commissioners

Page 41 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Appendix III Comments from the North American Securities Administrators Association

Page 42 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 43 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 44 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 45 GAO-11-235 Consumer Finance

Appendix IV

A

GAO Contact and Staff

cknowledgments

Appendix IV GAO Contact and Staff Acknowledgments

Alicia Puente Cackley (202) 512-8678 or cackleyagaogov GAO Contact

In addition to the contact named above Jason Bromberg (Assistant Staff Director) Sonja J Bensen Jessica Bull Emily Chalmers Patrick Dynes

Acknowledgments Ronald Ito Sarah Kaczmarek Marc Molino Linda Rego and Andrew Stavisky made key contributions to this report

(250550) Page 46 GAO-11-235 Consumer Finance

The Government Accountability Office the audit evaluation and GAOrsquos Mission investigative arm of Congress exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people GAO examines the use of public funds evaluates federal programs and policies and provides analyses recommendations and other assistance to help Congress make informed oversight policy and funding decisions GAOrsquos commitment to good government is reflected in its core values of accountability integrity and reliability

The fastest and easiest way to obtain copies of GAO documents at no cost Obtaining Copies of is through GAOrsquos Web site (wwwgaogov) Each weekday afternoon GAO GAO Reports and posts on its Web site newly released reports testimony and

correspondence To have GAO e-mail you a list of newly posted products Testimony go to wwwgaogov and select ldquoE-mail Updatesrdquo

Order by Phone The price of each GAO publication reflects GAOrsquos actual cost of production and distribution and depends on the number of pages in the publication and whether the publication is printed in color or black and white Pricing and ordering information is posted on GAOrsquos Web site httpwwwgaogovorderinghtm

Place orders by calling (202) 512-6000 toll free (866) 801-7077 or TDD (202) 512-2537

Orders may be paid for using American Express Discover Card MasterCard Visa check or money order Call for additional information

ContactTo Report Fraud Web site wwwgaogovfraudnetfraudnethtm Waste and Abuse in E-mail fraudnetgaogov

Federal Programs Automated answering system (800) 424-5454 or (202) 512-7470

Ralph Dawn Managing Director dawnrgaogov (202) 512-4400 Congressional US Government Accountability Office 441 G Street NW Room 7125 Relations Washington DC 20548

Chuck Young Managing Director youngc1gaogov (202) 512-4800 Public Affairs US Government Accountability Office 441 G Street NW Room 7149 Washington DC 20548

Please Print on Recycled Paper

  • GAO Doc d11235pdf
    • Letter
    • Background
    • Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities
      • Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws
      • Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities
      • Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations
        • Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited
          • Existing Regulation Covers Most Financial Planning Services
          • Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products
          • Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public
          • Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners
            • Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed
              • Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners
                • Creation of a Board to Oversee Financial Planners
                • Augmenting Oversight of Investment Advisers with an SRO
                • Extending Coverage of the Fiduciary Standard
                • Clarifying Financial Plannersrsquo Credentials and Standards
                  • Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners
                    • Conclusions
                    • Recommendations
                    • Agency Comments
                      • Appendix I Scope and Methodology
                      • Appendix II Comments from the National Association of Insurance Commissioners
                      • Appendix III Comments from the North American Securities Administrators Association
                      • Appendix IV GAO Contact and Staff Acknowledgments
                        • GAO Contact
                        • Staff Acknowledgments
                        • Obtaining Copies of GAO Reports and Testimony
                          • Order by Phone

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ltFEFF00560065007200770065006e00640065006e0020005300690065002000640069006500730065002000450069006e007300740065006c006c0075006e00670065006e0020007a0075006d002000450072007300740065006c006c0065006e00200076006f006e002000410064006f006200650020005000440046002d0044006f006b0075006d0065006e00740065006e002c00200076006f006e002000640065006e0065006e002000530069006500200068006f006300680077006500720074006900670065002000500072006500700072006500730073002d0044007200750063006b0065002000650072007a0065007500670065006e0020006d00f60063006800740065006e002e002000450072007300740065006c006c007400650020005000440046002d0044006f006b0075006d0065006e007400650020006b00f6006e006e0065006e0020006d006900740020004100630072006f00620061007400200075006e0064002000410064006f00620065002000520065006100640065007200200035002e00300020006f0064006500720020006800f600680065007200200067006500f600660066006e00650074002000770065007200640065006e002egt ESP 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 ETI ltFEFF004b00610073007500740061006700650020006e0065006900640020007300e4007400740065006900640020006b00760061006c006900740065006500740073006500200074007200fc006b006900650065006c007300650020007000720069006e00740069006d0069007300650020006a0061006f006b007300200073006f00620069006c0069006b0065002000410064006f006200650020005000440046002d0064006f006b0075006d0065006e00740069006400650020006c006f006f006d006900730065006b0073002e00200020004c006f006f0064007500640020005000440046002d0064006f006b0075006d0065006e00740065002000730061006100740065002000610076006100640061002000700072006f006700720061006d006d006900640065006700610020004100630072006f0062006100740020006e0069006e0067002000410064006f00620065002000520065006100640065007200200035002e00300020006a00610020007500750065006d006100740065002000760065007200730069006f006f006e00690064006500670061002e000d000agt FRA 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 GRE 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 HEB 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 HRV (Za stvaranje Adobe PDF dokumenata najpogodnijih za visokokvalitetni ispis prije tiskanja koristite ove postavke Stvoreni PDF dokumenti mogu se otvoriti Acrobat i Adobe Reader 50 i kasnijim verzijama) HUN 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 ITA 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 JPN ltFEFF9ad854c18cea306a30d730ea30d730ec30b951fa529b7528002000410064006f0062006500200050004400460020658766f8306e4f5c6210306b4f7f75283057307e305930023053306e8a2d5b9a30674f5c62103055308c305f0020005000440046002030d530a130a430eb306f3001004100630072006f0062006100740020304a30883073002000410064006f00620065002000520065006100640065007200200035002e003000204ee5964d3067958b304f30533068304c3067304d307e305930023053306e8a2d5b9a306b306f30d530a930f330c8306e57cb30818fbc307f304c5fc59808306730593002gt KOR ltFEFFc7740020c124c815c7440020c0acc6a9d558c5ec0020ace0d488c9c80020c2dcd5d80020c778c1c4c5d00020ac00c7a50020c801d569d55c002000410064006f0062006500200050004400460020bb38c11cb97c0020c791c131d569b2c8b2e4002e0020c774b807ac8c0020c791c131b41c00200050004400460020bb38c11cb2940020004100630072006f0062006100740020bc0f002000410064006f00620065002000520065006100640065007200200035002e00300020c774c0c1c5d0c11c0020c5f40020c2180020c788c2b5b2c8b2e4002egt LTH 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 LVI ltFEFF0049007a006d0061006e0074006f006a00690065007400200161006f00730020006900650073007400610074012b006a0075006d00750073002c0020006c0061006900200076006500690064006f00740075002000410064006f00620065002000500044004600200064006f006b0075006d0065006e007400750073002c0020006b006100730020006900720020012b00700061016100690020007000690065006d01130072006f00740069002000610075006700730074006100730020006b00760061006c0069007401010074006500730020007000690072006d007300690065007300700069006501610061006e006100730020006400720075006b00610069002e00200049007a0076006500690064006f006a006900650074002000500044004600200064006f006b0075006d0065006e007400750073002c0020006b006f002000760061007200200061007400760113007200740020006100720020004100630072006f00620061007400200075006e002000410064006f00620065002000520065006100640065007200200035002e0030002c0020006b0101002000610072012b00200074006f0020006a00610075006e0101006b0101006d002000760065007200730069006a0101006d002egt NLD (Gebruik deze instellingen om Adobe PDF-documenten te maken die zijn geoptimaliseerd voor prepress-afdrukken van hoge kwaliteit De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 50 en hoger) NOR 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 POL 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 PTB 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 RUM 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 RUS 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 SKY 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 SLV 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 SUO 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 SVE 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 TUR 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 UKR ltFEFF04120438043a043e0440043804410442043e043204430439044204350020044604560020043f043004400430043c043504420440043800200434043b044f0020044104420432043e04400435043d043d044f00200434043e043a0443043c0435043d044204560432002000410064006f006200650020005000440046002c0020044f043a04560020043d04300439043a04400430044904350020043f045604340445043e0434044f0442044c00200434043b044f0020043204380441043e043a043e044f043a04560441043d043e0433043e0020043f0435044004350434043404400443043a043e0432043e0433043e0020043404400443043a0443002e00200020042104420432043e04400435043d045600200434043e043a0443043c0435043d0442043800200050004400460020043c043e0436043d04300020043204560434043a0440043804420438002004430020004100630072006f006200610074002004420430002000410064006f00620065002000520065006100640065007200200035002e0030002004300431043e0020043f04560437043d04560448043e04570020043204350440044104560457002egt ENU (Use these settings to create Adobe PDF documents best suited for high-quality prepress printing Created PDF documents can be opened with Acrobat and Adobe Reader 50 and later) gtgt Namespace [ (Adobe) (Common) (10) ] OtherNamespaces [ ltlt AsReaderSpreads false CropImagesToFrames true ErrorControl WarnAndContinue FlattenerIgnoreSpreadOverrides false IncludeGuidesGrids false IncludeNonPrinting false IncludeSlug false Namespace [ (Adobe) (InDesign) (40) ] OmitPlacedBitmaps false OmitPlacedEPS false OmitPlacedPDF false SimulateOverprint Legacy gtgt ltlt AddBleedMarks false AddColorBars false AddCropMarks false AddPageInfo false AddRegMarks false ConvertColors ConvertToCMYK DestinationProfileName () DestinationProfileSelector DocumentCMYK Downsample16BitImages true FlattenerPreset ltlt PresetSelector MediumResolution gtgt FormElements false GenerateStructure false IncludeBookmarks false IncludeHyperlinks false IncludeInteractive false IncludeLayers false IncludeProfiles false MultimediaHandling UseObjectSettings Namespace [ (Adobe) (CreativeSuite) (20) ] PDFXOutputIntentProfileSelector DocumentCMYK PreserveEditing true UntaggedCMYKHandling LeaveUntagged UntaggedRGBHandling UseDocumentProfile UseDocumentBleed false gtgt ]gtgt setdistillerparamsltlt HWResolution [2400 2400] PageSize [612000 792000]gtgt setpagedevice

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Page 5: Input on the Report to Congress on How To Modernize and Improve

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+5)46$2=-67F327+80lt295+7+Xlt+287525(7O+88+2+5B7877(lt777B()278975+2D+(37aalM3)+FA(35+-^3+A+20353830)+5=B+5lt2gt7++58389+7(A(39275)+Z9+837gt88P+580)8)++X+73)+5=B+875)lt78)38+B++X(++58lNRebgt+287=7gt(8+80)3=7gtgt+28lt238+(9+)+(8+0lt2(92gt87(+)+2+8 75537++=+73(3785+2h S)++Z9gt75+X779+8)JJgt+283lt+7+8=gtO+3gt7ltlt23lt2+32=7gt8+732(+78lt2(92gt)+2B+95+7(+33A+2lbgt+2358=7gtB+788++P 390)+((397A9+8O+32+8922+75+2()2B+882++()+77A+8=+7-C7)+(3789=+2+X8)+(372()+2+2+735=B+8-67)8(8+0822+)gt+2P+89()(8+37(377B+7(gt75)+(383B3732lt3325A(+23=737R59(2gt77(lt77+2Q78927(+B+78lt23)OA+BA+7)+Ult+2(+A+5V(P35=B+8-)+D+327+gti+7+2[83(+753(582(327+gt82+3)+3lt238+(9+89()(8+8O+(98+)+8+7+7(+8)+gt(7+Xlt+(3()+A+23=89((+889lt238+(937789())B)ltlt+2(2=+2+lt2gt75)+2O95B+82+O++28lt+737=32+8+2398(2=+8-5537gt0gt+282+3+7O+33O72+8(883737)+(372(75)+2+927397583)+(+7)7389+50O98373(3=lt7+5B78)+UB+7V0)3=gt(3779+8+7Blt2359(97O+5- W+(A+gt0)+8+3(+283)+(392(+)+(2=+8lt+2lt+2+5Ogt97+)(lt77+28)239B)7(3775)+(P389lt+2A837753A+28B)389()23B9+lt77+28 Ogt)+1+lt3F32lt32378751+lt3678927(++A+8=38(3789=+283)+2375+A(+8O+(98+)+2+2+73++(A+5=782A+2+=+5+8AO+750)++B8gt8+=+7892+)+(3759((3779+8O+(98+)+(+778)+2=37+gtO(P)393=9()988- (378O+7BP+778+875Ogt46$38+=)+5+397+)(lt2((+87)875982gt-amp382+(+7gt046$889+52+B93782+Z927Bc23P+21++2889lt+2A8+8+83+Z9gt75+X779+8=5+Ogt)+22+B8+2+52+lt2+8+7A+8-82+890=7gt3)++88+)(2+lt2+8+7A+82++A7BO23P+25++280523ltlt7B)+2 8+(92+8(+78+83+X(98A+gt3+275+Xlt2359(83985+346$[889lt+2A832gt829(92+-C73297+gt0)+33lt)3+87F327[8875(P32+B9373UV 77(lt77+280+A+8F327[8(3789=+28)+=+2(gt3)+8+97+)(75A598- 5537gt0F6FD+(37MJKM-a+8)+839)+(922+77+(+88gt3(+7892+758lt+83977+(+882gt5+0)(3789+8U5A(+7)+O987+88378927(+V073)+2(37+7398889+=37B77(lt77+280)()O839+gt7++583O+552+88+5075(395O++5+2+A+3=P+)+2+B9379732=(2388bN8+8-)8O27B8 =+3 amp

1()amp$4)ampamp4$+6lt)amp4ampamp63)X$6)=amp3)4)3Iamp c+32+Y1()ampA$4)ampVamp$+6lt)Z(7O+++(A+gt75+(+7gt2+B9+5 7375+0=9828O+5+Z9+gt5+7+57=7gtD+8- +5+2((395(2++9732=5+737832U83(37V0U7+B337V0U278(37V7505537gt0U7+(+88gt3(+7892+Q2+B8237V3275A598)353737+753 U8+V78927(+8B+783)+7892+20O92)+207+753lt23A5+5A(+327+B3+5++75Q32389lt+2A8+75ltlt23A+)+(3783(+78+578927(+B+7 )=99(+7O+(98+37+X87B2+378)lt75+2+7(lt(gt-IWX=lt+87(95+83(PO23P+28077(lt77+2807A+8=+75A8+2875FG[8L7+X(983723= 2+B8237395O+gt+280)3=gt5A8+378lt+(83(372(75)3 lt+28378)395)35+388+8- 6758(98837ltlt+25+5D+lt+=O+2Mb0JKKe0)+F327G2359(+2E(+787B S32P7Bi239lt2+(3==+75+55+77BU83(37V7)+337B=77+2 A5amp+PC+252lt20+$0(0+2(0QRS(307+)02$+90102 320amp527+102)02$+amp+)-2$-+1062$)02$+T$-12+9 320amp+92amp+25UQESlt1amp1$0(0+$(30lt110+0++25050660amp6 )24+9320amp52+320amp5920amp)0+T$+020$+)0+55)-2amp1$++ +$-2+amp0)23-amp8 )8+32+57)+F327+B892+- F327832+(+7gt+4)3amp$amp64=)3amp3+7(D+(37MJKM-aR$+(+88gt3E(+78+ gt10655lt+amp40$20+00()62(5amp0+$-20-+302HCM+$-2+amp0H30 A0amp+RVWR970amp-$01020320amp520503$5amp+9+0+920660amp+ 10$506+$-2+amp0P XY)5++$93$amp-$$+$92+02)20+$69+36602+6)++$2 20amp((0+3+$+9+$-2+amp0amp4020$90)$-20$95($9)20(-($920$9 303-amp750$9)(0+)5+$92+102+$-2+amp0amp+2amp92)0+5+$-2+amp0 amp+2amp902($8 XZ0amp((0+3++3[234$+92-2+))5amp+$[)0+5))5amp+$[ )5amp15302$))5amp+$62+$-2+amp0amp40209)0+5))5amp+$62+$-2+amp0 amp402092)5amp15302$7-)2amp-52+$-2+amp0)5amp0$2+$-20lt1 )2amp-52amp()+0$2+$-202$8 X+3+6+$-2+amp0amp4020$8

D9()7B9B+395O+97+Z9A3(75(395O+7(32lt32+5734+5+2(-6 lt+7+8+2+8+739B)039532(+)38+lt23A57B+B5A(+7)+O987+883 78927(+32++389O=3D+32+5+2=75+5(+787B0+X=73775 (37797B+59(37)78(+27O+875255+A+3lt+5Ogt)+D+324+5+2+B932- )+2+87553737B37Blt23O+=)78927(+=2P+7BB+7(+8(+78+57 =9lt+8+83+27B29875+8+lt777B8+2A(+80I298amp8L)()(3789+8 )+979lt2((+30327)++2A+0)+9798)27B3+B++8)737Rgt+28-67+28+298=80=7gt3)+=3(+57$+A5)8=+07583=+297 Ogt32B73782+5gt7+532(+7892+573)+28+83lt+7gt83(78927(+B+78 75+7(392B+)+=398+O(PR53328+7B+()7Z9+87325+23B78+732(+78 298)+B)+27B8B7(777(732=37)+2O+98+538+ 779+832+78927(+lt2359(8-)8lt2((+82=lt775(3779+85+8lt+)+ 72359(3732+B937878+889()8F327-+5+2()8+287(37875lt+7+832A3378(3952+59(+32+=7+)+8+lt2((+8- 9)lt4$amp)=3)+)6)amp=64-amp3)4-64I )+2+8)395O+O23575(3=lt2+)+78A+lt23)O37378lt+(398+5+275+8+lt777B5+8B73780))+72359(3732+B93788=23)38+7F327-87F3270D+1+lt2=+7[83678927(+395lt2+lt2+83ltlt23A+5 5+8B7378753955+A+3ltA+7Blt23(+8837(95++X=7373+59(37 ++=+7802+A+7B)+)+2)++X=737lt23(+888lt23(32+5323lt+7O33P0)+)+2D+ltlt23A+5(37797B+59(3782+Z92+53=77322+7+7gt89()5+8B7370)+)+27gt5A(+BA+78537+837)+(lt(gt359(2gt075) lt3(+875lt23(+592+82+7lt(+3((+lt(3=lt7803258(lt7+)35+2837gt89()(+2(37875)+77+(+882gtlt23(+592+8322+A3(37752+lt327B358(lt72gtlt23(+592+83)+9)32+8-)8=75+(395O+=lt38+5)+5+2- C46lt46=ampD=6)+ampampC46lt46=ampD=64-Iamp 678927(+B+782+lt2+A+7+523=97B8lt+(398+5+275+8+lt777B5+8B73787325+23O2(+)+ltlt+27(+3+Xlt+28+08P+gt)+gt9273 )+37gt3)+2+AO+3)+=0)377(lt77+2-75)803(3928+0O27B8=+9(2(+3=gtlt2+A398(3==+7837)+7+(+88gt3()7B+7)+C732=67A+8=+75A8+28(-ID9lt2L)+2+32+6lt23lt38+))++2=77(lt77+27577(lt777BO+2+82(+5755+7+5975+2+5+203O+7(32lt32+5738+ 75)7gtlt+2837)3)35839877(lt77+2323+2877(lt777B8+2A(+8I833O+5+7+5LO+2+Z92+532+B8+2877A+8=+75A8+275lt23A5+ 89()5A(+859(2gt22+8lt+(A+3)+)+2)+gt833+27gt5A(+83)+A9+

37A+87B72+B9+58+(92+8-7+X+78A+895gt8lt+232=+52+5gtOgt)+i3A+27=+7((397Ogt(+37)+3lt(377(lt77+287577(lt777B I2+lt32()+5L750)+65373B2++))+2(37(983780)+gt=P+A+2gt89+3O8+2A3780)+7(+)+7(983732(37+X9lt92lt38+8087()=+73)82+lt32- 6O+)ltltgt3+Xlt75377gt3)+8+3lt(875lt23A5+5537732=3775 2+R++X=lt+8757+(53+89lt372+Z9+8-

+8lt+(9gtD9O=+50

gt32o883(+8 aJN-MdN-JJMd

$B+cgt320F4GH

Illegal Practices OfFee-Only Financial PlannersIn The Business Of Insurance

(Problems amp Solutions)

Prepared ByNigel Brian Taylor CFPreg

Santa Monica CA(Copyright copy2002 - 2009 Nigel Brian Taylor CFPreg All Rights Reserved)

Tel 310 260 1126 Website wwwiamafiduciarycom

Illegal Activities in the Business Of Insurance By Fee-Only Financial Planners (Problems And Solutions)

Prepared by Nigel Brian Taylor CFPreg

Santa Monica CA CA Insurance License Nr 0716446

INTRODUCTION

Overwhelming media focus on ldquomethods of compensationrdquo for financial services in the recent past rather than competence and regulatory compliance has fueled an ever increasing consumer-driven demand for FEE-ONLY advice in insurance planning Media and marketing hype has influenced the consumerrsquos perception and led many to conclude that ldquofee-only plannersrdquo are the only planners capable of giving objective unbiased advice relating to insurance matters because they receive no compensation from third parties are not affiliated with represent or take compensation from insurers and therefore have no conflicts of interest and loyalty that could impair their ability to provide objective and unbiased information Unfortunately however many fee-only financial planners in California and 38 other States with similar regulations are operating outside the law in order to provide this ldquoobjective and untaintedrdquo advice This discussion will highlight these illegal insurance activities and provide potential solutions (initially for California although the suggested solutions could be used as a model for other States) to increase compliance with current California insurance law It will also discuss developing trends in the business of offering insurance advice in California particularly in relation with the provision of insurance advice as a component of a ldquoComprehensive Financial Planrdquo All Statutes herein are California statutes unless otherwise indicated

INSURANCE LICENSING

The three most widely held insurance licenses issued to individuals who provide general advice to families and consumers on general insurance matters in California are The Life Agent License(LX) the Fire and Casualty Broker-Agent (FX) and to a negligible degree the Life and Disability Analyst License(LA) A full list of other licenses is available at wwwinsurancecagov

Life Agent (LX)

The licensing requirements for a Life Agent license are set forth in Chapter 5 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit I A Life Agent (LX) is defined as a person authorized by and on behalf of a life or disability or life and disability insurer to transact life disability or life and disability insurance1

Generally a life agent advises consumers as to the benefits and disadvantages of life health disability and long term care insurance etc and transact business on behalf of one or more insurance companies offering products to consumers A Life Agent must be compensated

Confidential Page 1 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

by the insurer on the sale of product in the form of commissions and cannot accept fees for service from the consumer There are approximately 154664 resident and non-resident LX agents serving Californians2

Fire amp Casualty Broker-Agent (FX)

A fire and casualty licensee is a person authorized to act as an insurance agent broker or solicitor and a fire and casualty broker-agent license is a license so to act The FX licenseersquos authority to act is determined by which documents are initially submitted

bull A $10000 Bond of Insurance Broker form 417-5 authorizes the licensee to act as an insurance broker An insurance broker is a person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurer

bull An Action Notice of Appointment form 447-54 authorizes the licensee to act as an insurance agent An insurance agent is a person authorized by and on behalf of an insurer to transact all classes of insurance except life insurance

bull An Action Notice of Solicitor form 417-31 authorizes the licensee to act as an insurance solicitor An insurance solicitor is a natural person employed to aid an insurance agent or insurance broker in transacting insurance other than life

There are approximately 88300 resident and non-resident FX agents serving Californians3

Life amp Disability Analyst (LA)

The licensing requirements for a Life and Disability Analyst license are set forth in Chapter 8 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit II A Life and Disability Insurance Analyst is defined as a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto4

Generally a LA is trained to a significantly higher level than a LX and can advise a consumer not only as to the advantages and disadvantages of all forms of insurance but can also provide competent unbiased comparative analysis of various policies for a fee as well as interpret the rights of consumers under any insurance contract The LA must among other things

bull Have been licensed as a Life Agent (LX) for a period of at least 5 years preceding a LA application5 and

bull Must complete a comprehensive course of education covering significantly more topics than the LX and

bull Pass a rigorous examination before obtaining the LA license

Confidential Page 2 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

It should be noted that the LA license currently authorizes a person to provide advice for a fee on all insurance related matters but does not currently require any training or examination in Long-Term Care insurance or require a minimum number of hours of continuing education credit in each licensing period In the past ten years the number of CA Life And Disability Analysts has remained stable at approximately 44 (forty four) for the entire Statersquos population6

ldquoFINANCIAL PLANNERSrdquo OFFERING INSURANCE ADVICE

There are over 34000 (thirty four thousand) Registered Investment Advisors and Investment Advisor Representatives in California7 An Investment Advisor in California is authorized under sect25009(b) California Corporations Code8 to utilize the title of ldquofinancial plannerrdquo (without any statutory requirement to substantiate his her competence to perform the tasks of a financial planner) and perform comprehensive financial planning services on a fee-only basis The examination and qualification requirements for the Series 65 (Uniform Investment Adviser Law Examination) are attached hereto as Exhibit III NO knowledge of insurance products or the business of insurance is required in order to register as an Investment Advisor ldquoFinancial Planningrdquo and ldquoFinancial Plannersrdquo are having an ever increasing and significant impact on the provision of insurance services in California It is important that State Agencies and boards such as the CA Dept of Insurance (CDI) Agent and Broker Advisory Committee (ABAC) provide input to regulators and legislators alike regarding allied ldquoprofessionsrdquo impacting the business of insurance to ensure that consumers are properly protected A copy of this discussion will therefore be forwarded to both the CDI and the ABAC for their consideration

Many fee-only planners offer ldquocomprehensiverdquo financial planning services that by definition include risk management analysis and recommendations as part of the planning process These recommendations include calculations regarding the amounts and types of life insurance recommendations with regard to the benefits and disadvantages of various individual and or group health insurance plans disability and long term care plans etc In some cases advice is provided on a fee basis regarding homeowners auto and other types of property casualty and general liability coverage

To avoid real and ldquoperceivedrdquo conflicts of interest many fee-only financial planners choose not to maintain affiliations or representation agreements with any insurer and therefore are unable to license themselves as LXrsquos or FXrsquos Some let their LX or FX licenses lapse when they transition to fee-only planning In both these cases California law is clear Any person accepting fees for insurance related matters from any third party other than an insurer unless otherwise exempt must be licensed as a LA9 In an attempt to circumvent the law other planners obtain a LX and or FX license to create the appearance of legal compliance but never have any intention of actually ldquotransacting businessrdquo or utilizing the license for the purpose for which it was originally issued or intended This practice is prohibited under CA law10 because it is the fee-only plannerrsquos true intention to charge the consumer for

Confidential Page 3 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance advice rather than to be compensated by an ldquoinsurerrdquo as CA Insurance Code Sections 32 amp 1622 (supra) require

Many fee-only planners quote an often-abused section of Californias Insurance code Section 1831(e) which provides a limited exemption from insurance licensing for Registered Investment Advisers to justify their unlawful behavior The following is an excerpt from a letter originally addressed to Errold Moody CFPtrade (A California Life amp Disability Analyst who has concerned himself with the illegal activities of fee-only financial planners in insurance matters for over 10 years in California) on July 27 1995 by Patricia Staggs the then Assistant General Counsel and Chief Compliance Bureau of the Legal Division Compliance Bureau of the California Department of Insurance who wrote regarding the Investment Adviser exemption

That exemption appears at Insurance Code Section 1831(e) and provides an exemption to the chapter regarding life and disability analysts for an investment adviser as defined in section 25009 of the Corporations Code when acting in that capacity (Emphasis added) Section 25009 of the Corporations Code provides as follows

Investment adviser means any 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 regular business publishes analyzes or reports concerning securities Investment Adviser does not include (a) a bank trust company or savings and loan association (b) an attorney law accountant engineer or teacher whose performance of these services is solely incidental to the practice of his profession (c) a broker-dealer whose performance of the services is solely incidental to the conduct of his business as a broker-dealer and who receives no special compensation for them or (d) a publisher of any bona fide newspaper news magazine or business or financial publication of general regular and paid circulation and the agents and servants thereof but this clause (d) does not exclude any person who engages in any other activity which would constitute him as an investment adviser within meaning of this section

A life and disability insurance analyst is defined in insurance code 325 as follows

Life and disability insurance analyst means a person who for a fee or compensation paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as a beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The Departments view to that exemption set forth in insurance code 1831(e) is that an investment adviser need not submit to regulation by the Department of Insurance so long as the activities engaged in by the investment adviser fall within the defined activities of an investment advisor as set forth in Corporations Code section 25009 It is noteworthy that the definition of an investment adviser contains no reference to insurance related activities

Confidential Page 4 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Emphasis Added) Therefore any activities included within the definition of life and disability analyst such as advising as the life insurance products are clearly outside the capacity of an investment adviser and would subject the person to the provisions of law relating to life and disability insurance analysts

Very Truly Yours Patricia Staggs

Since as early as 1995 the CDI has taken the documented position that the Investment Advisor exemption applies ONLY when a Registered Investment Advisor acts ldquoin that capacityrdquo and as defined in section 25009 of the Corporations code It is the authorrsquos conclusion based on conversations with CDI staff counsel Jody Miller therefore that the only time a Registered Investment Advisor in the State of California may lawfully provide ldquoinsurancerdquo related advice to a consumer for a fee would be for example if he were advising a client as to the allocation of sub accounts containing regulated securities within an already existing variable life insurance or variable annuity policy

This exemption does NOT however permit a Registered Investment Advisor to discuss the merits or disadvantages of any type of insurance including Life Health Disability Long Term Care Property Casualty Homeowners General Liability Auto insurance etc that do not contain any elements related to the provision of investment advisory services Under current law then any Registered Investment Advisor who provides such advice and is compensated directly by the consumer without having first obtained a LA license is guilty of a misdemeanor11

The position of the CDI was illuminated in a letter addressed to representatives of the financial services sector who attended a series of meetings held with the Dept of Insurance in late 1997 In as letter dated February 3 1998 Assistant Ombudsman and Legislative Liaison Jeffrey Kenny wrote

February 3 1998

On July 30 1997 a discussion concerning the life and disability insurance analyst license was held between the California Department of Insurance (CDI) and members of the financial planning industry As you participated in this dialog I am writing to communicate CDIs policy on this matter

The focal point for this issue is consumer protection not the interests of the individual factions With all parties based in customer service it is sad that this detail has been lost in much of the discussion As defined by insurance code Section 325 a life and disability insurance analyst is

a person who for a fee or compensation of any kind paid by or derived from any person or source other than the insurer advises purports to advise or offers to advise any person

Confidential Page 5 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insured under named as beneficiary of or have any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The fact that there are only 46 life and disability analyst in California is not a valid argument for repealing this code In fact the limited number of licensees and population in noncompliance begs for increased education and enforcement While the easy solution for those in noncompliance may be to repeal this law consumers who pay for fee advise on insurance matters deserve an analyst educated in insurance per CDI standards The current licensing requirements ensure that relationship Any legislative effort to repeal this law will likely be opposed on the basis that such action is harmful to consumers by consumer groups insurers agents and brokers and the California Department of Insurance

At the July 30 1997 meeting representatives from the financial planning industry raised two additional suggestions concerning CDIs examination requirement The first seeks to allow issuance of a Life and Disability Analyst license to Certified Financial Planners and Certified Public Accountants following the successful completion of their own professional examinations Again this is an idea that requires legislation and will certainly face opposition CDIs position remains at only those individuals who pass CDIs exam are to be issued a life and disability analyst license CDI is the agency charged with enforcing this license and will remain via its examination and related or regulatory functions the authorizing agency for this license

The final suggestion request a waiver of the requirement than an examinee must have five (5) years experience as a life licensee or employment experience under said licensee to sit for CDIs examination Again this is an idea that requires legislation CDI will reserve judgment until the full breadth of this proposal has been introduced to the state legislature

Despite some groups interest in changing current law there is an existing law which is and has always been quite clear While a financial planner may be illegally engaging in insurance analyst activities and may not be aware of their violation it is my hope that this the explanation of policy will provide them with the impetus to come into compliance or cease the illegal activity immediately Per insurance code Section 1844 any person who acts offers to acts assumes to act as a life and disability insurance analyst when not licensed by the commissioner per this article is guilty of a misdemeanor Consistent with current practice information obtained on individuals in noncompliance will be aggressively pursued

Sincerely

Jeffrey Kenny Assistant Ombudsman and Legislative Liaison

However successful criminal prosecutions for a violation of CIC sect1844 are apparently rare because the CDI must turn these matters over to local district attorneyrsquos offices Statewide Their failure to enforce the law is probably attributable to a lack of funding to prosecute

Confidential Page 6 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

non-violent misdemeanor counts of this nature where no victim can be produced Unfortunately and to the detriment of Californiarsquos consumers this lack of enforcement has had the effect of creating a Cavalier attitude towards compliance with State law that essentially seems to tolerate this unlawful activity permitting fee-only planners to operate almost with impunity

There are a number of fee-only financial planners who claim in their firms disclosure form that they have no affiliations or representation agreements with any insurance carriers and that they do not represent or offer for sale any kind of insurance products However in reality they maintain LX or FX licenses and have contracts with life insurance carriers who do not require a minimum annual production level without any intention of ldquotransactingrdquo on behalf of an insurer (a violation of CA Insurance code section 1668 sub (c) amp (g) supra) while making no disclosures anywhere on their disclosure statements or advertising materials as to their active insurance licenses which is in and of itself a violation of Section 17255 of the Insurance Code12

Other fee-only financial planners claim that any insurance advice given by them to their clients as part of a comprehensive financial plan is given ldquofree of chargerdquo They claim that a fee is charged for all the other elements (investment tax retirement amp estate planning) but not for the risk management portion of the plan They point to the fact that they never ldquoact in any of the capacities defined in Article 1 (commencing with Section 1621)rdquo because they do not appoint themselves with or represent an insurance company or any particular insurance product and do not actually ldquotransactrdquo insurance business (Thereby avoiding in their minds a licensing requirement under CIC Sections 32 amp 1622) Furthermore they claim they do not charge the consumer a fee for the advice they provide regardless of the complexity of that advice (Charging a fee would trigger a licensing requirement under section 325 Insurance Code) The result if the courts upheld this logic would be that the Dept of Insurance would lose all control and authority for the provision of insurance advice to consumers by fee-only financial planners in California to the California Dept of Corporations Worse still the only recourse damaged consumers would then have against fee-only financial planners in the business of insurance would be the California Dept of Corporations a state agency woefully equipped to enforce state insurance laws

One problem that requires statutory revision is the lack of a suitable definition for ldquotransactingrdquo in the business of insurance While the Dept of Insurance has considerable leeway in determining what constitutes ldquotransactingrdquo the code itself provides little or no useful information or guidance for fee-only planners who often feel based on the wording of the current definition that they acting inside the law when performing certain services Transaction is defined under sect35 of the Insurance code as

35 Transact as applied to insurance includes any of the following a) Solicitation b) Negotiations preliminary to execution c) Execution of a contract of insurance d) Transaction of matters subsequent to execution of the contract and arising out of it

Confidential Page 7 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

While the requirements under sub(s) b c amp d is self-explanatory ldquoSolicitationrdquo (sub A) Is not defined and the legislature has to date been loathe to define it leaving the interpretation to the CDI and creating a ldquofact at issuerdquo that requires administrative or judicial interpretation and determination in cases where fee-only planners dispute their activities as ldquotransactingrdquo This is not the first time the issue of defining ldquosolicitationrdquo has been brought to the attention of the Department of Insurance In a discussion paper dated September 25 1998 the Producer Licensing Working Group recommended defining ldquosolicitationrdquo in the following manner

Solicitation Any oral or written statement or image (1) made by any person either directly or by another person acting pursuant to the first persons authorization direction or control (2) which statement is made with the intention or likely effect of provoking directly or indirectly a recipients interest in potentially purchasing an insurance product

This author believes a clarification of what constitutes Solicitation under the Insurance Code will assist Registered Investment Advisors fee-only financial planners and others in assessing which license if any would be appropriate given their particular facts and circumstances If the legislature decides not to act the Dept of Insurance should issue authoritative guidelines or advisory opinions similar to those of other regulatory agencies such the SEC NASD and IRS in an effort to bolster compliance This is extremely important given recent trends and developments in the delivery methods and current practices of individuals providing insurance services in California

The issue of ldquotransactingrdquo and what constitutes ldquosolicitationrdquo aside and with regard to the practice of giving advice in insurance for free CIC Section 1631 does not mention compensation as a criteria for triggering a licensing requirement13 Even setting aside the current CDI determination of what constitutes ldquotransactingrdquo which is ambiguous Californiarsquos Insurance code for purposes of interpretation is also governed by Section 1858 of the California code of Civil Procedure (CCCP)14 There is voluminous precedent under CCCP section 1858 supporting the authorrsquos opinion that the interpretation of a statute that produces an absurd or anomalous result will not prevail when used as a defense In interpreting a statute Supreme Court avoids any construction that would produce absurd consequences15 In construing statute state Supreme Court will not parse each literal phrase of statute if doing so contravenes obvious underlying intent or leads to absurd or anomalous result16

Since it is already well settled in law that ldquoThe business of Insurance is a business affected with a public interestrdquo17 this author believes the circumvention of State Insurance licensing laws by fee-only financial planners in any manner irrespective of compensation or level of competence presents a clear and present danger to Californiarsquos consumers and is contrary to the public interest The intent and desire of the Legislature to require State licensure for insurance professionals is clearly set forth in CA Insurance Code Sections 1631 1633 amp 1633518 and is unambiguous in the authorrsquos opinion

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

UNLICENSED INSURANCE ADVICE CURRENT REMEDIES

CA Insurance Code Section 1668 applies in the case of fee only planners who maintain a license but do not intend to actively transact business as LXrsquos The sole remedy for such conduct is that under this section ldquo the commissioner may deny an application for any license issued pursuant to this chapter if

helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this staterdquo

CA Insurance Code Section 1668 is problematic in that it is difficult if not impossible to enforce unless insurers are ldquorequiredrdquo to terminate all LXrsquos amp FXrsquos not actively ldquotransactingrdquo insurance business and unless the Dept of Insurance requires proof be provided to the department by the insurer that a LX or FX is in fact actively transacting business The code could require insurers to review commissions paid to appointed agents on an annual basis and terminate the appointments of all agents who do not ldquotransactrdquo over a period of 12 months unless valid cause can be shown Exceptions could be made for salaried employee of insurers and persons engaged in the regulation of insurance business in whatever form

CA Insurance Code Section 1844 is applicable to fee only planners who provide insurance advice for a fee or ldquofor freerdquo and provides that any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

Again this is difficult if not impossible to enforce because the Dept of Insurance must rely on local district attorneyrsquos offices most of which have no funds to prosecute non-violent misdemeanor counts particularly when most DArsquos offices consider this a matter for the Insurance Commissioner in the first place Therefore rather than seek prosecution under this section the Dept of Insurance should actively enforce State law against violators under the recently introduced CIC section 129218 (discussed below) It makes no sense for the Dept to refer these cases to local district attorneyrsquos offices if their decision to prosecute under the Statersquos criminal statutes is based on ldquofinancial considerationsrdquo rather than the evidence of malfeasance

There are two other remedies available to the Dept of Insurance The first is California Insurance Code (CIC) 790 et Seq The Unfair and Deceptive Trade Practices Act The second is the aforementioned and recently introduced CIC Section 129218

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

Prosecution under CIC 790 et Seq does not require compensation because under section 79001 the Insurance Code applies to all persons engaged in the ldquobusinessrdquo of insurance19

Under section 79004 the Dept of Insurance is authorized to investigate any person engaged in the business of Insurance in California20 Transacting in the business of insurance without a valid license with or without compensation is clearly an unfair and deceptive competitive practice because violators seek to avoid and evade ascertainable standards in training examination licensing and continuing education required by the State for agents and brokers appointed by insurers who are performing essentially the same tasks while at the same time claiming to take the ldquoethical high groundrdquo in terms of the advice given State licensing places the agent at a competitive disadvantage because a licensed agent can only accept compensation from an insurer unless that agent is also a Life and disability Analyst Section 790035 provides substantial administrative penalties including fines and restraining orders for persons violating this Act21 The provision of unlicensed insurance advice whether for a fee or ldquofree of chargerdquo by fee-only planners is detrimental to the consumers of California because there is no ascertainable standard of education or requirement to keep current present unless such planners are subjected to the licensing requirements of the CA Dept of Insurance

The second remedy available is authorized under CIC Section 12921822 which provides for greater administrative remedies against those individuals who transact the business of insurance without proper licensure A CA Life amp Disability analyst whose business has been severely impacted filed complaints in early 2002 against prominent California fee-only planners who are flagrantly violating the law To date the CDI has taken no action against these planners and it remains unclear whether these new powers will be utilized on a proactive basis to seek out fee-only financial planners offering insurance advice or whether the Dept of Insurance will remain reactive to ldquoconsumerrdquo complaint only in the enforcement of Californiarsquos insurance laws

On a final note the CDI is considering proposed regulations pursuant to the authority granted to the Insurance Commissioner under the provisions of in SEC 8 of Assembly Bill 393 Chapter 321 Statutes of 2000 that among other things address the necessity for licensing These new regulations include a proposed section 21923

Draft

Section 21923 - Necessity of License

The following activities are not exempt from licensure under CIC Insurance Code Section 1631 because they are directly related to solicitation negotiation or effecting the sale of insurance

(a) Explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

limits premiums rates deductibles payment plans or any other insurance contract or potential insurance contract terms

(b) Recommending andor advising or urging applicantspotential applicantspolicyholders applicants for insurance coverage potential applicants for insurance coverage or policyholders to buy particular insurance policies or to insure with particular companies or insurers

(c) Binding of insurance coverages

Note Authority cited Section 8 of AB 393 Chapter 321 States of 2000 Reference Insurance Code Section 1631 of the Insurance Code

Should section 21923 be enacted any perceived ambiguities associated with the giving of ldquounlawfulrdquo advice by fee-only planners would be eliminated While the author applauds all these efforts to increase compliance through enforcement and regulation the consumerrsquos total ignorance of California Insurance law and the reactive nature of insurance enforcement will bring few if any real-world changes for consumers There have to date been few complaints regarding the illegal practices of fee-only financial planners by consumers because a) a licensed life insurance agent is always eventually involved in the ldquosalerdquo of a specific product to the consumer and b) the client has already received a written affirmation from the fee-only planner that he is acting in a fiduciary capacity as their trusted advisor The client therefore places greater value on the fee advice given by a fee-only planner than the advice of a licensed life agent ldquosellingrdquo the same product the fee-only planner recommends simply because the licensed individual is an agent of the insurer

Of course the consumer is paying twice for the same advice once in the form of fees and a second time in the form of commissions to a licensed ldquoagentrdquo Providing there is no relationship between the fee-only planner and the insurance agent and no referral fee is payable by the agent to the planner this fact is never disclosed to the client It is the authorrsquos personal experience that many fee-only financial planners refer these clients to out-of-state insurance agencies who have declared themselves willing to provide substantial discounts from their commissions While the author views these discounts are ldquoonly fair in light of the circumstancesrdquo it does not excuse the illegal conduct and the fact that the client is not receiving any favorable contractual benefits on their insurance policy such as shorter exclusion periods shorter surrender penalties lower mortality and expense fees or lower percentage monetary penalties for early termination of the product

The already established fiduciary relationship between a fee-only financial planner and his her client creates a bond of trust that implies by its very nature that the planner is fully complying with all federal and state laws In fact many fee-only planners subscribe to written codes of ethics established by credentialing bodies and professional membership organizations such as the CFP Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) which demand their members comply with all federal and state licensing laws However the aforementioned

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

professional membership and regulatory bodies are conflicted in their response to the problem of illegal activity because both organizations as mentioned previously on page 5 amp 6 of this report are lobbying for a change in the law that will allow such fee-only planners particularly those holding the CFPreg Certificate to qualify for a waiver from licensing These professional membership and regulatory bodies refuse to investigate or discipline such planners unless the State first prosecutes them The State of California for reasons stated elsewhere in this report have been loathe to take action against these fee-only planners despite repeated complaint filings by life and disability analysts over the most recent ten year period whose income is being severely impacted by such illegal activities

From a consumerrsquos perspective there would be absolutely no reason to question the integrity of their fee-only financial planner In fact organizations such as the National Association of Personal Financial Advisors (NAPFA) have marketed their fee-only planner members as the ldquoonlyrdquo planners capable of providing clear untainted unbiased advice on all financial matters including insurance and have disseminated brochures since the 1980rsquos claiming that commissioned based advice is somehow tainted and a totally flawed delivery method that could harm consumers NAPFArsquos position has been supported and publicized to a great extent by the media including magazines such as Bloomberg and Money to newspapers such as the Los Angeles Times which requires ldquofee-onlyrdquo as a pre-requisite ldquomethod of compensationrdquo for any planner participating in itrsquos popular ldquoMoney Makeoverrdquo series of consumer assistance feature articles It has also been supported by non-profit organizations such as the Consumer Federation of America Negative consumer perceptions of insurance licensed individuals has to a great extent been unfairly tainted by such media hype and marketing tactics

The recent introduction of section 12921822 coupled with an acceptance of proposed section 21923 would absolutely provide the CDI with additional needed powers to regulate the business of insurance It will not in the authorrsquos opinion however increase compliance in any meaningful manner Continued consumer ignorance of State insurance laws and reactive rather than pro-active enforcement by the CDI will almost certainly maintain the current status quo

This author applauds the sentiment of the recently introduced statute but believes it has no real-world practical value This license requirement will continue to be ignored by most fee-only planners because of the incredible burden it places on them in terms of initial compliance and qualification In addition the statute to date remains un-enforced because the CDI lacks the manpower and funding within the civil enforcement division to even begin to attack this widespread problem Simply stated this recently introduced legislation demands aggressive investigation large fines and numerous prosecutions to achieve even partial compliance The CA Department of Insurance has instigated a consumer-complaint driven ldquoreactiverdquo role rather than a consumer-protective ldquoproactiverdquo enforcement campaign even after the introduction of CIC section 129218

One major reason for continued non-compliance is the requirement that applicants be registered as LX agents for five years preceding their examination and licensure as LArsquos

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Fee-only planners view this as being forced to move back into a house they have already sold) Secondary reasons include fee-only planners view the LA license as an over-qualification to perform the tasks they desire to perform there are no schools or colleges currently teaching the course work required to become LArsquos because a total lack of enforcement by the CDI of this statute has created a total lack of interest on the part of fee-only planners Also there are no teaching materials or publications available for purchase to prepare for the examination These problems and potential solutions are discussed in more detail in the section below

Finally it is fascinating and significant to note that while many fee-only planners firmly believe State and SEC investment adviser regulations are outdated irrelevant and sorely in need of a complete revision and overhaul if they permit planners to ldquoperform comprehensive financial planningrdquo few if any fee-only financial planners actually violate the Investment advisory statutes One major reason for this almost total compliance is because of the rigorous enforcement efforts of the Dept of Corporations the NASD and the SEC in regards to the Investment Adviser Act of 1940 and the severe penalties including imprisonment it imposes for offenders

In light of the foregoing this author has concluded that the only way consumers will be substantially protected from unlicensed insurance activities is if (a) meaningful reforms are enacted that make statutory compliance desirable and (b) cooperation is sought with other State agencies such as the Dept of Corporations and private professional regulatory organizations such as the CFP Board of Standards (discussed later) who regulate activities in related financial service categories to facilitate the sharing of information crucial in establishing which activities fee-only financial planners are engaging in

RECOGNIZING NEW DELIVERY METHODS IN THE BUSINESS OF INSURANCE

It is the authorrsquos belief that licensing compliance in the business of insurance will only become a reality when States recognize the recent rapid developments in the ldquomethods of deliveryrdquo of insurance advice nationwide particularly those associated with the emerging profession of financial planning More and more consumers have recognized the advantages of employing one trusted advisor for all their financial affairs and view insurance advice as part of an overall financial plan Californiarsquos consumers are cognizant that conflicts of interest exist in insurance planning because LX amp FX agents are only compensated by insurers and represent the insurerrsquos interests to the client not the clientrsquos interests to the insurer Such agency relationships impact the fee-only plannerrsquos ability to honor hisher fiduciary obligation to act in the clientrsquos best interests at all times

Fee-only planners desire to perform the tasks and functions of an LX amp FX licensee Few if any desire to perform the more complex tasks and analysis normally expected of a Life and Disability Analyst Fee-only planners are committed to eliminating the conflicts of interests associated with representing an insurer and many consumers in California desire to employ one fee-only planner to handle all their affairs including the insurance planning portion of their financial plan rather than multiple professionals The net effect of this is that many

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

consumers seek out fee-only planners to reduce conflicts while ostensibly obtaining objective and untainted advice Unfortunately they are instead often given incompetent advice by unlicensed individuals In order then to benefit and protect consumers substantial but beneficial reform is necessary

Fee-only planners with established financial planning credentials equate obtaining the LA license with ldquomoving back into a house they are trying to sellrdquo They feel competent and qualified to assist consumers in insurance planning and may have held insurance licenses for years prior to allowing them to lapse State law however demands they be licensed for five years preceding their application for licensing as Analysts and during that time they would need to ldquotransactrdquo insurance as a licensed LX agent something they do not feel they can do

As the author sees it the State has two choices in this matter It can either crack down on fee-only planners and others offering unlicensed insurance advice for a fee (hardly feasible based on lack of funding staffing or voluminous consumer complaints) or seek ways to legalize regulate and supervise these plannerrsquos activities Currently financial planners are regulated at the state level under Section 25009(b) of Californiarsquos Corporations Code Which states

Section 25009 (b) (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part of another 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 publishes analyses or reports concerning securitieshelliphelliphelliphelliphelliphelliphelliprdquo

While consumers nationwide have embraced the concept of comprehensive financial planning California along with most other States has been slow to recognize that financial planning has developed far beyond the simple giving of ldquoinvestmentrdquo advice Financial planners in California are still regulated supervised and audited by the Dept of Corporations which while skilled in terms of overseeing regulated securities transactions is woefully under equipped to supervise the activities of a planner engaging in insurance investment tax retirement estate and asset protection planning The Series 65 Investment Advisor Examination is the only legal requirement for those who desire to use the term ldquofinancial plannerrdquo in California However as the Series 65 training and education requirements23 illustrate the current State educational requirements for ldquofinancial plannersrdquo are far removed from the level of competency actually required to practice ldquofinancial planningrdquo

RECOGNITION OF ldquoFINANCIAL PLANNINGrdquo AS A PROFESSION

The State of California is well known for its innovative and forward thinking and has a unique opportunity as the bell-weather State of this nation to lead the way for other States to follow It is time for Californiarsquos regulatory and licensing bodies such as the Dept of Insurance and Dept of Corporations to recognize ldquofinancial planningrdquo as an ldquoemerging

Confidential Page 14 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

allied professionrdquo that is having a significant impact on the provision of services traditionally regulated by their agencies Recognizing the emerging profession of financial planning and recommending to the legislature the necessity of developing regulations that will govern professionals who desire to practice the profession of financial planning is the only viable sensible and logical long-term solution for protecting Californiarsquos consumers from harm

As with any other emerging profession the State in developing any such regulations should recognize and seek the counsel of long established national and international organizations that have developed rules guidelines ethics and ascertainable standards of education examination criteria credentialing and continuing education requirements Consideration should also be given as to whether a new or existing State agency should regulate the activities of financial planners or whether these activities should be regulated independent of agencies in allied professions such as those agencies governing insurance and securities As an example lawyers accountants and bank employees etc are provided limited exemptions from registration under insurance and securities laws because the State has concluded that their existing professional State licensing requirements contained in the Business and Professions Code established standards of practice and a written codes of ethics and professional responsibility provide sufficient protection to consumers without requiring multiple State licensure

Regulations governing investment advisers are inadequate to address the multitude of tasks performed by comprehensive financial planners The question therefore arises as to whether a separate state license and new regulations should be developed within the Business amp Professions Code to govern comprehensive financial planners that is separate and distinct from investment advisory services in order to adequately protect Californiarsquos consumers Should the use of the commonly touted investment industry term ldquofinancial plannerrdquo be reserved for individuals who have been State certified as competent to perform comprehensive financial planning The greatest obstacle to the recognition of financial planning as an emerging profession requiring some form of licensure is by what standards should such a profession be measured Many fee-only financial planners have no professional accreditation whatsoever other than the investment adviser registration overseen by the CA Dept of Corporations Have ascertainable and acceptable standards been developed

FINANCIAL PLANNING AND THE CERTIFIED FINANCIAL PLANNERreg

CERTIFICANT

The most widely recognized professional financial planning designation worldwide is the CFPreg Certificate The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS INC24 (Hereafter CFP Board) has licensed its CFPreg and CERTIFIED FINANCIAL PLANNERreg trademarks to over 67000 individuals in 19 countries There are currently 4578 CERTIFIED FINANCIAL PLANNERreg Certificants licensed in California25 Most CFPreg Certificants hold multiple State or federal licenses (insurance securities Registered Investment Advisor etc) and are already supervised in their professional activities by

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

multiple federal and or state agencies Sadly not one auditor of any supervising federal or state agency possesses the knowledge base or skill sets to supervise the overall activities of a comprehensive fee-only financial planner It should be stated that while the CFP Board has established a code of ethics and uniform standards of practice for CFPreg Certificants that could be used as a yardstick by legislators the CFP Board does not currently supervise investigate or audit any CFPreg Certificantrsquos activities unless a formal complaint is filed against a Certificant with the Board

The CFP Board defines a ldquofinancial plannerrdquo as a person ldquowho is capable and qualified to offer objective integrated comprehensive financial advice to or for the benefit of individuals to help them achieve their financial objectivesrdquo A financial planning professional must have the ability to provide competent financial planning services to the client utilizing the ldquofinancial planning processrdquo26 which covers basic ldquofinancial planning subject areasrdquo 27

With specific regard to the business of insurance it is important to understand the benefits provided by the CFPreg Certificate course of education as well as its shortcomings The CFP Board has developed a course curriculum (Attached as Exhibit IV) in insurance planning as an integral part of the CFPreg Certificate examination requirement This educational requirement exceeds the training currently required by the California Department of Insurance on all levels There are however shortcomings to the CFP Boardrsquos program that cannot be overlooked There is no training in State insurance regulations or any Statersquos insurance code provisions governing the business of insurance Furthermore while there is a mandatory requirement that each CFPreg Certificant complete 30 hours of continuing education for each two year certification period there is currently no requirement that all of these hours be approved by the CDI for insurance continuing education credits

The CFP Board of Standards is willing to cooperate with the CDI to address and correct the shortcomings in its program Once these problems have been corrected there are two potential solutions that if implemented could encourage full compliance with State licensing laws certainly on the part of CFPreg Certificant fee-only planners not currently licensed

SOLUTION 1 PROVIDE A FULL EXEMPTION FROM INSURANCE EXAMINATION AND LICENSING TO CFPreg CERTIFICANTS WHO ARE LICENSED AS REGISTERED INVESTMENT ADVISORS

Currently section 1831(e) provides a limited exemption from insurance licensing for Registered Investment Advisors (RIArsquos) but only ldquowhen acting in that capacityrdquo (Discussed in detail earlier) This suggestion would expand the relevant code section and remove any limitation from RIArsquos performing the tasks of a LX or FX agent providing the following conditions are met

1 The person is and remains a licensed Registered Investment Advisor either with the State or by the SEC AND

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

2 The person remains a CFPreg Certificant in good standing AND

3 The person in addition to any continuing education requirements of the CFP Board of Standards in other areas of financial planning completes no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

4 The person provide to the CA Dept of Insurance proof of his current licensing status as a Registered Investment Advisor and CFPreg Certificant together with a list of all approved continuing education courses completed for each two year period or whenever required to do so by the Dept of Insurance AND

5 Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

6 Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS EXEMPTION

As previously illustrated the Registered Investment Advisor license alone does not qualify a person to offer insurance advice for a fee The CFPreg Certificate alone even once enhanced to provide training in statutory law and the regulation of the business of insurance in California would be insufficient because the CFPreg Certificate is not an official State regulated license However a combination of the CFPtrade Certificate and the Registered Investment Advisor license coupled with the other suggestions made above will provide a sound educational basis for any person desiring to offer insurance advice for a fee while protecting the public from harm to a far greater degree than they are protected under current law In addition this proposed exemption would alleviate the need for fee-only CFPreg Certificants to become licensed LArsquos in order to be compensated by the consumer thereby eliminating the requirement that they license themselves as LXrsquos for 5 years before meeting licensing qualification requirements By NOT forcing fee-only planners to move into a house theyrsquove already moved out of BUT RATHER demanding competence in return for a waiver from LA licensing requirements the CA Dept of Insurance would protect the consumer while facilitating an opportunity for immediate compliance without expensive investigation of illegal activities prosecution and supervision of future activities Compliance would go up the cost of supervision investigation and prosecution would go down

It is important to note that any advice given would be limited under this proposed change to the typical advice offered by LX or FX licensees who generally provide explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures limits premiums rates deductibles payment plans and

Confidential Page 17 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance contract or potential insurance contract terms as well as recommending andor advising potential applicantspolicyholders on insurance coverage to buy particular insurance policies or to insure with particular companies or insurers The advice given should not be allowed to encroach on the more complex tasks a Life amp Disability Analyst provides

This exemption will

bull Permit Registered Investment Advisors with a CFPreg Certificate to offer insurance advice without the need for appointment by an insurer and allow them to be compensated by a third party other than the insurer for that advice (A Variant of this model already exists in Connecticut and New Hampshire A very POORLY structured derivative (that this author does NOT support) has just been signed into law in Idaho The Idaho statute gives a Registered Investment Advisor carte blanche to offer insurance advice for a fee without any training examination or continuing education requirement in insurance planning a clear violation of the public trust In addition CFPreg Certificants will shortly be given an exemption from registration as Insurance Counselors (LA equivalent license for Texas) in Texas The author finds this unacceptable because again no instruction will be mandatory in insurance regulation and insurance law)

bull Require the candidate to complete a comprehensive course of education in among other things all aspects of insurance planning and demand state licensing (as an investment adviser) before qualifying for the exemption

bull Require continuing education of 30 hours in insurance planning a significant improvement over the LA license which requires NO continuing education currently

bull Leaves intact the State Insurance Commissionerrsquos authority (under CICsect790 et Seq And CICsect129218 (supra)) to supervise audit fine punish and bar from the business of insurance in CA any person who violates the publicrsquos trust

COMPARISON OF THE ldquoCFPreg PLUS REGISTERED INVESTMENT ADVISORrdquo EXEMPTION TO THE LIFE AND DISABILITY ANALYST LICENSE REQUIREMENT

There will still be a need for the Life amp Disability Analyst license in California LArsquos provide a valuable service to the public by

bull Offering expert testimony in court regarding all insurance related matters

bull Providing complex expert comparative analysis and interpretation of the terms and conditions of various insurance contracts to consumers accountants and lawyers

Confidential Page 18 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

bull Explanation of the rights of the parties under an insurance contract a service otherwise reserved exclusively to members of the Bar

The proposed exemption would not obviate the need for LA licensees It will provide a means for fee-only Registered Investment Advisor financial planners who have earned the CFPreg Certificate a professional financial planning credential that has course work superior to the current minimum standard requirement by the CA Dept of Insurance (with the noted exceptions listed above which must be addressed before an exemption would be granted) to serve their clients basic insurance needs without appointment by an insurer and the inherent conflicts of interest this may represent

EFFECT OF THIS PROPOSED EXEMPTION ON CONSUMERS

This proposed exemption would have a substantially positive effect on consumers with no negative impact whatsoever They will be able to seek out a professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education It will further provide greatly enhanced protections for the public against wrongdoing by requiring a bond in the amount of $100000 (one hundred thousand dollars) and mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CA Department of Insurance (It should however be noted that most if not all CFPreg Certificants meet all the above criteria already in terms of EampO insurance etc and obtaining a $100000 bond would not place an undue burden on any fee-only CFPreg Certificant planner) Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their insurance matters

POTENTIAL PROBLEMS ASSOCIATED WITH THE GRANTING OF AN EXEMPTION FOR CFPreg CERTIFICANTS MEETING THE ABOVE CRITERIA

One possible problem would of course be that other financial service professionals with professional insurance or financial planning credentials would seek to block any such legislation unless their credential were to be included Some other designations worthy of exemption would be

The Chartered Life Underwriter (CLU) The Chartered Financial Consultant (ChFC)

The author based on the knowledge and skill sets required to hold such designations has no objections to the inclusion of these designations for purposes of the aforementioned suggested exemption providing these professionals meet ALL the other criteria

SOLUTION 2 PERMIT STATE LICENSING AS A LX OR FX WITHOUT INSURANCE COMPANY APPOINTMENT AND AUTHORIZE PLANNERS TO BILL CLIENTS DIRECTLY

Confidential Page 19 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Under California law a person who ldquofor a fee or compensation of any kind paid by or derived from any person or source other than an insurerrdquo(emphasis added) must register a Life and Disability Insurance Analyst under CIC Section 325 As previously illustrated in this discussion however Life and Disability Insurance Analysts are required to

bull Pass an antiquated examination that has not been substantially revised since 1983 bull Self-Study in some cases already repealed statutes because no examination

revisions have been undertaken since 1983 Furthermore no educational courses are available from any college school or professional educational institution because there is simply no demand for the license due to a complete lack of enforcement of LA laws by the CDI

bull Self Study to familiarize themselves with many topics including Long Term Care and other more recently introduced exotic and hybrid insurance products because candidates are not tested on these products due to lack of LA examination revision

Oddly once licensed Life and Disability Insurance Analysts are NOT required to complete any continuing education requirements of any kind There is no requirement other than one imposed by ldquopotential liabilityrdquo through civil action for a LA to ldquoremain currentrdquo as a LA licensee

In light of the foregoing a far more sensible alternative and second potential solution would be to allow all LX amp FX agents to be licensed with the CDI without the requirement for appointment to transact on behalf of an insurer LX or FX agents desiring to be compensated directly from the consumer (for purposes of this discussion the author will refer to such agents as FLX amp FFX agents) would subject themselves to the same CDI licensing and examination requirements as traditional LX amp FX agents FLX amp FFX agents would also be subject to the same continuing education requirements as traditional LX amp FX agents The function of FLX amp FFX licensed individuals would be to act ldquoquasirdquo in the capacity of a personal representative of the client with the authority to negotiate and effect all insurance coverages on their behalf at the best possible terms with any company they choose (As fiduciaries such FLX ampFFX licensees would be subject to regulations similar to the NASDrsquos ldquobest executionrdquo rules They would be required to perform extensive due diligence and seek the best coverages at the most reasonable prices on behalf of their clients)

Currently such activities allowed under CIC sect33 are restricted to ldquoa person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurerrdquo (Emphasis added) In essence then a similar but new and distinct section would be created expanding the role of an ldquoinsurance brokerrdquo as defined under CIC sect33 to that of a FLX amp FFX who would be authorized to solicit and negotiate all forms of insurance including property casualty life health disability long-term-care and other forms of insurance

Confidential Page 20 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

This new Code section would make additional demands on any person seeking to license himherself as a FLX amp FFX licensee to protect consumers from harm Among other things such licensees would be required to

bull Complete BOTH LX and FX courses of education and the appropriate licensing examinations (Based on the CFP Boardrsquos program of education in insurance planning fee-only comprehensive financial planners provide information regarding all aspects of a consumerrsquos risk management needs

bull Be a licensed Registered Investment Advisor with the State AND

bull Complete no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

bull Provide to the CA Dept of Insurance proof of current licensing status as a Registered Investment Advisor together with a list of all approved continuing education courses completed each two year period or whenever required to do so by the Dept of Insurance AND

bull Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

bull Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS NEW LICENSE

This proposed license would have a substantially positive effect on consumers with no negative impact whatsoever Consumers will be able to seek out a ldquolicensedrdquo professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education The examination requirement supports the CDIrsquos position as stated in the February 8 1998 letter written by Jeffrey Kenny (Supra) that only those individuals who pass CDIrsquos exams are to be issued licenses and that the CDI will remain ldquovia its examination and related or regulatory functions the authorizing agencyhelliphelliprdquo in the business of insurance It will further provide greatly enhanced protections for consumers against wrongdoing by requiring a California surety bond in the amount of $100000 (one hundred thousand dollars) in addition to mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CDI Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their basic insurance needs on a fee-only basis

Confidential Page 21 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

SUMMARY AND CONCLUSIONS

The California Dept of Insurance has essentially four choices

1 Maintain a Status Quo approach do nothing to address the illegal activities of fee-only financial planners remaining a reactive rather than proactive regulator of the business of insurance

2 Implement a program of rigorous investigation and enforcement of illegal activities in the business of insurance utilizing current and newly introduced sections of the California Insurance Code to stamp out the widespread and growing problem of illegal activities on the part of fee-only financial planners offering advice in insurance matters for a fee in California

3 Consider implementation of one or more of the solutions suggested in this discussion

4 Develop meaningful initiatives such as those suggested herein to combat andor provide solutions to illegal activities in the business of insurance

Maintaining the status quo and doing nothing to address the illegal activities of fee-only planners will eventually cause the CDI to lose control and regulatory authority over the business of providing insurance advice to consumers to other state agencies such as the Dept of Corporations an agency ill equipped and hardly qualified to supervise and monitor such activities More and more broker-dealer registered financial planners and life agents are transitioning to the more profitable fee-only model Without aggressive enforcement of the law many of these planners may eventually surrender their insurance licenses to avoid multiple state licensure layering of regulation supervision and audit The current lack of any enforcement by the CDI against prominent planners who have already been reported to CDIrsquos investigations division by Errold Moody CFPreg and others over the past ten years is an encouragement to other transitioning planners to ignore and violate State law Inaction equates to state condoned tolerance and silent approval in the eyes and minds of many fee-only financial planners

Rigorous investigation and enforcement while preferable is also the most difficult policy to enforce The CDI has neither the manpower nor the consumer driven complaints necessary to actively enforce insurance laws against fee-only planners violating state law Simply put these planners are ldquooff the radarrdquo and rarely generate complaints Since they are not licensed they do not fall under the authority of the CDI and unless they are brought to the attention of the CDI by virtue of consumer complaints these planners will continue to remain extremely difficult to find Additionally the CDI lacks proper funding and manpower to effectively enforce Insurance laws in California at this time Therefore any consideration for rigorous investigation and enforcement must be viewed as impractical given the current budget deficit and the apparent lack of will on the part of the CDI and local district attorneyrsquos offices to prosecute violators when they are reported

Confidential Page 22 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

By implementing one or more of the suggestions contained in this discussion the CDI will facilitate voluntary and willing compliance with state law while ensuring that their mandate to protect consumers from harm by insisting that CDI established examination licensing and continuing education requirements would be met Fee-only planners would be able to offer the advice they desire to offer on a fee basis with direct client billing the CDI would be in a far better position to supervise control audit and discipline these planners if and when the need arises More importantly consumers would be able to turn to the CDI for assistance without hearing the phrase ldquoIrsquom sorry that individual is not licensed and does not fall under our jurisdictionrdquo

In conclusion the CDI has the opportunity to solicit opinions and suggestions from state sponsored agencies and boards such as the CA Agent and Broker Advisory Commission to the Dept of Insurance Some members of the CDI Agent and Broker Advisory committee are fee-only CFPreg Certificants and have an understanding of the issues involved These professionals and other insurance professionals whose livelihoods also depend in part on ethical conduct in the business of insurance are in a position to provide valuable input to the CDI regarding these suggestions

It is hoped that this discussion will generate concern and renewed scrutiny of the illegal activities of fee-only planners in California and that this in turn will lead to a necessary beneficial and long overdue overhaul of Californiarsquos insurance licensing laws for the benefit of not only Californiarsquos consumers but eventually Consumers nationwide who reside in States with similar insurance advisory statutes

Respectfully submitted

Nigel B Taylor is a Certified Financial Plannerreg Certificant General Securities Principal and CA Life Agent associated with Royal Alliance Securities Inc He is a former President of the Award Winning Institute of Certified Financial Planners Los Angeles Society (1999) and Former Chairman of the Financial Planners Association ndash Los Angeles Chapter (2000) Mr Taylor has published numerous articles regarding proposed regulation compliance ethics and professionalism for financial planners and CFPreg Certificants He is based in Santa Monica California

1 CA Insurance Code Sections 32 amp 1622 2 Source Dept of Insurance Annual Report 2000 3 Source Dept of Insurance Annual Report 2000 4 CA Insurance Code Section 325 5 CA Insurance Code Sections 1849 6 Source CA Dept of Insurance March 2002 7 Source CA Dept of Corporations March 2002 8 25009 (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part

Confidential Page 23 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

of another business of advising others either directly or through publications or writings as to the value of securitieshelliphellip(Excerpt) 9 CA Insurance Code Section 325 10 CA Insurance Code Section 1668 The commissioner may deny an application for any license issued pursuant to this chapter if helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this state 11 CA Insurance Code Section 1844 Any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

12 CA Insurance Code 17255 (a) For purposes of Sections 325 1625 1626 17245 17581 1765 1800 14020 14021 and 15006 every licensee shall prominently affix type or cause to be printed on business cards written price quotations for insurance products and print advertisements distributed exclusively in this state for insurance products its license number in type the same size as any indicated telephone number address or fax number

CIC 17255 (c) Any person in violation of this section shall be subject to a fine levied by the commissioner in the amount of two hundred dollars ($200) for the first offense five hundred dollars ($500) for the second offense and one thousand dollars ($1000) for the third and subsequent offenses The penalty shall not exceed one thousand dollars ($1000) for any one offense These fines shall be deposited into the Insurance Fund

13 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the commissioner authorizing the person to act in that capacity 14 1858 In the construction of a statute or instrument the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein not to insert what has been omitted or to omit what has been inserted and where there are several provisions or particulars such a construction is if possible to be adopted as will give effect to all 15 Flannery v Prentice (2001) 110CalRptr2d 809 26Cal 4th 572 28P3d 860 16 People v Martinez (1995) 45CalRptr2d 905 11Cal4th 434 903P2d 1037 17 Caminetti v State Mut Life Ins Co (1942) 126P2d80926Cal 4th 572 28P3d 860 18 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the

Confidential Page 24 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

commissioner authorizing the person to act in that capacity The issuance of a certificate of authority to an insurer does not exempt an insurer from complying with this article

1633 Any person who acts offers to act or assumes to act in a capacity for which a license is required without a valid license so to act is guilty of a misdemeanor

16335 It is hereby declared to be the intent of the Legislature in enacting this chapter that the regulations prescribed herein be the exclusive regulations relating to the conduct of insurance business by persons licensed to act in any of the capacities defined hereunder any local regulations or ordinances notwithstanding 19 79001 This article applies to reciprocal and interinsurance exchanges Lloyds insurers fraternal benefit societies fraternal fire insurers grants and annuities societies insurers holding certificates of exemptions motor clubs nonprofit hospital associations life agents broker-agents surplus line brokers and special lines surplus line brokers as well as all other persons engaged in the business of insurance (color amp emphasis added)

20 79004 The commissioner shall have power to examine and investigate into the affairs of every person engaged in the business of insurance in the State in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 79003 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance Such investigation may be conducted pursuant to Article 2 (commencing at Section 11180) of Chapter 2 Part 1 Division 3 Title 2 of the Government Code

21 790035 (a) Any person who engages in any unfair method of competition or any unfair or deceptive act or practice defined in Section 79003 is liable to the state for a civil penalty to be fixed by the commissioner not to exceed five thousand dollars ($5000) for each act or if the act or practice was willful a civil penalty not to exceed ten thousand dollars ($10000) for each act The commissioner shall have the discretion to establish what constitutes an act However when the issuance amendment or servicing of a policy or endorsement is inadvertent all of those acts shall be a single act for the purpose of this section

22 129218 (a) The commissioner shall have the authority to issue a cease and desist order against any person acting as or holding himself herself or itself out as an insurance agent or broker without being so licensed and against any person holding out that person as transacting or transacting the business of insurance without having been issued a certificate of authority The commissioner may issue a cease and desist order without holding a hearing prior to issuance of the order The commissioner may impose a fine of up to five thousand dollars ($5000) for each day the order is violated

22 Supra 23 See Exhibit III of this memorandum

Confidential Page 25 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

24 CFP Board a 501(c)(3) certifying organization fosters professional standards in

personal financial planning so that the public values has access to and benefits from competent financial planning CFP Board owns the certification marks CFPtrade CERTIFIED FINANCIAL PLANNERtrade and federally registered CFP (with flame) logo which it awards to individuals who successfully complete initial and ongoing certification requirements CFP Board has currently authorized more than 39214 individuals to use these marks in the United States and 27343 individuals outside the United States For more about CFP Board visit wwwCFPnet 25 Source CFP Board of Standards Inc Colorado 26 Financial Planning Process denotes the process which typically includes but is not limited to the six elements of establishing and defining the client-planner relationship gathering client data including goals analyzing and evaluating the clientrsquos financial status developing and presenting financial planning recommendations and monitoring the financial planning recommendations (CFPtrade Board Code of Ethics ndash Definitions) 27 Financial planning subject areas denotes the basic subject fields covered in the financial planning process which typically include but are not limited to financial statement preparation and analysis (including cash flow analysis planning and budgeting) investment planning (Including portfolio design ie asset allocation and portfolio management) income tax planning education planning Risk Management (emphasis added) retirement planning and estate planning (CFPtrade Board Code of Ethics ndash Definitions)

Confidential Page 26 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

EXHIBIT I

Confidential Page 27 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life Agent License Information

LIFE AGENT (LX) Licensing Information

TABLE OF CONTENTS

Authorizing acts and with definitions Qualifications Filing Requirements

Individual -- Residents Organization -- Residents Individual -- Non-Residents Organization -- Non-Residents

License Term Renewal of License Additional Information

APPLICABLE FORMS

Individual Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Action Notice of Appointment (Form 447-54) Organization Endorsement (Form 411-8A) Non-Resident Insurance License Stipulation and Agreement (Form 447-68)

These forms are also included in the Individual and Business Entity applications

AUTHORIZING ACT

California State Insurance Code Chapter 5 Part 2 Division 1

A life agent (LX) is a person authorized by and on behalf of a life disability or life and disability insurer to transact life disability or life and disability insurance

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

Prelicensing ExperienceEducation

1) Require a minimum of 40 hours of approved prelicensing classroom study A new California resident applicant who had a current life license in another state and completed 40 hours of prelicensing education for life insurance in order to obtain that license or an applicant holding either a Life Underwriter Training Council Fellowship (LUTCF) or Chartered Life Underwriter (CLU) designation is exempt from the 40 hours of prelicensing education

2) Require 12 hours of approved prelicensing classroom study on ethics and the California Insurance Code Where an applicant seeks both the Fire and Casualty broker-agent license and the Life agent license the applicant shall only be required to complete one 12-hour course on ethics and the California Insurance Code

Continuing Education

1) During each of the first four 12-month periods following the date of original issue of license satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to a minimum of 25 hours

2) Any licensee who has complied with the above or was licensed as of 123191 shall satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to 30 hours of instruction during each two-year license period

3) Any agent that markets long-term care insurance must complete an 8-hour California specific long-term care continuing education course Check with your insurer regarding long-term care insurance requirements

4) Effective January 01 1998 any person who is 70 years of age or older and who has been licensed for 30 continuous years as a licensee in good standing in this state may be exempt from continuing education requirement Any licensee that markets individual long-term care contracts is still required to meet the specific education requirements for marketing such contracts

The agent who is limited by the terms of a written agreement with the insurer to transact only specific life insurance policies or annuities having an initial face amount of $10000 or less that are designated by the purchaser for the payment of funeral or burial expenses will be exempted from the prelicensing and continuing education requirements The commissioner may require the insurer appointing those life agents to certify as to the limitation of the agents representations

FILING REQUIREMENTS INDIVIDUAL - RESIDENTS

Application Application for Insurance License form 441-9

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to CaliforniaThis form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants If an examination is required fingerprint impressions will be taken at the California examination sites

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Prelicensing Certificate Of Completion Original certificate(s) of completion signed by both classroom instructorprovider director and applicant for life agent course andor Ethics and Code course

Examination Applicants who do not hold an active Life (LX) California resident license and whose eligibility for that license without examination has expired must pass the written examination prepared and administered by the Department

Fees - Individual Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice or an Organization Endorsement $21 per notice Examination $35 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 all applicants must appear at the designated exam site with a check in the amount of $74 made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal Fee $124 (2-year term)

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 1

Life Agent License Information

FILING REQUIREMENTS ORGANIZATION - RESIDENTS

Organization Application

Corporation partnership unincorporated association limited liability company or nonprofit corporation applicants must submit the Application for Organization License form 441-11

NOTE The organization must have at least one California resident LX endorsee to establish and maintain the license

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each endorsee who holds an active California non-resident LX license Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Fees - Organization Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS INDIVIDUAL - NON-RESIDENTS

Application Application for Insurance License form 441-9 must be completed by applicants who do not hold an active California LX license

NOTE Licensed non-resident agents whose state of residence does not have continuing education must meet the same requirements as a California resident in order to renew their license Licensed non-resident agents who comply with the continuing education requirements of their state of residence are exempt from California continuing education requirements If licensees transact long term care products they must meet California specific long term care education requirements

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California This form is also included in the Individual and Business Entity applications

Stipulation and Agreement Non-resident Insurance Licensee Stipulation and Agreement form 447-68

Certification Of License Status From Resident State

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Examination Not required except if the applicants state commonwealth or Canadian province of residence has no reciprocal agreement for waiving of examination

Fees - Individual Non-Resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS ORGANIZATION - NON-RESIDENTS

Organization Application

Corporation partnership unincorporated association or nonprofit corporation applicants must submit the Application for Business Entity License form 441-11

Note A California resident cannot be endorsed on a non-resident organization

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each natural person who holds an active California non-resident LX license This form is also included in the Individual and Business Entity applications Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Stipulation and Agreement Non-resident Insurance License Stipulation and Agreement as required by law form 447-68 signed by an officer or partner of the organization

Certification Of License Status From Resident State Must be in the organization name

Fees - Organization Non-resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 2

Life Agent License Information

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed to the mailing address of record approximately 90 days prior to the expiration date of the license Individuals will receive a renewal application showing total fees due for all license types held and the total number of continuing education hours completed at the time the renewal form is printed If the continuing education requirement has not been met the renewal will indicate how many hours are needed If renewal application is not received refer to the back of the permanent license for renewal instructions

All licensees that renew their licenses late will be required to file new company appointments organization endorsements or solicitor appointments Late is defined as any renewal for which the requirements to renew (this includes completing the continuing education hours) are not met until after the expiration date of the previous license term

ADDITIONAL INFORMATION

The Commissioner may grant authority to transact variable contracts to a person or an organization licensed as a Life Agent which is appointed by an admitted insurer which is required to register itself or to register a separate account or fund with the United States Securities and Exchange Commission or to register its variable policies or contracts with the Securities and Exchange Commission The person must submit acceptable proof of registration with NASD or SECO before authority to transact variable contracts can be granted

If currently licensed as a resident of another state upon becoming a California resident a clearance letter from the former state of residence is required

Limited liability company applicants are required to submit the following information to demonstrate compliance with Section 16475 of the California Insurance Code

1 A statement as to the number of licensees rendering professional services on behalf of the Limited Liability Company

2 The aggregate dollar amount of E amp O Liability Insurance Cash Bonds Bank Certificates of Deposit US Treasury obligations etc held to provide security for claims against the Limited Liability Company (The amount required over the minimum of $500000 is at least $100000 multiplied by the number of licensees rendering professional services on behalf of the company however the maximum amount is not required to exceed $5000000)

3 For purposes of satisfying the security requirements of California Insurance Code Section 16475 we will require one or more of the following

(A) A copy of the declaration page for each liability insurance policy used to satisfy the minimum security requirement

(B) Verification by the bank or escrow holder listing the type and current dollar value of the assets used to satisfy the minimum security requirements

Limited liability company licensees must file at least once each year an annual confirmation with the commissioner in the above format to demonstrate continuing compliance with the financial security requirements of Section 16475 of the California Insurance Code

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 644A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - January 16 2002 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 3

EXHIBIT II

Confidential Page 31 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life and Disability Insurance Analyst License Information

LIFE AND DISABILITY INSURANCE ANALYST (LA) License Information

APPLICABLE FORMS

Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Organization Endorsement (Form 441-8A) Request For Live Scan Service (form 442-39A)

This form is also included in the Individual and Business Entity applications

AUTHORIZING ACT California State Insurance Code Chapter 8 Part 2 Division 1

A Life and Disability Insurance Analyst is a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is required

Prelicensing ExperienceEducation Must have worked as a life licensee as defined under Chapter 5 Part 2 Division 1 of the Insurance Code for five years preceding the date of the examination or as an employee of such a licensee

Continuing Education

Not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

FILING REQUIREMENTS - INDIVIDUAL

Application Application for Insurance License form 441-9

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants You must call SYLVANIDENTIX at 1-(800) 315-4507 to schedule an appointment to have your fingerprint impressions taken prior to submitting your application Fingerprint impressions will not be accepted from any other source A copy of your Request For Live Scan Service (form 442-39A) must be submitted with your application verifying your prints were taken by SYLVANIDENTIX

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

FEES - Individual

License Filing $418 (2-year term) Examination $103 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 this fee must be paid at the designated site when the fingerprint impressions are taken You may pay by check made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal $418 (2-year term )

EXAMINATION

The applicant must pass the written examination prepared and administered by the Department

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 1

Life and Disability Insurance Analyst License Information

STUDY MATERIAL

Although the Department does not recommend any particular text method or course of study listed below is a study guide to assist in the preparation for the examination 1) The life and disability laws of this state are contained in the California Insurance Code Those sections on which an applicant might be tested are

General Provisions Sections 1 - 46 Division 1 Part 1 Chapter 1 Sections 100 - 123 Division 1 Part 1 Chapter 2 Article 1 Sections 150 - 151 Division 1 Part 1 Chapter 2 Article 3 Sections 250 - 252 Division 1 Part 1 Chapter 2 Article 4 Sections 280 - 287 Division 1 Part 1 Chapter 2 Article 5 Sections 300 - 305 Division 1 Part 1 Chapter 3 Article 1 Sections 330 - 339 Division 1 Part 1 Chapter 3 Article 2 Sections 350 - 361 Division 1 Part 1 Chapter 4 Article 1 Sections 380 - 393 Division 1 Part 1 Chapter 4 Article 3 Section 430 Division 1 Part 1 Chapter 4 Article 4 Sections 440 - 449 Division 1 Part 1 Chapter 4 Article 5 Section 460 Division 1 Part 1 Chapter 5 Sections 480 - 489 Division 1 Part 1 Chapter 6 Article 3 Sections 550 - 5575 Division 1 Part 2 Chapter 1 Article 1 Section 680 Division 1 Part 2 Chapter 1 Article 3 Sections 669 - 726 Division 1 Part 2 Chapter 1 Article 5 Sections 750 - 767 Division 1 Part 2 Chapter 1 Article 55 Sections 770 - 776 Division 1 Part 2 Chapter 1 Article 57 Sections 7771 - 7773 Division 1 Part 2 Chapter 1 Article 6 Sections 780 - 784 Division 1 Part 2 Chapter 1 Article 65 Sections 790 - 79010 Division 1 Part 2 Chapter 1 Article 75 Sections 815 - 816 Division 1 Part 2 Chapter 2 Article 5 Sections 1220 - 1221 Division 1 Part 2 Chapter 4 Article 2 Sections 1580 - 1599 Division 1 Part 2 Chapter 5 Sections 1621 - 17585 Division 1 Part 2 Chapter 5A Sections 1759 - 175910 Division 1 Part 2 Chapter 8 Sections 1831 - 1849 Division 2 Part 2 Chapters 1-13 Sections 10110 - 11533 Division 2 Part 61 Sections 12670 - 12691 Division 3 Chapters 1 and 2 Sections 12900 - 12977

2) The provisions terms and conditions of a life and disability insurance contract that might be tested are but not limited to the following Life Insurance Disability Insurance

Insuring Agreement Insurance Clause Reinstatement Schedule Incontestability Renewal Provisions Settlement Options Benefit Provisions Dividend Options Co-Insurance Ownership Provisions Waiting Periods Nonforfeiture Provisions Elimination Periods Grace Periods Deductibles Loan Provisions Waivers Suicide Exclusions Assignments of Transfers Restrictions Aviation Clause Pre-existing Conditions Beneficiaries Provisions Other Insurance

Additionally the applicants are expected to be thoroughly familiar with the types of contracts being issued in this state including but not necessarily limited to Life Disability

Individual Contracts Individual ContractsGroup Contracts Group ContractsIndustrial Contracts Blanket ContractsOrdinary Life Basic Hospital ExpenseLimited Payment Life Basic Medical-Surgical ExpenseModified and Graded Premium Basic Hospital and Medical-Surgical ExpenseEndowment Insurance Hospital Confinement IndemnityImmediate Annuities Major Medical ExpenseDeferred Annuities Comprehensive Major Medical ExpenseVariable Annuities Disability Income ProtectionLevel Term Life Accident OnlyIncreasing Term Life Specified DiseaseDecreasing Term Life Specified AccidentRe-entry Term Life Medicare SupplementUniversal Life 3) A thorough and complete knowledge of life and disability insurance may include

a Application and consequences of various policies b Applications and consequences of federal and estate taxes c Interrelationship with other investment vehicles d Interrelationship with other regulatory agencies including but not limited to SEC RIA etc e Interrelationship with contract business probate and investment laws in California f Insurance companys financial and organization analysis g Rate calculations and risk transfer

FILING REQUIREMENTS - ORGANIZATION

Organization Application

Corporation partnership nonprofit corporation or unincorporated association applicants must submit the Application for Business Entity License form 441-11

Natural Person Named On Organization

Application for insurance license form 441-9 and Organization Endorsement form 411-8A must be completed by each natural person who does not hold an active California LX license (individual filing requirements must be met)

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 2

Life and Disability Insurance Analyst License Information

Organization Endorsement form 441-8A (this form is also included in the Business Entity application) must be completed for each natural person who holds an active California LX license

FEES - ORGANIZATION

Fees are not required for the organization license Each natural person named on the organization must pay individual fees

License filing $418 (2-year term) Renewal Fee $418 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed approximately 60 days prior to the expiration date of the license and will show total fees due for all license types held If this application is not received refer to the back of the permanent license for renewal instructions

ADDITIONAL INFORMATION

The following persons are exempt from the requirements of this license

a Active members of the State Bar of California

b Any person who has passed all of the qualifying examinations necessary to become an Associate of the Society of Actuaries

c An officer or employee of any bank or trust company who receives no compensation from sources other than the bank or trust company for activities connected with his employment which would otherwise subject him to licensing requirements

d Any person employed by an employer who on behalf of his or her employer or any employee of his or her employer transacts life or disability insurance with but not on behalf of an insurer or advises his or her employer or any employee of his or her employer in any manner concerning life or disability insurance if

1 the employer receives no compensation by reason of such transactions or advice and 2 such person receives no compensation from any source other than his or her employer for such transactions or advice

e An investment advisor as defined in Section 25009 of the Corporations Code when acting in that capacity

NOTE An employee or officer of any insurer is not eligible for a license as a Life and Disability Insurance Analyst

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 765A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - December 18 2000 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 3

EXHIBIT III

Confidential Page 35 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Series 65 Exam

The Uniform Investment Adviser Law Examination and the available study outline were developed by the North American Securities Administrators Association Inc (NASAA) The examination called the Series 65 exam is designed to qualify candidates as investment adviser representatives The exam covers topics that have been determined to be necessary to understand in order to provide investment advice to clients The study outline is designed to provide an overview of the exams general content and format

The study outline is divided into corresponding sections to aid in preparing for the examination

The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline Applicants are allowed 180 minutes to complete the examination At least 89 (685) of the questions must be answered correctly for an individual to pass the Series 65 exam

The examination is conducted as a closed book test Upon completion of the examination the score for each section and the overall test score will immediately be made available to the candidate

The examination is administered by the National Association of Securities Dealers Inc (NASD) To schedule a candidate for the examination an individuals firm should file a Form U-4 or the individual should file a Form U-10 and pay the $11000 examination fee to the NASD at the following address

NASD Regulation Inc Attention Exams Dept 9509 Key West Avenue Rockville MD 20850 301590-6500

Once registered NASD will open a 120-day window within which an individual may schedule the exam A link to the NASD Forms can be found at httpwwwnasdrcom3400asp More information on exam sites can be found at httpwwwnasdrcom2630asp

The questions in the examination the examination study outline and the method by which the examination is administered have been designed by Chauncey Group International for NASAA and approved by NASAA and the Competency Exam Project Group In addition each examination question is statistically analyzed to insure reliability

Any attempt to compromise the examination may serve to destroy its validity and usefulness Therefore NASAA intends to bring appropriate action against persons who attempt to compromise the examination in whole or in part In addition such conduct may subject a candidate to further action by state administrators

Successful completion of the Uniform Investment Adviser Law Examination does not relieve a candidate of the personal responsibility to know and to abide by the specific requirements of the securities laws and regulations of the states in which the candidate transacts business Furthermore although successful completion of the examination may satisfy a portion of the requirements of a particular state it does not convey the right to transact business prior to being granted a license or registration by that state

NASAA believes that the Uniform Investment Adviser Law Examination will significantly benefit the industry and state regulators alike by such uniformity The investing public will be afforded a greater degree of protection through enhanced uniform qualification standards

NASAA Uniform Investment Adviser Law Exam (Series 65)

Exam Specifications

CONTENT AREA

OF ITEMS

I Economics and Analysis

20

A B Understand basic economic concepts

1 Inflationdeflation a Definitions b Causes of inflationdeflation

2 Interest rates and yield curves a Graphs b Definitions c Interest rate = cost of money

3 Basic economic indicators a GDP b Employment indicators c Trade deficit d Balance of payments e CPI

A

determine investment merits A Income statement

a Revenues b Cost of goods sold c Pre-tax margins d Cash flow

B Balance sheet a Assets b Liabilities c Working capital d Owners equity e Footnotes

A

C Demonstrate understanding of quantitative methods to evaluate investments

A Time value of money B Expected return C Net present value D Internal rate of return E Inflation-adjusted return (real return) F After-tax returnyield G Risk-adjusted return H Total return I Holding period return J Yield-to-maturity K Yield-to-call L Current yield M Risk measurements (eg Beta standard deviation duration) N Valuation ratios (eg PE price-to-book) O Benchmark portfolios P Annualized return

D E Identify risks (ie definitions impact on the market companies

and personal investments) D Business E Market F Interest rate G Inflation H Regulatory (eg tax law changes) I Liquidity

J Opportunity cost

II Investment Vehicles

26

A B Evaluate cash and cash equivalents

A Types and characteristics of cash and cash equivalents a Certificates of deposit b Money market funds c Treasury bills

B Benefitsrisks of owning cash and cash equivalents

B C Evaluate fixed income securities

B Types and characteristics of fixed income securities a US government and agency securities b Mortgage-backed securities c Corporate bonds (ie investment grade and high yield) d Convertible bonds e Municipal bonds f Zero-coupon bonds

C Benefitsrisks of owning fixed income securities

C D Evaluate equity securities

C Types and characteristics of equity securities a Common stock (eg voting rights etc) b Preferred stock c Convertible preferred stock

D Methods used to determine the value of equity securities (eg technical and fundamental analyses dividend discount)

E Benefitsrisks of owning equity securities

D E Evaluate investment company securities

D Types and characteristics of investment companies a Open-end investment companies

(mutual funds)

b Closed-end investment companies c Classes of shareholders expense ratios sales load

breakpoints 12b-1 fees E Benefitsrisks of owning investment company securities

E Recognize derivative securities and their benefitsrisks

F G Understand unique aspects of international investing

F Emerging vs developed markets G American Depository Receipts (ADRs) H Currency influences (concept of risk)

G H Understand real estate partnerships and investment trusts

(REITs) and variable annuities G Definitions H Benefitsrisks

III Investment Recommendations and Strategies

39

A B Determine and analyze the financial profile of the client to

develop a suitable investment policy and strategy A Type of client

a Individual b Sole proprietorship c General partnership d Limited partnership (including family limited

partnership) e Limited liability company f C corporation g S corporation h Trust i Estate

B Financial goals C Current financial status (eg cash flow balance sheet) D Capital needs (eg current retirement death disability)

E Current investments and strategies F Time horizon G Non-financial investment considerations (eg values

attitudes experience demographic characteristics) H Risk tolerance I Tax situation

B C Understand portfolio management strategies styles and

techniques (fixed income and equities) B Portfolio management styles and strategies

a Strategic and tactical asset allocation (eg style asset class rebalancing)

b Active vs passive c Growth vs value d Market capitalization (micro small mid large) e Buyhold f Indexing g Diversification

C Funding techniques a Dollar-cost averaging b Income reinvestment (eg dividend interest cap gain)

C D Recognize fundamental taxation issues

C Individual income tax (eg capital gains tax basis retirement distribution alternative minimum tax)

D Corporate trust and estate income tax E Estate and gift tax

D E Recognize types of retirement plans and related issues

D Retirement plans a Individual Retirement Arrangements (IRA) b 403(b) plans c Qualified retirement plans (eg pension and profit

sharing 401(k)) d Nonqualified retirement plans

E Important ERISA issues a Fiduciary responsibility (eg 404(c)) b Investment policy statement

c Prohibited transactions

E F Define the fundamental terms and concepts of trading securities

E Terminology (eg bids offers quotes) F Role of broker-dealers specialists market-makers G Types of orders (eg market limit stop short sale) H Types of accounts (eg cash margin option) I Commissions markups spread

F G Calculate performance

F Calculate performance a Total return (ie yield plus growth) b Inflation-adjusted return c After-tax returnyield d Current yield

IV Ethics and Legal Guidelines

45

A B Understand relevant aspects of securities acts and other rules and

regulations in order to comply as an investment adviser representative

A Investment Company Act of 1940 B Investment Advisers Act of 1940 C Securities Act of 1933 and Securities Exchange Act of 1934

(as applicable to investment adviser issues) D SEC Release No IA-1092 (applicability of the Investment

Advisers Act to financial planners and others) E State securities laws (ie Blue Sky) F NASAA rules prohibiting dishonest and unethical business

practices G Limitations on permissible practice (ie technical licensing

requirements)

B C Demonstrate ability to apply ethical practices

B Fiduciary responsibility C Conflict of interest D Prudent Investor standards E Limitations on advice and activities (ie when to consult other

professionals)

EXHIBIT IV

Confidential Page 44 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

CFP Required subject matter for ldquoInsurance Planning and Risk Managementrdquo

CFPreg Candidates must complete comprehensive training in the following subject areas at a college or university whose program has been inspected and approved by the CFP Board This course represents approximately 20 of the educational requirement for CFP Candidates Other courses include ldquoFinancial Planning Fundamentalsrdquo ldquoInvestment Planningrdquo ldquoTax Planningrdquo ldquoRetirement Planning amp Qualified Plansrdquo and ldquoEstate Planningrdquo

Principles of insurance

A Definit ions and application of

principles

1) Risk

2) Peril

3) Hazard

4) Law of large numbers

5) Adverse selection

B Response to risk

1) Retain

2) Transfer

3) Control

4) Reduce

5) Avoid

C Mortality vs morbidity

Analysis and evaluation of risk

exposures

A Personal Insurance l ines

1) Death

2) Disability

3) Poor health

4) Unemployment

5) Outliving onersquos capital

B Property Insurance l ines

1) Real

2) Personal

3) Auto

C Liability Issues

1) Negligence

2) Libel

3) Slander

4) Malpractice

D Business-related risks

E Calculation of benefits

23 Legal aspects of insurance

A Indemnity

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Insurable interest

C Contract requirements

D Contract characterist ics

Property and casualty insurance

(individual and business)

A Real property

B Automobile and recreational

vehicles

C Business

D Business activity

E Personal property

F Umbrella liability

General business liability

A Professional l iabili ty

B Errors and omissions

D Product liability

Health insurance (individual)

A Hospital-surgical

B Major medical

C Traditional indemnity

D Preferred Provider Organization

(PPO)

E Health Maintenance Organization

(HMO)

F Medicare supplemental insurance

G Other

Disability income insurance

(individual)

A Occupational definit ions and

application

1) Total

2) Partial

3) Residual

C Directors and officers

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Benefit period

C Elimination period

D Benefit amount

E Riders

F Taxation of benefits

Long-term care insurance (individual

and joint)

A Basic provisions

B Eligibility

C Benefit amount and period

D Elimination period

E Inflation protection

F Nursing home and in-home care

G Comparing and selecting policies

H Tax implications and qualification

I Appropriateness of coverage

Life insurance

A Fundamentals

B Types

C Contractual provisions

D Dividend options

E Non-forfeiture and other options

F Settlement options

G Policy replacement

H Tax issues and strategies

I Policy ownership issues and

strategies including split-dollar

Viatical settlements

A Legal principles

B Requirements

C Tax implications

D Planning

E Ethical concepts and planning

Insurance needs analysis and

rationale

A Life insurance amount required

1) Liquidity and survivor income needs

2) Human life value

3) Capital retention

B Disabili ty insurance

C Long-term care insurance

D Health insurance

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

E Property insurance E Reinsurance

F Liabili ty insurance F Investments

Taxation of l ife disability and long- G Underwriting

term care insurance H Federal and state law

A Income

B Gift

C Estate

D Generation-Skipping Transfer

Tax (GSTT)

E Ownership issues

F Beneficiary issues

G Withdrawals

Insurance policy selection

A Purpose of coverage

B Length of t ime required

C Risk tolerance

D Cash flow constraints

Insurance company selection and due

diligence

A Financials

B Ratios

C Ratings

D Mutual vs stock

Source CFP Board of Standards Inc Denver CO

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

CURRENT ISSUE

PAST ISSUES

RIA Survey 2011 Click Here

ADVISOR SERVICES Broker-Dealers

CustodianFee-Only

Technology

ADVICE 401(k) plans

Annuities

Business Transitions

ComplianceFraud

Economy

Education529

Estate Planning

Insurance

Practice Management

Retirement Planning

Retirement Income

Social Media

Tax Planning

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INVESTING Alternative Investments

Analysis

Commodities

ETFs

Fixed Income

International

Mutual Funds

Free Site RegistrationgtgtLogin Logout

SEARCH GO December 10 2011

HOME CE CENTER WEBCASTS CONFERENCES EVENTS SUBSCRIBE

November 23 2011

SEC OFFICIAL SCRUTINIZED FOR lsquoCRASH-PROOF RETIREMENTrsquo INTERVIEW WITH ADVISOR

(Bloomberg News) The US Securities and Exchange Commissionrsquos internal watchdog has come under scrutiny for comments he made in a 75-minute videotaped interview about the agency and the stock market to a man who markets a ldquocrash-proof retirementrdquo plan through the Internet and a paid radio program

SEC Inspector General H David Kotz has been contacted about the matter by the agencyrsquos general counselrsquos office which also has briefed the SECrsquos commissioners over concerns the interview could be construed as investment advice or an endorsement of financial services

Phillip Cannella III chief executive officer of First Senior Financial Group in King of Prussia Pennsylvania edited the interview he conducted at SEC headquarters in late July into more than a dozen video segments He posted them on YouTube and his website wwwcrashproofretirementcom and plays them on the radio as well as during his seminars about insurance products for retirees

The SEC doesnrsquot ban its employees from interviews with people connected to commercial ventures Kotz said he cleared the matter in advance with the SECrsquos internal ethics counsel He told SEC officials he would ask an outside group the Council of Inspectors General on Integrity and Efficiency to look into whether he said or did anything improper in the interview according to two people briefed on the situation

The Federal Bureau of Investigation which oversees the panel within the inspector generalrsquos group that deals with integrity matters doesnrsquot comment on its inquiries said William Carter an FBI spokesman

lsquoAppropriate Caveatsrsquo

Kotz said in an e-mailed statement to Bloomberg News that he provided ldquoall the appropriate caveats and disclaimersrdquo to Cannella and ldquospecifically stated in the radio interview that I was not in a position to nor was I providing investment advicerdquo

SEC Chairman Mary Schapiro said in a statement that she appreciated that Kotz requested an independent review

ldquoDavid Kotz is an experienced professional with expertise in the ethics rules who I

believe would not intentionally create an appearance issuerdquo Schapiro said

The SEC didnrsquot say if it was taking further action on the matter The agencyrsquos ethics counsel Shira Pavis Minton didnrsquot respond to a request for comment

In the interview segments posted on the website Kotz discusses issues ranging from the Bernard Madoff fraud to the difficulties the SEC faces policing Wall Street A press release issued by Cannellarsquos company headlined Kotzrsquos suggestion that retirees consider cutting their investments in stocks

lsquoTurbulent Timesrsquo

ldquoSo much money is in the stock market where peoplersquos lives are so affected by it that sometimes it may make sense to take things out in turbulent times to ensure that yoursquore not living and dying so to speak by the Dow Jones going up and downrdquo Kotz told Cannella as the two sat in the agencyrsquos Washington offices in front of the SEC seal ldquoParticularly with whatrsquos occurred over the last several yearsrdquo

Kotz also discusses the SECrsquos past shortcomings and says the agency has improved being a ldquofundamentally different place now than when I first started at the SEC and before we issued our Madoff reportrdquo

FINANCIAL ADVISOR BLOGS

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10 Ways To Stronger Client Connections

Tips on how to create stronger bonds with clients capped off IMCAs Winter Specialty Conference in Vail Colowith speaker Jamie Ziegler founder of AUMPartners telling attendees ldquoTrust is the single most important factor in building lasting relationshipsrdquo Read more

Business Growth Through Referrals

BOOKSTORE

httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 1 of 2

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

Real EstateREITs

US Equity

RESEARCH BD Ranking

RIA Ranking

SMA Ranking

MORE SERVICES BD Profiles 2011

BD Recruitment Center

RIA Services

White Papers

Cannella said in a phone interview that he was contacted by an SEC attorney several weeks ago asking that he put a disclaimer on the videos to make clear that neither the agency nor Kotz endorse sponsor or promote his firm Cannella said he quickly complied Kotz said he supported efforts by the SECrsquos general counselrsquos office ldquoto ensure that my interview is not being used to endorse any productrdquo

lsquoNot a Journalistrsquo

Cannella said he was pleased to be able to interview a high-level government official like Kotz -- a man he said he greatly respects While it costs him $12000 a week to air the radio show on two Philadelphia area stations Cannella said he treats it like a consumer advocacy program not an infomercial

ldquoI canrsquot believe myselfrdquo Cannella said ldquoIrsquom not a journalist and I got over a 75-minute interview with Kotz inside the SEC buildingrdquo

Besides the radio program Cannella said he holds ldquoeducational eventsrdquo in restaurants where he teaches people in their 50s and older about ldquosafe investment alternatives in the insurance industryrdquo His website has clips of prospective clients being asked about their reaction to watching the Kotz interview

One woman who wasnrsquot identified in the video said that Cannellarsquos interview with the inspector general shows that the host is ldquostanding up for the little people and very admirable and thatrsquos one of the reasons that Irsquom very anxious to proceed with Philrdquo

Probes

In another clip an unidentified man said ldquoIt was incredible to find out that the SEC feels like it canrsquot police the securities industry because it doesnrsquot have the funding or the manpowerrdquo

The fracas adds a new chapter to Kotzrsquos contentious four-year tenure at the SEC In recent months current and former officials have spoken out about what they say are his overly aggressive probes and their negative impact on the agencyrsquos ability to police the markets Earlier this month the Justice Department declined to open an investigation into Kotzrsquos allegations that former SEC General Counsel David Becker violated ethics laws

Kotz and his supporters have dismissed the complaints saying his oversight has done much to help the SEC burnish its image after it was widely attacked for missing massive frauds like Madoffrsquos and the alleged Ponzi scheme run by R Allen Stanford

Commissions

In his interview with Cannella Kotz said victims of investment schemes ldquodeserve a strong vibrant effective aggressive SEC that goes after those people gets their money back as possible and puts them in jailrdquo

Because he doesnrsquot sell securities Cannella isnrsquot regulated by the SEC He said he is licensed to sell insurance in over 40 states His company puts together individual plans for clients and then earns commission on products they buy from an insurance company He described the investments as ldquoguaranteed tax-deferred contractual agreements with income options from a statutory corporationrdquo

The investments are ldquooutside of the securities industryrdquo and ldquomany of them have outperformed the markets since their inception with no market risk no market fees no upfront commissions or sales costsrdquo he added

The trade magazine Senior Market Advisor in January 2008 reported that Cannella said he wrote about $25 million in premiums in 2007 for fixed index annuities Cannella said he didnrsquot want to put a specific name on the investments he sells because he thinks the media has misreported on the products

ldquoIrsquom not well-liked among securities guys because I am speaking truth and logic to a deceptive industryrdquo Cannella said ldquoYou canrsquot beat the sword of truthrdquo

Comments

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Techniques for gaining more business through client referrals were among the topics broached at the IMCA 2011 Winter Specialty Conference in Vail Colo Read more

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Raise Taxes On Rich To Reward True Job Creators In this opinion piece a venture capitalist makes a case for raising taxes on the rich to benefit the true job creators the middle class Read more

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Birmingham Ala office will be third for Atlanta Capital Group Read more

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 2 of 2

United States Government Accountability Office

Report to Congressional AddresseesGAO

January 2011 CONSUMER FINANCE

Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

GAO-11-235

January 2011

CONSUMER FINANCE Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

Accountability bull Integrity bull Reliability

Highlights of GAO-11-235 a report to congressional addressees

Why GAO Did This Study

Consumers are increasingly turning for help to financial plannersmdash individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products and managing tax and estate planning The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners This report examines (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of this regulation and (3) the advantages and disadvantages of alternative regulatory approaches To address these objectives GAO reviewed federal and state statutes and regulations analyzed complaint and enforcement activity and interviewed federal and state government entities and organizations representing financial planners various other arms of the financial services industry and consumers

What GAO Recommends

GAO recommends that (1) NAIC assess consumersrsquo understanding of the standards of care associated with the sale of insurance products (2) SEC assess investorsrsquo understanding of financial plannersrsquo titles and designations and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers NAIC said it would consider GAOrsquos recommendation and SEC provided no comments

View GAO-11-235 or key components For more information contact Alicia Puente Cackley at (202) 512-8678 or cackleyagaogov

What GAO Found

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level but various laws and regulations apply to most of the services they provide Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners

The regulatory structure applicable to financial planners covers the great majority of their services but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain First consumers may be unclear about when a financial planner is required to serve the clientrsquos best interest particularly when the same financial planner provides multiple services associated with different standards of care SEC is studying these issues with regard to securities transactions but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products Second financial planners can adopt numerous titles and designations which vary greatly in the expertise or training that they signify but consumers may not understand or be able to distinguish among them SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed Finally the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole A regulatory system should have data to identify risks and problem areas and given that financial planning is a growing industry that has raised certain consumer protection issues regulators could benefit from better information on the extent of problems specifically involving financial planning services

A number of stakeholders have proposed different approaches to the regulation of financial planners including (1) creation of a federally chartered board overseeing financial planners as a distinct profession (2) augmenting oversight of investment advisers with a self-regulatory organization (3) extending the fiduciary standard of care to more financial services professionals and (4) specifying standards for financial planners and the designations that they use While the views of stakeholder interests vary a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities Given available information an additional layer of regulation specific to financial planners does not appear to be warranted at this time

United States Government Accountability Office

Contents

Letter 1

Background 2 Various Federal and State Laws and Regulations Apply to Financial

Planners and Their Activities 3 Regulatory Structure for Financial Planners Covers Most Activities

but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited 11

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed 28

Conclusions 33 Recommendations 34 Agency Comments 35

Appendix I Scope and Methodology

Appendix II Comments from the National Association of

Insurance Commissioners

Appendix III Comments from the North American Securities

Administrators Association

Appendix IV GAO Contact and Staff Acknowledgments

Figures

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act 5

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners 12

Figure 3 Differences in the Standards of Care Required of Financial Planners 17

Page i GAO-11-235 Consumer Finance

37

41

42

46

Abbreviations

Advisers Act Investment Advisers Act of 1940 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer

Protection Act FINRA Financial Industry Regulatory Authority Form ADV Uniform Application for Investment Adviser

Registration FTC Federal Trade Commission NAIC National Association of Insurance Commissioners NASAA North American Securities Administrators Association SEC Securities and Exchange Commission

This is a work of the US government and is not subject to copyright protection in the United States The published product may be reproduced and distributed in its entirety without further permission from GAO However because this work may contain copyrighted images or other material permission from the copyright holder may be necessary if you wish to reproduce this material separately

Page ii GAO-11-235 Consumer Finance

United States Government Accountability Office

Washington DC 20548

January 18 2011

Congressional Addressees

Consumers are increasingly turning for help to professionals who describe themselves as financial planners for assistance with a broad range of services such as selecting the right balance of stocks and bonds for an investment portfolio choosing among insurance products and tax and estate planning Although there is no statutory or single definition of financial planning it can be broadly defined as a systematic process that individuals use to achieve their financial goals Between 2000 and 2008 the number of financial planners more than doubled and may continue to climb as more individuals are asked to take responsibility for their retirement savings and must choose among a growing array of investment options

Some financial planning organizations have raised concerns that no single law governs providers of financial planning services broadly describing this situation as a regulatory gap Concerns also exist that financial planners may have an inherent conflict of interest in recommending products they may stand to benefit from selling In addition some consumer advocates believe consumers may be confused by the numerous titles and designations that financial planners can use This report responds to a mandate included in Section 919C of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that directed GAO to conduct a study on the oversight and regulation of financial planners Our objectives are to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

To address these objectives we reviewed federal and selected state statutes and regulations applicable to financial planners We also reviewed regulations issued by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) and model laws developed by the National Association of Insurance Commissioners (NAIC) and by the North American Securities Administrators Association (NASAA) In addition we reviewed applicable securities and insurance laws and regulations of five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texas We also interviewed representatives of and

Page 1 GAO-11-235 Consumer Finance

gathered documentation from SEC FINRA the Federal Trade Commission (FTC) NAIC and organizations representing the interests of consumers financial planners and various arms of the financial services industry In addition we gathered information on complaints and enforcement activity as available from SEC FINRA FTC and selected state regulators and organizations A more extensive discussion of our scope and methodology appears in appendix I

We conducted this performance audit from June 2010 to January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Background Financial planning typically involves a variety of services including preparing financial plans for clients based on their financial circumstances and objectives and making recommendations for specific actions clients may take In many cases financial planners also help implement these recommendations by for example providing insurance products securities or other investments Individuals who provide financial planning services may call themselves a variety of different titles such as financial planner financial consultant financial adviser trust advisor or wealth manager In addition many financial planners have privately conferred professional designations or certifications such as Certified Financial Plannerreg Chartered Financial Consultantreg or Personal Financial Specialist

The number of financial planners in the United States rose from approximately 94000 in 2000 to 208400 in 2008 according to the Bureau of Labor Statistics The bureau projects the number will rise to 271200 by 2018 because of the need for advisers to assist the millions of workers expected to retire in the next 10 years1 According to the bureau 29 percent of financial planners are self-employed and the remaining 71

1While the Bureau of Labor Statistics reports these statistics using the term ldquofinancial adviserrdquo bureau officials said that this term could be used interchangeably with financial planner The bureau broadly defined a ldquopersonal financial adviserrdquo as an individual who provides financial planning services and that private bankers or wealth managers would also be categorized as financial advisers

Page 2 GAO-11-235 Consumer Finance

percent are employees of firms some of them large entities with offices nationwide that provide a variety of financial services The median annual wage for financial planners was $68200 in May 2009

According to an analysis of the 2007 Survey of Consumer Finances the most recent year for which survey results are available in 2007 about 22 percent of US households used a financial planner for investment and saving decisions and about 12 percent of US households used a financial planner for making credit and borrowing decisions Those households most likely to use a financial planner were those with higher incomes For example 37 percent of households in the top income quartile used a financial planner to make investment and saving decisions compared to 10 percent of households in the bottom quartile2

Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities

Financial planners are primarily regulated by federal and state investment adviser laws because planners typically provide advice about securities as part of their business In addition financial planners that sell securities or insurance products are subject to applicable laws governing broker-dealers and insurance agents Certain laws and regulations can also apply to the use of the titles designations and marketing materials that financial planners use

Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level However the activities of financial planners are primarily regulated under federal and state laws and regulations governing investment advisersmdashthat is individuals or firms that provide investment advice about securities for compensation According to SEC staff financial planning normally includes making general or specific recommendations about securities insurance savings and anticipated retirement3 SEC has issued guidance that broadly interprets the Investment Advisers Act of 1940 (Advisers Act) to apply to most financial planners because the advisory services they offer clients typically include

2Our percentage estimates based on the 2007 Survey of Consumer Finances have 95 percent confidence intervals of +- 25 percentage points or less For example we are 95 percent confident that between 82 and 118 percent of households in the bottom quartile used financial planners for investment decisions See appendix I for additional information

3Investment Adviser Act Release No 1092 52 Fed Reg 38400 38401 (Oct 16 1987) (IA Rel No 1092)

Page 3 GAO-11-235 Consumer Finance

providing advice about securities for compensation4 Similarly NASAA representatives told us that states take a similar approach on the application of investment adviser laws to financial planners and as a result generally register and oversee financial planners as investment advisers As investment advisers financial planners are subject to a fiduciary standard of care when they provide advisory services so that the planner ldquo[is] held to the highest standards of conduct and must act in the best interest of [the adviserrsquos] clientsrdquo5

SEC and state securities departments share responsibility for the oversight of investment advisers in accordance with the Advisers Act6 Under that act SEC generally oversees investment adviser firms that manage $25 million or more in client assets and the states that require registration oversee those firms that manage less7 However as a result of section 410 of the Dodd-Frank Act as of July 2011 the states generally will have registration and oversight responsibilities for investment adviser firms that manage less than $100 million in client assets instead of firms that manage less than $25 million in assets as under current law8 This will result in the states gaining responsibility for firms with assets under management between $25 million and $100 million As shown in figure 1 as of October 2010 of the approximately 16000 investment adviser firms providing

4The Advisers Act defines an investment adviser as any person (ie individual or firm) who is in the business of providing advice or issuing reports or analyses regarding securities for compensation 15 USC sect 80b-2(a)(11) IA Rel No 1092 In addition to applicable securities law investment advice related to a retirement savings plan such as a 401(k) plan may also be subject to the Employee Retirement Income Security Act The requirements under that act are outside the scope of this study A forthcoming GAO report GAO-11-119 will provide more information on investment advice in 401(k) plans

5In SEC v Capital Gains Research Bureau Inc 375 US 180 189-192 (1963) the US Supreme Court recognized that the Advisers Act imposes a fiduciary duty on investment advisers This standard imposes an affirmative duty to act solely in the best interests of the client The investment adviser also must eliminate or disclose all conflicts of interest

615 USC sect 80b-3a The term investment adviser can refer to a person or firm Investment adviser firms generally register with SEC or state securities departments as registered investment advisers According to NASAA certain natural persons that are employed by firms generally register with the state securities departments as investment adviser representatives

7Id Under 17 CFR sect 275203A-1 SEC registration has been optional for certain

investment advisers having assets under management between $25 and $30 million Firms also may have a different basis for registering with SEC (other than the amount of client assets the firm has under management) such as whether the principal office and place of business are within a state that has no registration requirement

8Pub L No 111-203 sect 410 124 Stat 1376 1576-77 (2010)

Page 4 GAO-11-235 Consumer Finance

financial planning services the states were overseeing about 11100 firms and SEC was overseeing about 4900 such firms9 However in July 2011 about 2400 of investment adviser firms that provided financial planning services (15 percent of the 16000 firms) may shift from SEC to state oversight10

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act

SECrsquos supervision of investment adviser firms includes evaluating their compliance with federal securities laws by conducting examinations of firmsmdashincluding reviewing disclosures made to customersmdashand investigating and imposing sanctions for violations of securities laws According to SEC staff in its examinations the agency takes specific steps to review the financial planning services of investment advisers For example SEC may review a sample of financial plans that the firm prepared for its customers to check whether the firmrsquos advice and investment recommendations are consistent with customersrsquo goals the contract with the firm and the firmrsquos disclosures

9In registering with SEC or a state investment adviser firms are required to report whether they provide financial planning services in Part 1A of the Uniform Application for Investment Adviser Registration Item 5 G(1) SEC does not provide a definition of financial planning services for firms to use when completing the registration form The total number of investment adviser firms overseenmdashincluding both those that do and do not provide financial planning servicesmdashis 15016 for the states and 11873 for SEC For data on investment adviser firms firms that were registered with both SEC and the states were counted with SEC-registered investment adviser firms

10See 75 Fed Reg 77052 (Dec 10 2010) (SEC proposed rule which if finalized would give advisers until August 20 2011 to report the market value of their assets under management to the SEC as the first step in the process)

Page 5 GAO-11-235 Consumer Finance

However the frequency with which SEC conducts these examinations varies largely because of resource constraints faced by the agency11 SEC staff told us that the agency examined only about 10 percent of the investment advisers it supervises in 2009 In addition they noted that generally an investment adviser is examined on average every 12 to 15 years although firms considered to be of higher risk are examined more frequently In 2007 we noted that harmful practices could go undetected because investment adviser firms rated lower-risk are unlikely to undergo routine examinations within a reasonable period of time if at all12

According to NASAA state oversight of investment adviser firms generally includes activities similar to those undertaken by SEC including taking specific steps to review a firmrsquos financial planning services According to NASAA states generally register not just investment adviser firms but also investment adviser representativesmdashthat is individuals who provide investment advice and work for a state- or federally registered investment adviser firm13

Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities

In addition to providing advisory services such as developing a financial plan financial planners generally help clients implement the plan by making specific recommendations and by selling securities insurance products and other investments SEC data show that as of October 2010 19 percent of investment adviser firms that provided financial planning

11GAO Securities and Exchange Commission Steps Being Taken to Make Examination

Program More Risk-Based and Transparent GAO-07-1053 (Washington DC Aug 14 2007) As we noted since the detection of mutual fund trading abuses in late 2003 in light of limited resources SEC has shifted its approach to examinations of investment advisers from one that focused on routinely examining all registered firms regardless of risk to one that focuses on more frequently examining those firms and industry practices at higher risk for compliance issues

12GAO-07-1053 SEC reported in February 2010 that it is now placing a greater emphasis on fraud detection in addition to identifying potential violations of securities laws and rules strengthening procedures and internal controls to maximize limited resources recruiting examiners with specialized skills and increasing expertise through enhanced training

13According to NASAA New York Minnesota and Wyoming do not register investment adviser representatives although New York and Minnesota do have certain examination and other requirements that must be met

Page 6 GAO-11-235 Consumer Finance

services also provided brokerage services and 27 percent provided insurance14

Financial planners that provide brokerage services such as buying or selling stocks bonds or mutual fund shares are subject to broker-dealer regulation at the federal and state levels At the federal level SEC oversees US broker-dealers and SECrsquos oversight is supplemented by self-regulatory organizations (SRO)15 The primary SRO for broker-dealers is FINRA State securities offices work in conjunction with SEC and FINRA to regulate securities firms Salespersons working for broker-dealers are subject to state registration requirements including examinations About half of broker-dealers were examined in 2009 by SEC and SROs Under broker-dealer regulation financial planners are held to a suitability standard of care when making a recommendation to a client to buy or sell a security meaning that they must recommend those securities that they reasonably believe are suitable for the customer16

Financial planners that sell insurance products such as life insurance or annuities must be licensed by the states to sell these products and are subject to state insurance regulation In contrast to securities entities (other than national banks) that are subject to dual federal and state oversight the states are generally responsible for regulating the business of insurance When acting as insurance agents financial planners are

14The brokerage and insurance services provided by these investment adviser firms are not necessarily a part of their financial planning services In addition many financial planners may sell securities- or insurance-related products through affiliated brokers or agents

15The primary law for regulating broker-dealers is the Securities Exchange Act of 1934 codified at 15 USC sectsect 78a-78oo Brokers effect transactions for the account of others while dealers buy and sell securities for their own accounts 15 USC sect 78c The term registered representative is generally used to refer to certain employees of a broker-dealer firm who are engaged in providing securities recommendations Broker-dealers must be members of a qualifying self-regulatory organization (either a national exchange or a registered securities association) 15 USC sect 78o(b)(8)

16Under NASD Conduct Rule 2310 a FINRA member making an investment recommendation to a customer must have grounds for believing that the recommendation is suitable for that customerrsquos financial situation and needs In November 2010 SEC approved FINRArsquos proposed new consolidated rules governing the suitability obligations of its members 75 Fed Reg 71479 (Nov 23 2010) This rule proposed FINRA Rule 2111 requires salespersons to have a reasonable basis for believing based on adequate due diligence that a recommendation of a transaction or strategy is suitable for at least some investors that the recommendation is suitable for a specific customer based on that customerrsquos profile and that a series of recommended transactions is not excessive and unsuitable for the customer

Page 7 GAO-11-235 Consumer Finance

subject to state standard of care requirements which can vary by product and by state As of October 2010 32 states had adopted a previous version of the NAIC Suitability in Annuities Transactions Model Regulation according to NAIC17 In general this regulation requires insurance agents to appropriately address consumersrsquo insurance needs and financial objectives at the time of an annuity transaction18 Thirty-four states had also adopted the Life Insurance Disclosure Model Regulation in a uniform and substantially similar manner as of July 2010 according to NAIC This regulation does not include a suitability requirement although it does require insurers to provide customers with information that will improve their ability to select the most appropriate life insurance plan for their needs and improve their understanding of the policyrsquos basic features

Financial planners that sell variable insurance products such as variable life insurance or variable annuities are subject to both state insurance regulation and broker-dealer regulation because these products are regulated as both securities and insurance products When selling variable insurance financial planners are subject to FINRA sales practice standards requiring that such sales be subject to suitability standards19 In addition other FINRA rules and guidance such as those governing standards for communication with the public apply to the sale of variable insurance products20 In addition as previously discussed 32 states also generally require insurance agents and companies to appropriately address a consumerrsquos insurance needs and financial objectives at the time of an annuity transaction However in the past we have reported that the effectiveness of market conduct regulationmdashthat is examination of the sales practices and behavior of insurersmdashmay be limited by a lack of

17NAIC amended this model regulation in March 2010 according to NAIC one state has adopted the updated model and additional states are expected to do so

18According to NAIC in 4 of these 32 states the regulation applies only when the consumers are senior citizens

19NASD Notice to Members 96-86 outlines that variable contracts for insurance products are subject to suitability requirements

20NASD Interpretive Material 2210-2 outlines guidance concerning communications with the public about variable life insurance and variable annuities FINRA has proposed that this guidance be replaced by a separate new FINRA Rule 2211 See FINRA Rule Filing No SR-FINRA-2009-070

Page 8 GAO-11-235 Consumer Finance

reciprocity and uniformity which may lead to uneven consumer protection across states21

Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations

At the federal level SEC and FINRA have regulations on advertising and standards of communication that apply to the strategies investment adviser firms and broker-dealers use to market their financial planning services For example SEC-registered investment advisers must follow SEC regulations on advertising and other communications which prohibit false or misleading advertisements and these regulations apply to investment advisersrsquo marketing of financial planning services22 FINRA regulations on standards for communication with the public similarly prohibit false exaggerated unwarranted or misleading statements or claims by broker-dealers and broker-dealer advertisements are subject to additional approval filing and recordkeeping requirements and review procedures23 According to many company officials we spoke with their companies responded to these requirements by putting procedures in place to determine which designations and titles their registered representatives may use in their marketing materials such as business cards

SEC and state securities regulators also regulate information that investment advisers are required to disclose to their clients In the Uniform Application for Investment Adviser Registration (Form ADV) regulators have typically required investment adviser firms to provide new and prospective clients with background information such as the basis of the advisory fees types of services provided (such as financial planning services) and strategies for addressing conflicts of interest that may arise

21GAO Insurance Reciprocity and Uniformity NAIC and State Regulators Have Made

Progress in Producer Licensing Product Approval and Market Conduct Regulation but

Challenges Remain GAO-09-372 (Washington DC Apr 6 2009) Reciprocity refers to the extent to which state regulators accept other statesrsquo regulatory actions Uniformity refers to the extent to which states have implemented either the same or substantially similar regulatory standards and procedures

2217 CFR sect 275206(4)-1

23NASD Rule 2210

Page 9 GAO-11-235 Consumer Finance

from their business activities24 Recent changes to Form ADV are designed to improve the disclosures that firms provide to clients For example firms must now provide clients with information about the advisory personnel on whom they rely for investment advice including the requirements and applicability of any professional designations or certifications advisers may choose to include in their background information

Most states regulate the use of the title ldquofinancial plannerrdquo and state securities and insurance laws can apply to the misuse of this title and other titles For example according to NASAA at least 29 states specifically include financial planners in their definition of investment adviser25 According to NAIC in many states regulators can use unfair trade practice laws to prohibit insurance agents from holding themselves out as financial planners when in fact they are only engaged in the sale of life or annuity insurance products However as noted earlier the effectiveness of the regulation of insurersrsquo market conduct varies across states In particular in 2010 we noted inconsistencies in the state regulation of life settlements a potentially high-risk transaction in which financial planners may participate26

In addition we were told some states had adopted regulations limiting the use of ldquosenior-specific designationsrdquomdashthat is designations that imply expertise or special training in advising senior citizen or elderly investors According to NAIC as of December 2010 25 states had adopted in a uniform and substantially similar manner the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities which limits the use of senior-specific designations by insurance agents According to NASAA as of December 2010 31 states had adoptedmdashand at least 9 other states were

24SEC and the states use Form ADV to register investment adviser firms and collect information from them Part 2 of Form ADV provides information about the investment adviser and its business for use of the clients and is publicly available on the Investment Adviser Public Depository Web site The SEC adopted amendments to Form ADV that were effective October 12 2010 requiring Part 2 of Form ADV be written in a plain English narrative format See Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (to be codified at 17 CFR pt 275 and 279)

25The District of Columbia and Puerto Rico also include financial planners in their definitions of investment adviser according to NASAA

26GAO Life Insurance Settlements Regulatory Inconsistencies May Pose a Number of

Challenges GAO-10-775 (Washington DC July 9 2010)

Page 10 GAO-11-235 Consumer Finance

planning to adoptmdashthe NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations which prohibits the misleading use of senior-specific designations by investment adviser representatives and other financial professionals

Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited

The regulatory system for financial planners covers most activities in which they engage However enforcement of regulation may be inconsistent and some questions exist about consumersrsquo understanding of the roles standards of care and titles and designations that a financial planner may have The ability of regulators to identify potential problems is limited because they do not specifically track complaints inspections and enforcement actions specific to financial planning services

Existing Regulation Covers Most Financial Planning Services

Although there is no single stand-alone regulatory body with oversight of financial planners the regulatory structure for financial planners covers most activities in which they engage As discussed earlier and summarized in figure 2 the primary activities a financial planner performs are subject to existing regulation at the federal or state level primarily through regulation pertaining to investment advisers broker-dealers and insurance agents As such SEC FINRA and NASAA staff a majority of state securities regulators financial industry representatives consumer groups and academic and subject matter experts with whom we spoke said that in general they believe the regulatory structure for financial planners is comprehensive although as discussed below the attention paid to enforcing existing regulation has varied

Page 11 GAO-11-235 Consumer Finance

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners

Financial planner

Capacity Investment adviser Broker-dealer Insurance agent

Applicable federal and state laws

Federal bull Investment Advisers Act of 1940 and rules from SEC

State bull State securities laws

Federal bull Securities and Exchange Act of 1934 and rules of SEC and FINRA

State bull State securities laws

State bull State insurance laws

Financial planning service covered by regulation

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for specific securities products bull Purchase or sale of securities products

bull Recommendations for insurance products

bull Sale of insurance products

bull Sale of variable insurance (variable annuities variable life insurance) bull

Federal and state regulators enforcing laws

Federal bull SEC

State bull State securities agencies

Federal bull SEC and FINRA

State bull State securities agencies

State bull State insurance agencies

Customer

Source GAO

Note This figure highlights three major areas of regulatory oversight but is not comprehensive and does not include other regulatory regimes or practice standards that may be applicable to financial planners In addition not all investment advisers broker-dealers or insurance agents are financial planners

As noted earlier the activities a financial planner normally engages in generally include advice related to securitiesmdashand such activities make financial planners subject to regulation under the Advisers Act One industry association and an academic expert noted that it would be very difficult to provide financial planning services without offering investment

Page 12 GAO-11-235 Consumer Finance

advice or considering securities SEC staff told us that financial planners holding even broad discussions of securitiesmdashfor example what proportion of a portfolio should be invested in stocksmdashwould be required to register as investment advisers or investment adviser representatives In theory a financial planner could offer only services that do not fall under existing regulatory regimesmdashfor example advice on household budgetingmdashbut such an example is likely hypothetical and such a business model may be hard to sustain SEC and NASAA staff a majority of the state securities regulators we spoke with and many representatives of the financial services industry told us that they were not aware of any individuals serving as financial planners who were not regulated as investment advisers or regulated under another regulatory regime Some regulators and industry representatives also said that to the extent that financial planners offered services that did not fall under such regulation the new Bureau of Consumer Financial Protection potentially could have jurisdiction over such services27

However not everyone agreed that regulation of financial planners was comprehensive One group the Financial Planning Coalition has argued that a regulatory gap exists because no single law governs the delivery of the broad array of financial advice to the public28 According to the coalition the provision of integrated financial advicemdashwhich would cover topics such as selecting and managing investments income taxes saving for college home ownership retirement insurance and estate planningmdash is unregulated Instead the coalition says that there is patchwork regulation of financial planning advice and it views having two sets of lawsmdashone regulating the provision of investment advice and another regulating the sale of productsmdashas problematic

27Section 1011 of the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate ldquothe offering and provision of consumer financial products or services under the Federal consumer financial lawsrdquo A financial product or service is defined in section 1002(15)(A)(viii) of the act to include financial advisory services to consumers on individual financial matters with the exception of advisory services related to securities provided by a person regulated by SEC or a state securities commission to the extent that such person acts in a regulated capacity Accordingly it appears that the bureau may have jurisdiction over financial planners to the extent that they may offer services that would not be under the jurisdiction of SEC or a state securities commission

28The members of this coalition include the Certified Financial Planner Board of Standards Inc the Financial Planning Association and the National Association of Personal Financial Advisors

Page 13 GAO-11-235 Consumer Finance

In addition although the regulatory structure itself for financial planners may generally be comprehensive attention paid to enforcing existing statute and regulation has varied For example as noted earlier due to resource constraints the examination of SEC-supervised investment advisers is infrequent Further as also noted earlier market conduct regulation of insurersmdashwhich would include the examination of the sales practices and behavior of financial planners selling insurance productsmdash has been inconsistent Some representatives of industry associations told us that they believed that a better alternative to additional regulation of financial planners would be increased enforcement of existing law and regulation particularly related to fraud and unfair trade practices

Certain professionalsmdashincluding attorneys certified public accountants broker-dealers and teachersmdashwho provide financial planning advice are exempt from regulation under the Advisers Act if such advice is ldquosolely incidentalrdquo to their other business activities29 According to an SEC staff interpretation this exemption would not apply to individuals who held themselves out to the public as providing financial planning services and would apply only to individuals who provided specific investment advice on anything other than ldquorare isolated and non-periodic instancesrdquo30 Banks and bank employees are also excluded from the Advisers Act and are subject to separate banking regulation31 The American Bankers Association told us that the financial planning activities of bank employees such as trust advisors or wealth managers were typically utilized by clients with more than $5 million in investable assets The association noted that these activities were subject to a fiduciary standard and the applicable supervision of federal and state banking regulators

Most regulators and academic experts and many financial services industry representatives we spoke with told us that there is some overlap in the regulation of individuals who serve as financial planners because

2915 USC sect 80b-2(a)(11) IA Rel No 1092(II)(B) at 38403 Under 15 USC sect 80bshy2(a)(11)(C) brokers and dealers also cannot receive any special compensation for their services in order to be exempt from registration as an investment adviser

30Id

31Id The Advisers Act excludes bank and bank holding companies from the definition of

investment adviser Further a bank and a bank holding company is an investment adviser under the act to the extent that the bank or bank holding company serves or acts as an adviser to a registered investment company If such services are performed in a separate department or division of a bank the department or division and not the bank itself is the investment adviser

Page 14 GAO-11-235 Consumer Finance

such individuals might be subject to oversight by different regulatory bodies for the different services they provide For example a financial planner who recommends and sells variable annuities as part of a financial plan is regulated as a registered representative of a broker-dealer as well as an insurance agent under applicable federal and state laws However some state regulators we spoke with told us that such overlap may be appropriate since the regulatory regimes cover different functional areas

Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products

As seen in figure 3 financial planners are subject to different standards of care in their capacities as investment advisers broker-dealers and insurance agents

bull Fiduciary Standard of Care As noted earlier investment advisers are subject to a fiduciary standard of caremdashthat is they must act in their clientrsquos best interest ensure that recommended investments are suitable for the client and disclose to the client any material conflicts of interest32

According to SEC and NASAA representatives the fiduciary standard applies even when investment advisers provide advice or recommendations about products other than securities such as insurance in conjunction with advice about securities

bull Suitability Standard of Care When Recommending Security Products FINRA regulation requires broker-dealers to adhere to a suitability standard when rendering investment recommendationsmdashthat is they must recommend only those securities that they reasonably believe are suitable for the customer33 Unlike the fiduciary standard suitability rules do not necessarily require that the clientrsquos best interest be served According to FINRA staff up-front general disclosure of a broker-dealerrsquos business activities and relationships that may cause conflicts of interest is not

32The SEC has in effect established rules of conduct for investment advisers including requirements for disclosing conflicts of interest obtaining the best execution on behalf of clients allocating investments among clients fairly ensuring that investments are suitable for clients and ensuring that there is a reasonable basis for recommendations SEC also requires investment advisers to maintain records pertaining to client accounts and business operations

33A broker-dealer must have an adequate and reasonable basis for any recommendation and must make recommendations based on a customerrsquos financial situation needs and other securities holdings

Page 15 GAO-11-235 Consumer Finance

required34 However according to SEC broker-dealers are subject to many FINRA rules that require disclosure of conflicts in certain situations although SEC staff also note that those rules may not cover every possible conflict of interest and disclosure may occur after conflicted advice has already been given35

bull Suitability Standard of Care When Recommending Insurance Products Standards of care for the recommendation and sale of insurance products vary by product and by state For example as seen earlier NAICrsquos model regulations on the suitability standard for annuity transactions adopted by some states but not others require consideration of the insurance needs and financial objectives of the customer while NAICrsquos model regulation for life insurance does not include a suitability requirement per se

34Letter from Marc Menchel Executive Vice President and General Counsel FINRA to Elizabeth M Murphy Secretary SEC 4 (Aug 25 2010) available at httpwwwfinraorgwebgroupsindustryipregguidedocumentsindustryp121983p df

35The standards of conduct for broker-dealers may also be based on antifraud provisions of the securities law and agency principles Broker-dealers also have a duty of fairness in their contracts with a customer which requires them to disclose material information that the customer would consider important as an investor In addition broker-dealers that handle discretionary accounts are generally thought to owe fiduciary obligations to their customers

Page 16 GAO-11-235 Consumer Finance

Figure 3 Differences in the Standards of Care Required of Financial Planners

Financial planner

Capacity

Investment adviser Broker-dealer Insurance agent

Fiduciary Suitability Varies by product and by state insurance law

Standard of care

bull Person has an affirmative duty to render services solely in the best interests of clients

bull Requires advisers to disclose material conflicts of interest to clients

bull Rules require standard of care that includes among other things rendering

investment recommendations that are suitable for customers

bull Requires insurance agents to follow suitability standards when state has adopted such standards for products

Financial planning service covered by standard of care

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for the purchase or sale of specific securities products

bull Recommendations for the purchase of insurance products

bull Recommendations for the purchase of variable insurance (variable annuities variable life insurance)

Customer

Source GAO

Note This figure is illustrative and is not comprehensive financial planners may serve in capacities other than those shown here and not all investment advisers broker-dealers and insurance agents serve as financial planners

Conflicts of interest can exist when for example a financial services professional earns a commission on a product sold to a client Under the fiduciary standard applicable to investment advisers financial planners must mitigate any potential conflicts of interest and disclose any that remain But under a suitability standard applicable to broker-dealers conflicts of interest may exist and generally may not need to be disclosed

Page 17 GAO-11-235 Consumer Finance

up-front36 For example as confirmed by FINRA financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission as long as the product is suitable and the broker-dealer complies with other requirements Because the same individual or firm can offer a variety of services to a clientmdasha practice sometimes referred to as ldquohat switchingrdquomdashthese services could be subject to different standards of care As such representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care if any applies to a financial professional As shown above the standards of caremdashand the extent to which conflicts of interest must be disclosedmdashcan vary depending on the capacity in which the individual serves37 A 2007 report by the Financial Planning Association stated that ldquoit would be difficult if not impossible for an individual investor to discern when the adviser was acting in a fiduciary capacity or in a non-fiduciary capacityrdquo38 A 2008 SEC study conducted by the RAND Corporation consisting of a national household survey and six focus group discussions with investors found that consumers generally did not understand not only the distinction between a suitability and fiduciary standard of care but also the differences between broker-dealers and investment advisers39 Similarly a 2010 national study of investors found that most were confused about which financial professionals are required to operate under a fiduciary standard that requires professionals to put their clientrsquos interest ahead of their own40

36FINRA officials have stated that they believe that the regulation of broker-dealersmdashwhile lacking an express fiduciary dutymdashprescribes in great detail the conduct and supervision of broker-dealers who provide investment advice to retail customers

37Blackrsquos Law Dictionary (9th ed 2009) defines the term ldquoconflict of interestrdquo as a ldquoreal or seeming incompatibility between onersquos private interests and onersquos public or fiduciary dutiesrdquo

38Final Report on Financial Planner Standards of Conduct FPA Fiduciary Task Force

June 2007

39Angela A Hung et al RAND Institute for Civil Justice Investor and Industry

Perspectives on Investment Advisers and Broker-Dealers (2008)

40Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010 The survey was conducted among a sample of 2012 adults living in the continental United States including 1319 who identified themselves as investors The survey was sponsored by AARP the Consumer Federation of America NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors

Page 18 GAO-11-235 Consumer Finance

Representatives of financial services firms that provide financial planning told us they believe that clients are sufficiently informed about the differing roles and accompanying standards of care that a firm representative may have They noted that when they provide both advisory and transactional services to the same customer each servicemdashsuch as planning brokerage or insurance salesmdashis accompanied by a separate contract or agreement with the customer These agreements disclose that the firmrsquos representatives have different obligations to the customer depending on their role In addition once a financial plan has been provided some companies told us that they have customers sign an additional agreement stating that the financial planning relationship with the firm has ended

Recent revisions by SEC to Form ADV disclosure requirements were designed to address among other things consumer understanding of potential conflicts of interest by investment advisers and their representatives Effective October 12 2010 SEC revised Form ADV Part 2 which financial service firms must provide to new and prospective clients41 The new form which must be written in plain English is intended to help consumers better understand the activities and affiliations of their investment adviser It requires additional disclosu res about a firmrsquos conflicts of interest compensation business activities and disciplinary information that is material to an evaluation of the adviser rsquos integrity Similarly in October 2010 FINRA issued a regulatory notice requesting comments on a concept proposal regarding possible new disclosure requirements that would among other things detail for consumers in plain English the conflicts of interest that broker-dealers may have associated with their services42

Section 913 of the Dodd-Frank Act requires SEC to study the substantive differences between the applicable standards of care for broker-dealers and investment advisers the effectiveness of the existing legal or regulatory standards of care for brokers dealers and investment advisers and consumersrsquo ability to understand the different standards of care SEC

41Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (requires investment advisers registered with SEC to provide new and prospective clients with a brochure and brochure supplements clearly setting forth a meaningful current disclosure of the business practices conflicts of interest and background of the investment adviser and its advisory personnel and requires the brochures to be filed with SEC electronically which will make them available to the public through its Web site)

42FINRA Regulatory Notice 10-54

Page 19 GAO-11-235 Consumer Finance

will also consider the potential impact on retail customers of imposing the same fiduciary standard that now applies to investment advisers on broker-dealers when they provide personalized investment advice Under the act SEC may promulgate rules to address these issues and is specifically authorized to establish a uniform fiduciary duty for broker-dealers and investment advisers that provide personalized investment advice about securities to customers As a result further clarification of these standards may be forthcoming FINRA officials told us that they support a fiduciary standard of care for broker-dealers when they provide personalized investment advice to retail customers

Consumer confusion on standards of care may also be a source of concern with regard to the sale of some insurance products A 2010 national survey of investors found that 60 percent mistakenly believed that insurance agents had a fiduciary duty to their clients43 Some insurance products such as annuities are complex and can be difficult to understand and annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators as well as SEC and FINRA for many years44 According to NAIC many states have requirements that insurance salespersons sell annuities only if the product is suitable for the customer However NAIC notes that some states do not have a suitability requirement for annuities Consumer groups and others have stated that high sales commissions on certain insurance products including annuities may provide salespersons with a substantial financial incentive to sell these products which may or may not be in the consumerrsquos best interest As a result of section 989J of the Dodd-Frank Act one type of annuitymdashthe indexed annuitymdashis to be regulated by states as an insurance product rather than regulated by SEC as a security under certain conditions45

SECrsquos pending study related to the applicable standards of care for broker-dealers and investment advisers will not look at issues of insurance that

43Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010

44See for example Securities and Exchange Commission Rule 151A and Annuities Issues and Legislation CRS Report for Congress 7-7500 (July 29 2010)

45State regulation applies so long as a state has adopted NAICrsquos Suitability in Annuity Transactions model regulation or if an insurance company adopts and implements practices on a nationwide basis that meet or exceed the minimum requirements established by NAICrsquos model regulation Indexed annuities are products that guarantee a purchaserrsquos principal and a certain rate of return and offer a chance for additional returns linked to a securities index or indices

Page 20 GAO-11-235 Consumer Finance

fall outside of SECrsquos jurisdiction NAIC has not undertaken a similar study regarding consumer understanding of the standard of care for insurance agents As we reported in the past financial markets function best when consumers understand how financial service providers and products work and know how to choose among them46 Given the evidence of consumer confusion about differing standards of care and given the increased risks that certain insurance products can pose there could be benefits to an NAIC review of consumersrsquo understanding of standards of care for high-risk insurance products

Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public

Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public including financial planner financial consultant and financial adviser among many others However evidence suggests that the different titles financial professionals use can be confusing to consumers The 2008 RAND study found that even experienced investors were confused about the titles used by broker-dealers and investment advisers including financial planner and financial adviser Similarly in consumer focus groups of investors conducted by SEC in 2005 as part of a rulemaking process participants were generally unclear about the distinctions among titles including broker investment adviser and financial planner47 In addition a representative of one consumer advocacy group has expressed concern that some financial professionals may use as a marketing tool titles suggesting that they provide financial planning services when in fact they are only selling products One industry group the Financial Planning Coalition also has noted that some individuals may hold themselves out as financial planners without meeting minimum training or ethical requirements Federal and state regulators told us they generally focused their oversight and enforcement actions on financial plannersrsquo activities rather than the titles they use Moreover NASAA has said that no matter what title financial planners use most are required to register as investment adviser representatives and must satisfy certain competency requirements

46GAO Financial Regulation A Framework for Crafting and Assessing Proposals to

Modernize the Outdated US Financial Regulatory System GAO-09-216 (Washington DC Jan 8 2009)

47Results of Investor Focus Group Interviews About Proposed Brokerage Account

Disclosures Report to the Securities and Exchange Commission by Siegel amp Gale LLC and Gelb Consulting Group Inc Mar 10 2005

Page 21 GAO-11-235 Consumer Finance

including passing an examination or obtaining a recognized professional designation48

Financial plannersrsquo professional designations are typically conferred by a professional or trade organization These designations may indicate that a planner has passed an examination met certain educational requirements or had related professional experience Some of these designations require extensive classroom training and examination requirements and include codes of ethics with the ability to remove the designation in the event of violations State securities regulators view five specific designations as meeting or exceeding the registration requirements for investment adviser representatives according to NASAA and allow these professional designations to satisfy necessary competency requirements for prospective investment adviser representatives49 For example one of these five designations requires a bachelorrsquos degree from an accredited college or university 3 years of full-time personal financial planning experience a certification examination and 30 hours of continuing education every 2 years

The criteria used by organizations that grant professional designations for financial professionals vary greatly FINRA has stated that while some designations require formal certification procedures including examinations and continuing professional education credits others may merely signify that membership dues have been paid The Financial Planning Coalition and The American College a nonprofit educational institution that confers several financial designations similarly told us that privately conferred designations range from those with rigorous competency practice and ethical standards and enforcement to those that can be obtained with minimal effort and no ongoing evaluation

48According to NASAA all but three statesmdashNew York Minnesota and Wyomingmdashregister investment adviser representatives and require that they pass either the Series 65 (Uniform Investment Adviser Law Examination) or the Series 66 (Uniform Combined State Law Examination) or obtain a recognized professional designation While New York and Minnesota do not register individual investment adviser representatives their state laws require that the representatives meet other requirements such as passing certain examinations or obtaining a professional designation accepted by the state

49The five designations recognized as such are Certified Financial Plannerreg Chartered Financial Consultantreg Personal Financial Specialist Chartered Financial Analyst and Chartered Investment Counselor

Page 22 GAO-11-235 Consumer Finance

As noted earlier designations that imply expertise or special training in advising senior citizen or elderly investors have received particular attention from regulators A joint report of SEC FINRA and NASAA described cases in which financial professionals targeted seniors by using senior-specific designations that implied that they had a particular expertise for senior investors when in fact they did not as noted earlier NASAA and NAIC have developed a model rule to address the issue50 The report also noted these professionals targeted seniors through the use of so-called free-lunch seminars where free meals are offered in exchange for attendance of a financial education seminar However the focus of the seminars was actually on the sale of products rather than the provision of financial advice

Given the large number of designations financial planners may use concerns exist that consumers may have difficulty distinguishing among them To alleviate customer confusion FINRA has developed a Web site for consumers that provides the required qualifications and other information about the designations used by securities professionals The site lists more than 100 professional designations 5 of which include the term ldquofinancial plannerrdquo and 24 of which contain comparable terms such as financial consultant or counselor51 The American College told us that it had identified 270 financial services designations Officials from NASAA NAIC and a consumer advocacy organization told us that consumers might have difficulty distinguishing among the various designations Officials from The American College told us that the number of designations itself was not necessarily a cause for concern but rather consumersrsquo broadly held misperception that all designations or credentials are equal

To help address these concerns FINRA plans to expand its Web site on professional designations to include several dozen additional designations related to insurance However FINRA officials noted that consumersrsquo use of this tool has been limited For example in 2009 the site received only 55765 visits A recent national study of the financial capability of American adults sponsored by FINRA found that only 15 percent of adults

50Protecting Senior Investors Report of Examinations of Securities Firms Providing

ldquoFree Lunchrdquo Sales Seminars by the Office of Compliance Inspections and Examination Securities and Exchange Commission North American Securities Administrators Association and the Financial Industry Regulatory Authority September 2007

51See httpappsfinraorgDataDirectory1prodesignationsaspx

Page 23 GAO-11-235 Consumer Finance

who had used a financial professional in the last 5 years claimed to have checked the background registration or license of a financial professional52 In addition SEC staff acknowledged that there have been concerns about confusing designations and SECrsquos October 2010 changes to investment adviser disclosure requirements mandate that investment adviser representatives who list professional designations and certifications in their background information also provide the qualifications needed for these designations so that the consumer can understand the value of the designation for the services being provided

Section 917 of the Dodd-Frank Act includes a requirement that SEC conduct a study identifying the existing level of financial literacy among retail investors including the most useful and understandable relevant information that they need to make informed financial decisions before engaging a financial intermediary While the section does not specifically mention the issue of financial plannersrsquo titles and designations the confusion we found to exist could potentially be addressed or mitigated if SEC incorporated this issue into its overall review of financial literacy among investors SEC staff told us that at this time its review would not likely address this issue although it would address such things as the need for conducting background checks on financial professionals Financial markets function best when consumers have information sufficient to understand and assess financial service providers and products53

Including financial plannersrsquo use of titles and designations in SECrsquos financial literacy review could provide useful information on the implications of consumersrsquo confusion on this issue

Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners

Available data do not show a large number of consumer complaints and enforcement actions involving financial planners but the exact extent to which financial planners may be a source of problems is unknown We were able to find limited information on consumer complaints from various agencies For example representatives of FTC and the Better Business Bureau said that they had received relatively few complaints related to financial planners FTC staff told us that a search in its Consumer Sentinel Network database for the phrase ldquofinancial plannerrdquo

52Applied Research amp Consulting LLC Financial Capability in the United States Initial

Report of the Research Findings from the 2009 National Survey prepared for the FINRA Investor Education Foundation (New York December 2009)

53GAO-09-216

Page 24 GAO-11-235 Consumer Finance

found 141 complaints in the 5-year period from 2005 through 2010 but that only a handful of these appeared to actually involve activity connected to the financial planning profession54 The staff added that additional searches on other titles possibly used by financial planners such as financial consultant and personal financial adviser did not yield significant additional complaints In addition a representative of the Better Business Bureau told us that it had received relatively few complaints related to financial planners although the representative noted that additional complaints might exist in broader categories such as ldquofinancial servicesrdquo

Consumer complaint data may not be an accurate gauge of the extent of problems Complaints may represent only a small portion of potential problems and complaints related to ldquofinancial plannersrdquo may not always be recorded as such As we have previously reported consumers also may not always know where they can report complaints55 At the same time some complaints that are made may not always be valid

SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm The agency does record and track whether federally and state-registered investment adviser firms provide financial planning services but its data tracking systems for complaints examination results and enforcement actions are not programmed to readily determine and track whether the complaint result or action was specifically related to a financial planner or financial planning service For example SEC staff told us the number of complaints about financial planners would be undercounted in their data system that receives and tracks public inquiries known as the Investor Response Information System because this code would likely be used only if it could not be identified whether the person (or firm) was an investment adviser or broker-dealer In addition the data system that SEC uses to record examination results known as the Super Tracking and Reporting System

54The Consumer Sentinel Network database is a secure online database of millions of consumer complaints available only to law enforcement In addition to storing complaints received by FTC the Consumer Sentinel Network also includes complaints filed with the Internet Crime Complaint Center Better Business Bureaus Canadarsquos PhoneBusters the US Postal Inspection Service the Identity Theft Assistance Center and the National Fraud Information Center among others

55GAO Telecommunications FCC Needs to Improve Oversight of Wireless Phone Service GAO-10-34 (Washington DC November 2009) p 18

Page 25 GAO-11-235 Consumer Finance

does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers

However SEC staff told us that a review of its Investor Response Information System identified 51 complaints or inquiries that had been recorded using their code for issues related to ldquofinancial plannersrdquo between November 2009 and October 2010 SEC staff told us that the complaints most often involved allegations of unsuitable investments or fraud such as misappropriation of funds56 A review of a separate SEC database called Tips Complaints and Referralsmdashan interim system that was implemented in March 2010mdashfound 124 allegations of problems possibly related to financial planners from March 2010 to October 201057

SEC staff told us that they did not have comprehensive data on the extent of enforcement activities related to financial planners per se In addition NASAA said that states generally do not track enforcement data specific to financial planners At our request SEC and NASAA provided us with examples of enforcement actions related to individuals who held themselves out as financial planners Using a keyword search SEC identified 10 such formal enforcement actions between August 2009 and August 2010 According to SEC documents these cases involved allegations of such activities as defrauding clients through marketing schemes receiving kickbacks without making proper disclosures and misappropriation of client funds Although NASAA also did not have comprehensive data on enforcement activities involving financial planners representatives provided us with examples of 36 actions brought by 30 states from 1986 to 2010 These cases involved allegations of such things as the sale of unsuitable products fraudulent misrepresentation of qualifications failure to register as an investment adviser and misuse of client funds for personal expenses

56Of these 51 complaints or inquiries 29 involved allegations of fraud 9 involved allegations of unsuitable investments and the remaining 13 represented questions on a variety of topics

57Of these 124 allegations 13 were coded as ldquofraudulent or unregistered offer or sale of securities including Ponzi schemes high yield investment programs or other investment programsrdquo 12 as ldquomanipulation of a securityrsquos price or volumerdquo 6 as ldquotheft or misappropriation of funds or securitiesrdquo 5 as ldquofalse or misleading statements about a companyrdquo 3 as ldquoproblems with my brokerage or advisory accountrdquo and 2 as ldquoinsider tradingrdquo An additional 14 were coded as ldquoother fraudulent conductrdquo and 69 were coded simply as ldquootherrdquo

Page 26 GAO-11-235 Consumer Finance

Because of limitations in how data are gathered and tracked SEC and state securities regulators are not currently able to readily determine the extent to which financial planning services may be causing consumers harm NASAA officials told us that as with SEC state securities regulators did not typically or routinely track potential problems specific to financial planners SEC and NASAA representatives told us that they had been meeting periodically in recent months to prepare for the transition from federal to state oversight of certain additional investment adviser firms as mandated under the Dodd-Frank Act but they said that oversight of financial planners in particular had not been part of these discussions SEC staff have noted that additional tracking could consume staff time and other resources They also said that because there are no laws that directly require registration recordkeeping and other responsibilities of ldquofinancial plannersrdquo per se tracking such findings relating to those entities would require expenditure of resources on something that SEC does not have direct responsibility to oversee Yet as we have reported in the past while we recognize the need to balance the cost of data collection efforts against the usefulness of the data a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking58 Given the significant growth in the financial planning industry ongoing concerns about potential conflicts of interest and consumer confusion about standards of care regulators may benefit from identifying ways to get better information on the extent of problems specifically involving financial planners and financial planning services

58GAO Managing for Results Using GPRA to Help Congressional Decisionmaking and

Strengthen Oversight GAOT-00-95 (Washington DC March 2000) p 13 GAO Executive

Guide Effectively Implementing the Government Performance and Results Act GAOGGD-96-118 (Washington DC June 1996) p 27

Page 27 GAO-11-235 Consumer Finance

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed

Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners

Creation of a Board to Oversee Financial Planners

Over the past few years a number of stakeholdersmdashincluding consumer groups FINRA and trade associations representing financial planners securities firms and insurance firmsmdashhave proposed different approaches to the regulation of financial planners Following are four of the most prominent approaches each of which has both advantages and disadvantages

In 2009 the Financial Planning Coalitionmdashcomprised of the Certified Financial Planner Board of Standards Financial Planning Association and the National Association of Personal Financial Advisorsmdashproposed that Congress establish a professional standards-setting oversight board for financial planners According to the coalition its proposed legislation would establish federal regulation of financial planners by allowing SEC to recognize a financial planner oversight board that would set professional standards for and oversee the activities of individual financial planners although not financial planning firms For example the board would have the authority to establish baseline competency standards in the areas of education examination and continuing education and would be required to establish ethical standards designed to prevent fraudulent and manipulative acts and practices It would also have the authority to require registration or licensing of financial planners and to perform investigative and disciplinary actions Under the proposal states would retain antifraud authority over financial planners as well as full oversight for financial plannersrsquo investment advisory activity However states would not be allowed to impose additional licensing or registration requirements for financial planners or set separate standards of conduct Supporters of a new oversight board have noted that its structure and governance would be analogous to the Public Company Accounting Oversight Board a private nonprofit organization subject to SEC oversight that in turn oversees the audits of public companies that are subject to securities laws

Page 28 GAO-11-235 Consumer Finance

Augmenting Oversight of Investment Advisers with an SRO

According to the Financial Planning Coalition a potential advantage of this approach is that it would treat financial planning as a distinct profession and would regulate across the full spectrum of activities in which financial planners may engage including activities related to investments taxes education retirement planning estate planning insurance and household budgeting Proponents argue that a financial planning oversight board would also help ensure high standards and consistent regulation for all financial planners by establishing common standards for competency professional practices and ethics

However many securities regulators and financial services trade associations with whom we spoke said that they believe such a board would overlap with and in many ways duplicate existing state and federal regulations which already cover virtually all of the products and services that a financial planner provides Some added that the board would entail unnecessary additional financial costs and administrative burdens for the government and regulated entities In addition some opponents of this approach question whether ldquofinancial planningrdquo should be thought of as a distinct profession that requires its own regulatory structure noting that financial planning is not easily defined and can span multiple professions including accounting insurance investment advice and law One consumer group also noted that the regulation of individuals and professions is typically a state rather than a federal responsibility Finally we note that the analogy to the Public Company Accounting Oversight Board may not be apt That board was created in response to a crisis involving high-profile bankruptcies and investor losses caused in part by inadequacies among public accounting firms In the case of financial planners there is limited evidence of an analogous crisis or as noted earlier of severe harm to consumers

A number of proposals over the years have considered having FINRA or a newly created SRO supplement SEC oversight of investment advisers These proposals date back to at least 1963 when an SEC study recommended that all registered investment advisers be required to be a

Page 29 GAO-11-235 Consumer Finance

member of an SRO59 In 1986 the National Association of Securities Dealers a predecessor to FINRA explored the feasibility of examining the investment advisory activities of members who were also registered as investment advisers The House of Representatives passed a bill in 1993 that would have amended the Advisers Act to authorize the creation of an ldquoinspection onlyrdquo SRO for investment advisers although the bill did not become law60 In 2003 SEC requested comments on whether one or more SROs should be established for investment advisers citing among other reasons concerns that the agencyrsquos own resources were inadequate to address the growing numbers of advisers61 However SEC did not take further action Section 914 of the Dodd-Frank Act required SEC to issue a study in January 2011 on the extent to which one or more SROs for investment advisers would improve the frequency of examinations of investment advisers62

According to FINRA the primary advantage of augmenting investment adviser oversight with an SRO is that doing so would allow for more frequent examinations given the limited resources of states and SEC The Financial Services Institute an advocacy organization for independent broker-dealers and financial advisers has stated that an industry-funded SRO with the resources necessary to appropriately supervise and examine all investment advisers would close the gap that exists between the regulation of broker-dealers and investment advisers FINRA said that it finds this gap troubling given the overlap between the two groups (approximately 88 percent of all registered advisory representatives are also broker-dealer representatives) FINRA adds that any SRO should operate subject to strong SEC oversight and that releasing SEC of some of its responsibilities for investment advisers would free up SEC resources for other regulatory activities

59See Securities and Exchange Commission News Digest Issue No 63-4-3 8 (1963) which describes SECrsquos report to Congress regarding the adequacy of the rules of national securities exchanges and national securities associations pursuant to Pub L No 87-196 75 Stat 465 (1961) wherein SEC points out that the framework of industry self-regulation permitted many broker-dealer firms and registered investment advisers to remain outside of any official self-regulatory group According to the SEC News Digest the report suggested that membership in an SRO should be a prerequisite to registration with SEC as a broker-dealer or investment adviser

60HR 578 103rd Cong (1993)

61Investment Advisers Act Release No 2107 68 Fed Reg 7038 (Feb 11 2003)

62SEC is required to report the results of its study within 180 days of enactment of the Dodd-Frank Act

Page 30 GAO-11-235 Consumer Finance

Extending Coverage of the Fiduciary Standard

However NASAA some state securities regulators and one academic with whom we spoke opposed adding an SRO component to the regulatory authority of investment advisers NASAA said it believed that investment adviser regulation is a governmental function that should not be outsourced to a private third-party organization that lacks the objectivity independence expertise and experience of a government regulator Further NASAA said it is concerned with the lack of transparency associated with regulation by SROs because unlike government regulators they are not subject to open records laws through which the investing public can obtain information Two public interest groups including the Consumer Federation of America have asserted that one SROmdashFINRAmdash has an ldquoindustry mindsetrdquo that has not always put consumer protection at the forefront In addition the Investment Adviser Association and two other organizations we interviewed have noted that funding an SRO and complying with its rules can impose additional costs on a firm63

Proposals have been made to extend coverage of the fiduciary standard of care to all those who provide financial planning services Some consumer groups and others have stated that a fiduciary standard should apply to anyone who provides personalized investment advice about securities to retail customers including insurance agents who recommend securities The Financial Planning Coalition has proposed that the fiduciary standard apply to all those who hold themselves out as financial planners Proponents of extending the fiduciary standard of care which also include consumer groups and NASAA generally maintain that consumers should be able to expect that financial professionals they work with will act in their best interests They say that a fiduciary standard is more protective of consumersrsquo interests than a suitability standard which requires only that a product be suitable for a consumer rather than in the consumerrsquos best interest In addition the Financial Planning Coalition notes that extending a fiduciary standard would somewhat reduce consumer confusion about financial planners that are covered by the fiduciary standard in some capacities (such as providing investment advice) but not in others (such as selling a product)

However some participants in the insurance and broker-dealer industries have argued that a fiduciary standard of care is vague and undefined They say that replacing a suitability standard with a fiduciary standard could

63The Investment Adviser Association is a not-for-profit association that represents the interests of SEC-registered investment adviser firms

Page 31 GAO-11-235 Consumer Finance

Clarifying Financial Plannersrsquo Credentials and Standards

actually weaken consumer protections since the suitability of a product is easier to define and enforce Opponents also have argued that complying with a fiduciary standard would increase compliance costs that in turn would be passed along to consumers or otherwise lead to fewer consumer choices

The American College has proposed clarifying the credentials and standards of financial professionals including financial planners In particular it has proposed creating a working group of existing academic and practice experts to establish voluntary credentialing standards for financial professionals As noted previously consumers may be unable to distinguish among the various financial planning designations that exist and may not understand the requirements that underpin them Clarifying the credentials and standards of financial professionals could conceivably take the form of prohibiting the use of certain designations as has been done for senior-specific designations in some states or establishing minimum education testing or work experience requirements needed to obtain a designation The American College has stated that greater oversight of such credentials and standards could provide a ldquoseal of approvalrdquo that would generally raise the quality and competence of financial professionals including financial planners help consumers distinguish among the various credentials and help screen out less qualified or reputable players

However the ultimate effectiveness of such an approach is not clear since the extent to which consumers take designations into account when selecting or working with financial planners is unknown as is the extent of the harm caused by misleading designations In addition implementation and ongoing monitoring of financial plannersrsquo credentials and standards could be challenging Further the issue of unclear designations has already been addressed to some extentmdashfor example as noted earlier some states regulate the use of certain senior-specific designations and allow five professional designations to satisfy necessary competency requirements for prospective investment adviser representatives State securities regulators also have the authority to pursue the misleading use of credentials through their existing antifraud authority

Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners

In general a majority of the regulatory agencies consumer groups academics trade associations and individual financial services companies with which we spoke did not favor substantial structural change in the regulation of financial planners In particular few supported an additional oversight body which was generally seen as duplicative of existing regulation Some stakeholders in the securities and insurance industries

Page 32 GAO-11-235 Consumer Finance

Conclusions

noted that given the dynamic financial regulatory environment under way as a result of the Dodd-Frank Actmdashsuch as creation of a new Bureau of Consumer Financial Protectionmdashmore time should pass before additional regulatory changes related to financial planning services were considered Several industry associations also noted that opportunities existed for greater enforcement of existing law and regulation as discussed earlier

Existing statutes and regulations appear to cover the great majority of financial planning services and individual financial planners nearly always fall under one or more regulatory regimes depending on their activities While no single law governs the broad array of activities in which financial planners may engage given available information it does not appear that an additional layer of regulation specific to financial planners is warranted at this time At the same time as we have previously reported more robust enforcement of existing laws could strengthen oversight efforts In addition there are some actions that can be taken that may help address consumer protection issues associated with the oversight of financial planners

First as we have reported financial markets function best when consumers understand how financial providers and products work and know how to choose among them Yet consumers may be unclear about standards of care that apply to financial professionals particularly when the same individual or firm offers multiple services that have differing standards of care As such consumers may not always know whether and when a financial planner is required to serve their best interest While SEC is currently addressing the issue of whether the fiduciary standard of care should be extended to broker-dealers when they provide personalized investment advice about securities the agency is not addressing whether this extension should also apply to insurance agents who generally fall outside of SECrsquos jurisdiction Sales practices involving some high-risk insurance products such as annuities have drawn attention from federal and state regulators A review by NAIC of consumersrsquo understanding of the standards of care with regard to the sale of insurance products could provide information on the extent of consumer confusion in the area and actions needed to address the issue

Second we have seen that financial planners can adopt a variety of titles and designations The different designations can imply different types of qualifications but consumers may not understand or distinguish among these designations and thus may be unable to properly assess the qualifications and expertise of financial planners SECrsquos recent changes in this areamdashrequiring investment advisers to disclose additional information

Page 33 GAO-11-235 Consumer Finance

on professional designations and certifications they listmdashshould prove beneficial Another opportunity lies in SECrsquos mandated review of financial literacy among investors Incorporating issues of consumer confusion about financial plannersrsquo titles and designations into that review could assist the agency in assessing whether any further changes are needed in disclosure requirements or other related areas

Finally SEC has limited information about the nature and extent of problems specifically related to financial planners because it does not track complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole However a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking SEC staff have noted that additional tracking could require additional resources but other opportunities may also exist to gather additional information on financial planners Because financial planning is a growing industry and has raised certain consumer protection issues regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services

Recommendations We recommend that the National Association of Insurance Commissioners in concert with state insurance regulators take steps to assess consumersrsquo understanding of the standards of care with regard to the sale of insurance products such as annuities and take actions as appropriate to address problems revealed in this assessment

We also recommend that the Chairman of the Securities and Exchange Commission direct the Office of Investor Education and Advocacy Office of Compliance Inspections and Examinations Division of Enforcement and other offices as appropriate to

bull Incorporate into SECrsquos ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumersrsquo investment decisions and

bull Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services and take actions to address any problems that are identified

Page 34 GAO-11-235 Consumer Finance

Agency Comments We provided a draft of this report for review and comment to FINRA NAIC NASAA and SEC These organizations provided technical comments which we incorporated as appropriate In addition NAIC provided a written response which is reprinted in appendix II NAIC said it generally agreed with the contents of the draft report and would give consideration to our recommendation regarding consumersrsquo understanding of the standards of care with regard to the sale of insurance products

NASAA also provided a written response which is reprinted in appendix III In its response NASAA said it agreed that a specific layer of regulation for financial planners was unnecessary and provided additional information on some aspects of state oversight of investment advisers NASAA also said that it welcomed the opportunity to continue to collaborate with SEC to identify methods to better understand and address problems specifically involving financial planners as we recommended In addition NASAA expanded upon the reasons for its opposition to proposals that would augment oversight of investment advisers with an SRO

We are sending copies of this report to interested congressional committees the Chief Executive Officer of FINRA Chief Executive Officer of NAIC Executive Director of NASAA and the Chairman of SEC In addition the report will be available at no charge on GAOrsquos Web site at httpwwwgaogov

If you or your staffs have any questions about this report please contact me at (202) 512-8678 or cackleyagaogov Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report GAO staff who made major contributions to this report are listed in appendix IV

Alicia Puente Cackley Director Financial Markets

and Community Investment

Page 35 GAO-11-235 Consumer Finance

List of Congressional Addressees

The Honorable Bob Corker The Honorable Tim Johnson The Honorable Herbert Kohl The Honorable Richard C Shelby United States Senate

The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives

Page 36 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

Appendix I Scope and Methodology

Our reporting objectives were to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

For background information we obtained estimates for 2000 and 2008 and projections for 2018 from the Bureau of Labor Statistics on the number of individuals who reported themselves as ldquopersonal financial advisersrdquo a term that the agency said was interchangeable with ldquofinancial plannerrdquo The bureau derived these estimates from the Occupational Employment Statistics survey and the Current Population Survey1

According to the bureau the Occupational Employment Statisticsrsquo estimates for financial planners have a relative standard error of 19 percent and the median wage estimate for May 2009 has a relative standard error of 15 percent Because the overall employment estimates used are developed from multiple surveys it was not feasible for the bureau to provide the relative standard errors for these financial planner employment statistics To estimate the number of households that used financial planners we analyzed 2007 data from the Board of Governors of the Federal Reserversquos Survey of Consumer Finances This survey is conducted every three years to provide detailed information on the finances of US households2 Because the survey is a probability sample based on random selections the sample is only one of a large number of samples that might have been drawn Since each sample could have provided different estimates we express our confidence in the precision of our particular samplersquos results as a 95 percent confidence interval (eg plus or minus 25 percentage points) This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn In this report for this survey all percentage

1As explained by the Bureau of Labor Statistics the Occupational Employment Statistics program produces employment and wage estimates for over 800 occupations These are estimates of the number of people employed in certain occupations and estimates of the wages paid to them Since self-employed persons are not included in the estimates the bureau also considers information from the Current Population Survey a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics to derive its occupation estimates

2Additional information on the sample design and data collected by the Survey of Consumer Finances is available at httpwwwfederalreservegovpubsossoss2abouthtml

Page 37 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

estimates have 95 percent confidence intervals that are within plus or minus 25 percentage points from the estimate itself

To identify how financial planners are regulated and overseen at the federal and state levels we identified and reviewed on the federal level federal laws regulations and guidance applicable to financial planners the activities in which they engage and their marketing materials titles and designations We also reviewed relevant SEC interpretive releases such as IA Rel No 1092 Applicability of the Investment Advisers Act to

Financial Planners Pension Consultants and Other Persons Who

Provide Investment Advisory Services as a Component of Other

Financial Services We also discussed the laws and regulations relevant to financial planners in meetings with staff of the Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) Department of Labor and Internal Revenue Service We also interviewed two legal experts and reviewed a legal compendium on the regulation of financial planners At the state level we interviewed representatives from the North American Securities Administrators Association (NASAA) and the National Association of Insurance Commissioners (NAIC) and reviewed model regulations developed by these agencies In addition we selected five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texasmdashfor a more detailed review We chose these states because they had a large number of registered investment advisers and varying approaches to the regulation of financial planners and represented geographic diversity For each of these states we reviewed selected laws and regulations related to financial planners which included those related to senior-specific designations and insurance transactions and we interviewed staff at each statersquos securities and insurance agencies

To identify what is known about the effectiveness of the regulation of financial planners and what regulatory gaps or overlap may exist we reviewed relevant federal and state laws regulations and guidance In addition we spoke with representatives of the federal and state agencies cited above as well as FINRA and organizations that represent or train financial planners including the Financial Planning Coalition The American College and the CFA Institute organizations that represent the financial services industry including the Financial Services Institute Financial Services Roundtable Securities Industry and Financial Markets Association Investment Advisers Association American Society of Pension amp Professional Actuaries National Association of Insurance and Financial Advisors American Council of Life Insurers Association for Advanced Life Underwriting American Institute of Certified Public Accountants American Bankers Association and organizations

Page 38 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

representing consumer interests including the Consumer Federation of America and AARP We also spoke with selected academic experts knowledgeable about these issues In addition we reviewed relevant studies and other documentary evidence including a 2008 study of the RAND Corporation that was commissioned by SEC ldquoInvestor and Industry Perspectives on Investment Advisers and Broker-Dealersrdquo ldquoResults of Investor Focus Group Interviews About Proposed Brokerage Account Disclosuresrdquo sponsored by SEC results of the FPA Fiduciary Task Force ldquoFinal Report on Financial Planner Standards of Conductrdquo ldquoUS Investors amp The Fiduciary Standard A National Opinion Surveyrdquo sponsored by AARP the Consumer Federation of America the NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors and the 2009 National Financial Capability Study commissioned by FINRA We determined that the reliability of these studies was sufficient for our purposes In addition we reviewed relevant information on the titles and designations used by financial planners including FINRArsquos Web site that provides the required qualifications and other information about the designations used by securities professionals

We also obtained and reviewed available data on complaints and selected enforcement actions related to financial planners from the Federal Trade Commission Better Business Bureau and SEC We collected from the Federal Trade Commission complaint data from its Consumer Sentinel Network database using a keyword search of the term ldquofinancial plannerrdquo for complaints filed from 2005 to 2010 From the Better Business Bureau we collected the number of complaints about the financial planning industry received in 2009 From SEC we collected complaints from the agencyrsquos Investor Response Information System that had been coded as relating to ldquofinancial plannersrdquo from November 2009 to October 2010 We also reviewed data from SECrsquos Tips Complaints and Referrals database that resulted from a keyword search for the terms ldquofinancial plannerrdquo ldquofinancial adviserrdquo ldquofinancial advisorrdquo ldquofinancial consultantrdquo and ldquofinancial counselorrdquo from March 2010 to October 2010 In addition at our request SEC and NASAA provided us anecdotally with examples of enforcement actions related to individuals who held themselves out as financial planners SEC identified 10 formal enforcement actions between August 2009 and August 2010 and NASAA provided us selected examples of state enforcement actions involving financial planners from 1986 to 2010 from 30 states We gathered information on SEC- and state-registered investment advisers from SECrsquos Investment Adviser Registration Database FINRA did not provide us with data on complaints examination results or

Page 39 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

enforcement actions specific to financial planners FINRA officials told us they do not track these data specific to financial planners

To identify alternative approaches for the regulation of financial planners and their advantages and disadvantages we conducted a search for legislative and regulatory proposals related to financial planners which have been made by Members of Congress consumer groups and representatives of the financial planning securities and insurance industries We identified and reviewed position papers studies public comment letters congressional testimonies and other documentary sources that address the advantages and disadvantages of these approaches In addition we solicited views on these approaches from representatives of the wide range of organizations listed above including organizations that represent financial planners financial services companies and consumers as well as state and federal government agencies and associations and selected academic experts

We conducted this performance audit from June 2010 through January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Page 40 GAO-11-235 Consumer Finance

Appendix II Comments from the National

Association of Insurance Commissioners

Appendix II Comments from the National Association of Insurance Commissioners

Page 41 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Appendix III Comments from the North American Securities Administrators Association

Page 42 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 43 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 44 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 45 GAO-11-235 Consumer Finance

Appendix IV

A

GAO Contact and Staff

cknowledgments

Appendix IV GAO Contact and Staff Acknowledgments

Alicia Puente Cackley (202) 512-8678 or cackleyagaogov GAO Contact

In addition to the contact named above Jason Bromberg (Assistant Staff Director) Sonja J Bensen Jessica Bull Emily Chalmers Patrick Dynes

Acknowledgments Ronald Ito Sarah Kaczmarek Marc Molino Linda Rego and Andrew Stavisky made key contributions to this report

(250550) Page 46 GAO-11-235 Consumer Finance

The Government Accountability Office the audit evaluation and GAOrsquos Mission investigative arm of Congress exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people GAO examines the use of public funds evaluates federal programs and policies and provides analyses recommendations and other assistance to help Congress make informed oversight policy and funding decisions GAOrsquos commitment to good government is reflected in its core values of accountability integrity and reliability

The fastest and easiest way to obtain copies of GAO documents at no cost Obtaining Copies of is through GAOrsquos Web site (wwwgaogov) Each weekday afternoon GAO GAO Reports and posts on its Web site newly released reports testimony and

correspondence To have GAO e-mail you a list of newly posted products Testimony go to wwwgaogov and select ldquoE-mail Updatesrdquo

Order by Phone The price of each GAO publication reflects GAOrsquos actual cost of production and distribution and depends on the number of pages in the publication and whether the publication is printed in color or black and white Pricing and ordering information is posted on GAOrsquos Web site httpwwwgaogovorderinghtm

Place orders by calling (202) 512-6000 toll free (866) 801-7077 or TDD (202) 512-2537

Orders may be paid for using American Express Discover Card MasterCard Visa check or money order Call for additional information

ContactTo Report Fraud Web site wwwgaogovfraudnetfraudnethtm Waste and Abuse in E-mail fraudnetgaogov

Federal Programs Automated answering system (800) 424-5454 or (202) 512-7470

Ralph Dawn Managing Director dawnrgaogov (202) 512-4400 Congressional US Government Accountability Office 441 G Street NW Room 7125 Relations Washington DC 20548

Chuck Young Managing Director youngc1gaogov (202) 512-4800 Public Affairs US Government Accountability Office 441 G Street NW Room 7149 Washington DC 20548

Please Print on Recycled Paper

  • GAO Doc d11235pdf
    • Letter
    • Background
    • Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities
      • Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws
      • Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities
      • Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations
        • Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited
          • Existing Regulation Covers Most Financial Planning Services
          • Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products
          • Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public
          • Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners
            • Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed
              • Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners
                • Creation of a Board to Oversee Financial Planners
                • Augmenting Oversight of Investment Advisers with an SRO
                • Extending Coverage of the Fiduciary Standard
                • Clarifying Financial Plannersrsquo Credentials and Standards
                  • Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners
                    • Conclusions
                    • Recommendations
                    • Agency Comments
                      • Appendix I Scope and Methodology
                      • Appendix II Comments from the National Association of Insurance Commissioners
                      • Appendix III Comments from the North American Securities Administrators Association
                      • Appendix IV GAO Contact and Staff Acknowledgments
                        • GAO Contact
                        • Staff Acknowledgments
                        • Obtaining Copies of GAO Reports and Testimony
                          • Order by Phone

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 JPN ltFEFF9ad854c18cea306a30d730ea30d730ec30b951fa529b7528002000410064006f0062006500200050004400460020658766f8306e4f5c6210306b4f7f75283057307e305930023053306e8a2d5b9a30674f5c62103055308c305f0020005000440046002030d530a130a430eb306f3001004100630072006f0062006100740020304a30883073002000410064006f00620065002000520065006100640065007200200035002e003000204ee5964d3067958b304f30533068304c3067304d307e305930023053306e8a2d5b9a306b306f30d530a930f330c8306e57cb30818fbc307f304c5fc59808306730593002gt KOR ltFEFFc7740020c124c815c7440020c0acc6a9d558c5ec0020ace0d488c9c80020c2dcd5d80020c778c1c4c5d00020ac00c7a50020c801d569d55c002000410064006f0062006500200050004400460020bb38c11cb97c0020c791c131d569b2c8b2e4002e0020c774b807ac8c0020c791c131b41c00200050004400460020bb38c11cb2940020004100630072006f0062006100740020bc0f002000410064006f00620065002000520065006100640065007200200035002e00300020c774c0c1c5d0c11c0020c5f40020c2180020c788c2b5b2c8b2e4002egt LTH 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 LVI 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 NLD (Gebruik deze instellingen om Adobe PDF-documenten te maken die zijn geoptimaliseerd voor prepress-afdrukken van hoge kwaliteit De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 50 en hoger) NOR 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 POL ltFEFF0055007300740061007700690065006e0069006100200064006f002000740077006f0072007a0065006e0069006100200064006f006b0075006d0065006e007400f300770020005000440046002000700072007a0065007a006e00610063007a006f006e00790063006800200064006f002000770079006400720075006b00f30077002000770020007700790073006f006b00690065006a0020006a0061006b006f015b00630069002e002000200044006f006b0075006d0065006e0074007900200050004400460020006d006f017c006e00610020006f007400770069006500720061010700200077002000700072006f006700720061006d006900650020004100630072006f00620061007400200069002000410064006f00620065002000520065006100640065007200200035002e0030002000690020006e006f00770073007a0079006d002egt PTB 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 RUM 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 RUS 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 SKY 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 SLV 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 SUO 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 SVE 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 TUR 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 UKR ltFEFF04120438043a043e0440043804410442043e043204430439044204350020044604560020043f043004400430043c043504420440043800200434043b044f0020044104420432043e04400435043d043d044f00200434043e043a0443043c0435043d044204560432002000410064006f006200650020005000440046002c0020044f043a04560020043d04300439043a04400430044904350020043f045604340445043e0434044f0442044c00200434043b044f0020043204380441043e043a043e044f043a04560441043d043e0433043e0020043f0435044004350434043404400443043a043e0432043e0433043e0020043404400443043a0443002e00200020042104420432043e04400435043d045600200434043e043a0443043c0435043d0442043800200050004400460020043c043e0436043d04300020043204560434043a0440043804420438002004430020004100630072006f006200610074002004420430002000410064006f00620065002000520065006100640065007200200035002e0030002004300431043e0020043f04560437043d04560448043e04570020043204350440044104560457002egt ENU (Use these settings to create Adobe PDF documents best suited for high-quality prepress printing Created PDF documents can be opened with Acrobat and Adobe Reader 50 and later) gtgt Namespace [ (Adobe) (Common) (10) ] OtherNamespaces [ ltlt AsReaderSpreads false CropImagesToFrames true ErrorControl WarnAndContinue FlattenerIgnoreSpreadOverrides false IncludeGuidesGrids false IncludeNonPrinting false IncludeSlug false Namespace [ (Adobe) (InDesign) (40) ] OmitPlacedBitmaps false OmitPlacedEPS false OmitPlacedPDF false SimulateOverprint Legacy gtgt ltlt AddBleedMarks false AddColorBars false AddCropMarks false AddPageInfo false AddRegMarks false ConvertColors ConvertToCMYK DestinationProfileName () DestinationProfileSelector DocumentCMYK Downsample16BitImages true FlattenerPreset ltlt PresetSelector MediumResolution gtgt FormElements false GenerateStructure false IncludeBookmarks false IncludeHyperlinks false IncludeInteractive false IncludeLayers false IncludeProfiles false MultimediaHandling UseObjectSettings Namespace [ (Adobe) (CreativeSuite) (20) ] PDFXOutputIntentProfileSelector DocumentCMYK PreserveEditing true UntaggedCMYKHandling LeaveUntagged UntaggedRGBHandling UseDocumentProfile UseDocumentBleed false gtgt ]gtgt setdistillerparamsltlt HWResolution [2400 2400] PageSize [612000 792000]gtgt setpagedevice

                              1. identify B Identify components of a businesss financial statements to
Page 6: Input on the Report to Congress on How To Modernize and Improve

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amp9)lt4ampRLeRSLampO6QampGamp)+amp6lt4-amp4amp6ampamp()amplt66lt44)amp3)4)3amp4ampG+4lt=)ampLamp Olt77)lt4-amp04(amp9)lt4ampLMRLQampamp(4amplt(6)+amp63amp0(amp+)+))amp(47)=amp+amp ()+)=ampamp)amp6amp)[)+amp(6==amp)amp$b)ltampamp()amp+844amp)amp+(amp4amp9)lt4ampR^JJeOQamp amp()ampGamp++64amp3)amp63amp7$amp+8)amp(6amp6amp)+84lt)amp)++7)3amp0(4=)amp 6lt4-amp4amp6ampamp()amplt66lt44)amp3)4)3amp4ampG+4lt=)ampLampOlt77)lt4-amp04(amp9)lt4ampLMRLQamp 0)+)amp)++7)3amp04(amp()amp3$)amplt6+)amp63ampT4==amp+)66=ampamp)amp)[)lt)3ampamp6amp)+amp 0(amp4amp$lt(amp6amp)[)+Samp amp OQampC+amp()amp$+)ampamp(4amp)lt4Bamp()amp==04-amp6=Iamp

OLQampGamp)+amp+)+))amp(6amp$lt(amp)+amp4amp6ampi)[)+iamp04(4amp()amp7)64-ampamp(4amp )lt4amp4amp$lt(amp)+amp+)+))amp(6amp()amp+amp()amp4amp6ampi46lt46=amp=6)+Biampi46lt46=amp 6384)+Biampi46lt46=amplt$)=+Biampi46lt46=amplt$=6iamp+amp6ampi48)7)amp6384)+Biamp i48)7)amplt$)=+iamp+ampi48)7)amplt$=6BiampY9)4+ampG384+BZampY9)4+amp $=6BZampYh6)ampD=6)+BZampYh6)ampD=64-amp9)lt46=4BZampYh=3)+ampD=6)+BZampYh=3)+amp $)=+BZampYh=3)+amp9)lt46=4BZamp+Bamp6ampamp()amp+)-4-amp4=)amp4ampltb$lt4amp04(amp()amp )+7ampY(6+)+)3BZampY)+44)3BZamp+ampY9)lt46=4Zamp+Bamp$)amp6amp()+amp4=)Bamp+)46=amp 3)4-64Bamp6lt63)74ltamplt+)3)46=amp+amp+)46=amplt)+44lt64amp76+Tamp(6amp0$=3amp=)63amp 6amp+)66=)amp)+ampampltlt=$3)amp(6amp()amp+amp()amp))amp$lt(amp)[)+4)Bamp+amp(6amp$lt(amp )+amp)+amp63amp+amp+)3)+amp

i46lt46=amp=64-amp)+84lt)Biampi46lt46=amp6384+amp)+84lt)Biampi46lt46=amplt$)=4-amp )+84lt)Biampi46lt46=amplt$=4-amp)+84lt)iamp+ampi48)7)amp6384+amp)+84lt)Biamp i48)7)amplt$)=4-amp)+84lt)iamp+ampi48)7)amplt$=4-amp)+84lt)iampY+$amp)+84lt)Zamp Y)=3)+BZampY)6)BZamp+ampY)4+Zamp6384+amp)+84lt)Bamplt$=4-amp)+84lt)ampBamp+amplt$)=4-amp )+84lt)amp+amp6amplt7464amp()+)Bamp+amp76T)amp$646==amp)X$486=)amp +)+))64amp04(amp+))ltampamp$lt(amp)+gamp$4)amp+ampX$6=44lt64Samp

ORQampiD)+iamp4lt=$3)amp6amp434843$6=Bamplt++64Bamp6+)+(4Bamp=474)3amp=464=4amp lt76Bampb4amp8)$+)Bamp6amp6lt464Bampb4ampltTamplt76Bamp6amp+$amp+amp $4lt++6)3amp6lt464Samp

OltQamp1()amp==04-amp)+amp6+)ampamp=46=)amp$3)+amp()amp+844ampamp(4amp)lt4Iamp

OLQampGamp)+Bamp0()amp)-6-)3amp4amp()amp$+lt(6)amp+amp6=)ampamp6-4=)amp)+6=amp+)+amp +amp(4amp+amp()+amp0amp6ltlt$Bamp63amp()amp6-)amp63amp)7=))ampamp$lt(amp)+Samp

ORQampGamp)+Bamp63amp()amp6-)amp63amp)7=))ampamp$lt(amp)+Bamp=4lt))3amp$3)+Bamp )[)7)3amp+7amp=4lt)4-amp$3)+Bamp+ampamp$b)ltampamp=4lt)4-amp$3)+ampamp+)6ampamp6amp )[+)amp)[lt=$4amp+7amp6amp3)444amplt64)3amp4Bamp()amp7734amph[lt(6-)ampGltBamp()amp 8)7)ampG384)+ampGltampampLeNJBamp()amp6=4+46amp7734ampH60Bamp()amp++6)amp 9)lt$+44)ampH60ampampLeMjBamp()amp)6=amph6)ampH60Bamp+amp6amp6)amp+amp)3)+6=amp=60amp+amp()amp =4lt)4-amp63amp+)-$=64ampamp6Tamp+amp684-amp63amp=6amp6lt464Samp amp 9)lt4ampRLeRSPampWamp)lt)4ampampH4lt))amp

1()amp==04-amp6lt4844)amp6+)ampamp)[)7amp+7amp=4lt)$+)amp$3)+amp$+6lt)amp3)amp9)lt4amp LMPLBamp)lt6$)amp()amp6+)amp34+)lt=amp+)=6)3ampamp=4lt464Bamp)-464Bamp+amp))lt4-amp()amp 6=)ampamp4$+6lt)Iamp

O6Q h[=664Bamp34lt$4Bamp+amp4)++)64ampBamp63amp)+4-ampamp44amp+amp +)lt77)364ampBamp4$+6lt)amplt8)+6-)Bamp)[$+)Bamp=474Bamp+)74$7Bamp +6)Bamp3)3$lt4=)Bamp67)amp=6Bamp+amp6amp()+amp4$+6lt)amplt+6ltBamp+amp )46=amp4$+6lt)amplt+6ltBamp)+7Samp

OQ )lt77)34-amp63844-Bamp+amp$+-4-amp6=4lt6amp+amp4$+6lt)amplt8)+6-)Bamp )46=amp6=4lt6amp+amp4$+6lt)amplt8)+6-)Bamp+amp=4lt(=3)+ampamp$amp6+4lt$=6+amp 4$+6lt)amp=4lt4)amp+ampamp4$+)amp04(amp6+4lt$=6+amplt764)amp+amp4$+)+Samp

OltQ A434-ampamp4$+6lt)amplt8)+6-)Samp amp

)IampG$(+4Iamp9)lt4ampjampampGAampPePBamp(6)+ampPRLBamp96)ampampRJJJSamp))+)lt)Iamp $+6lt)amp3)amp9)lt4ampLMPLSamp

67F3270)+F1+lt-3F32lt3237875)+F1+lt-3678927(+2+)+3D+B+7(+82+8lt378O+32)+89lt+2A8373=3875A598752=8)3)35398lt23A57BU77(lt777BV8+2A(+80)()7(95++8+lt777B08+73275+5+2 lt777B-^3+A+20)+58lt2gt758(3892+803A+28B)7589lt+2A837=37B)38+lt23+88378)3U)35398V77(lt77+2808+7325A832832+Xlt+288)9B+- 46$+B8+2+5+lt2+8+7A+82+83=+)2+82(+5797B)++2=77(lt77+2325A+287BU77(lt777BV8+2A(+8Ogt)+2O23P+25++28O+(98+)+2 _3O5+8(2lt373lt23A57B7A+8=+75A(+78+(92+8))+937389()+2=83957+(+88+2+B823787A+8=+75A8+22+lt2+8+7A+83)+2=- ^3+A+203A+28B)7589lt+2A837)+c23P+21++2+A+83+A+8=9()3O+5+82+50758B7(753(9=+737(7O+lt23A5+53+B83288)37B)+gtlt+83O98+(3789=+2889+2)+)758397+)(759789lt+2A8+52+B8+2+52+lt2+8+7A+87578927(+B+78-68)39583O+32(+9gt(37A+gt+53+B8328

)]78927(+(3=lt7+8537389lt+2A8+09503A+28++32+X=7+)+5A+287B328+8lt2((+83)+2B+78- F327[889+8(377)3lt++8880)())+O3A+7B9B+395X-F922+7gt0)+F1+lt3F32lt323787+2lt2+8)+689++2gt05+2+7+8O+++7)++2=77(Ult77+2V7577(Ult777BV75B732+87gt75A59322=)33+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67 )+MJ8-F+792gt0)7+75+X(++57Bgt(3=lt+Xlt2359(80)()(7+8gt=8+5lt+283773O++A7B)+gt2+8+(92+8lt2(92gt)+7)+gt2+5A+28+575 =2P++58)A7B3)+9lt85+3)+83(P=2P+)737+3)+53785+V0)8395+5=35+32+B937=P+8738+78+)83+A+2- 6=P+88+78+321+lt3F32lt32378+X=7+28389lt+2A8+09575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt77A+8=+75A832gt2=)+7)+gtlt(+++27+5Ogt59(2gt5A8+28O+++7jM0NNNRj0NNN32lt77A3A7BjbNN0NNN-NN388+80)+7892+gt=P+8+A+7=32+8+78+39575+X=7+)+gtlt+75Z9gt377(02+2+=+775+8+lt777B5A(+3+2+5Ogt737R59(2gt78927(+B+7)3(=833+2)+U8=++A+V3 +Xlt+277(02+2+=+775+8+lt777B8+2A(+8)++277B7A+2B+3 jb0NNN-NN3787B+jbNN0NNN75+X779gt278(37053+873T +2+=+7G777B0W8+G777B0XG777B08Pamp7B+=+775)+lt2+lt23737+32)0(8)375O95B+7B8+=+788lt237gt77(lt72+Z92+8 8B7(7+Xlt+28+0737+3)()8(922+7gt(377+5)7)+8+2+8l32db3278927(+(+787B(922(99=-33lt+2837398+)++U77(lt77+2V3+2)+8+8+2A(+838+78Ogt322++752+((3=lt+37)59(2gt7A+8=+75A8+2875+7BB+7U77(75+5+2lt777BV)3989lt+2A837Ogt)+F1+lt3F32lt323788=ltgtO+(98+)+gt(=7333+25A(+78+(92+88877+7553+8 73+7(392B++)((3759(0O92)+20(9gt2+258)38+)33lt39355372+B937089lt+2A8377595)+882+8lt378Ogt75Ogt32)+2(378- )+2B+879=O+23(3=lt7837B)239B)2+B93287bN8+8)8=+72+B2583X+57575+X779+875+lt2359(88++=3O+35B+5B7878927(+B+78)3)35398+Xlt+28777(02+2+=+775+8+lt777B75)39++=3378O8+58+7B+()7Z9+89B)U)+779gtC7A+28gtVI=37B3)+28L3U7A+8V7X+575WZ9gt675+X779+875+lt2359(8-67)+(8+3+Z9gt75+Xlt2359(80)()2+732+B9+588+(92+80(=82+3+7=5+)89()lt2359(8 3+2)+9lt85+3)+83(P=2P+)737+3)+53785+-B+782+9B)3lt7lt238lt+(873(327+27532)+lt238lt+(3O+B32Z95373)+2 8+(92+8lt32337A3237779gt-cgt537B830)+97(+78+5B+7A3587gt 59(2gtOgt37)+U2+(3==+753738+V75)+2+87359(2gtOgt3289lt+2A83772+(3==+757B)+lt92()8+3775+X779gt32778927(+B+7073

<777BV>Hh99amp()amp6=amp)+amp6384<)amp4quotampY)<$+44)ZS67>mailto3+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67

+5)46$2=-67F327+80lt295+7+Xlt+287525(7O+88+2+5B7877(lt777B()278975+2D+(37aalM3)+FA(35+-^3+A+20353830)+5=B+5lt2gt7++58389+7(A(39275)+Z9+837gt88P+580)8)++X+73)+5=B+875)lt78)38+B++X(++58lNRebgt+287=7gt(8+80)3=7gtgt+28lt238+(9+)+(8+0lt2(92gt87(+)+2+8 75537++=+73(3785+2h S)++Z9gt75+X779+8)JJgt+283lt+7+8=gtO+3gt7ltlt23lt2+32=7gt8+732(+78lt2(92gt)+2B+95+7(+33A+2lbgt+2358=7gtB+788++P 390)+((397A9+8O+32+8922+75+2()2B+882++()+77A+8=+7-C7)+(3789=+2+X8)+(372()+2+2+735=B+8-67)8(8+0822+)gt+2P+89()(8+37(377B+7(gt75)+(383B3732lt3325A(+23=737R59(2gt77(lt77+2Q78927(+B+78lt23)OA+BA+7)+Ult+2(+A+5V(P35=B+8-)+D+327+gti+7+2[83(+753(582(327+gt82+3)+3lt238+(9+89()(8+8O+(98+)+8+7+7(+8)+gt(7+Xlt+(3()+A+23=89((+889lt238+(937789())B)ltlt+2(2=+2+lt2gt75)+2O95B+82+O++28lt+737=32+8+2398(2=+8-5537gt0gt+282+3+7O+33O72+8(883737)+(372(75)+2+927397583)+(+7)7389+50O98373(3=lt7+5B78)+UB+7V0)3=gt(3779+8+7Blt2359(97O+5- W+(A+gt0)+8+3(+283)+(392(+)+(2=+8lt+2lt+2+5Ogt97+)(lt77+28)239B)7(3775)+(P389lt+2A837753A+28B)389()23B9+lt77+28 Ogt)+1+lt3F32lt32378751+lt3678927(++A+8=38(3789=+283)+2375+A(+8O+(98+)+2+2+73++(A+5=782A+2+=+5+8AO+750)++B8gt8+=+7892+)+(3759((3779+8O+(98+)+(+778)+2=37+gtO(P)393=9()988- (378O+7BP+778+875Ogt46$38+=)+5+397+)(lt2((+87)875982gt-amp382+(+7gt046$889+52+B93782+Z927Bc23P+21++2889lt+2A8+8+83+Z9gt75+X779+8=5+Ogt)+22+B8+2+52+lt2+8+7A+8-82+890=7gt3)++88+)(2+lt2+8+7A+82++A7BO23P+25++280523ltlt7B)+2 8+(92+8(+78+83+X(98A+gt3+275+Xlt2359(83985+346$[889lt+2A832gt829(92+-C73297+gt0)+33lt)3+87F327[8875(P32+B9373UV 77(lt77+280+A+8F327[8(3789=+28)+=+2(gt3)+8+97+)(75A598- 5537gt0F6FD+(37MJKM-a+8)+839)+(922+77+(+88gt3(+7892+758lt+83977+(+882gt5+0)(3789+8U5A(+7)+O987+88378927(+V073)+2(37+7398889+=37B77(lt77+280)()O839+gt7++583O+552+88+5075(395O++5+2+A+3=P+)+2+B9379732=(2388bN8+8-)8O27B8 =+3 amp

1()amp$4)ampamp4$+6lt)amp4ampamp63)X$6)=amp3)4)3Iamp c+32+Y1()ampA$4)ampVamp$+6lt)Z(7O+++(A+gt75+(+7gt2+B9+5 7375+0=9828O+5+Z9+gt5+7+57=7gtD+8- +5+2((395(2++9732=5+737832U83(37V0U7+B337V0U278(37V7505537gt0U7+(+88gt3(+7892+Q2+B8237V3275A598)353737+753 U8+V78927(+8B+783)+7892+20O92)+207+753lt23A5+5A(+327+B3+5++75Q32389lt+2A8+75ltlt23A+)+(3783(+78+578927(+B+7 )=99(+7O+(98+37+X87B2+378)lt75+2+7(lt(gt-IWX=lt+87(95+83(PO23P+28077(lt77+2807A+8=+75A8+2875FG[8L7+X(983723= 2+B8237395O+gt+280)3=gt5A8+378lt+(83(372(75)3 lt+28378)395)35+388+8- 6758(98837ltlt+25+5D+lt+=O+2Mb0JKKe0)+F327G2359(+2E(+787B S32P7Bi239lt2+(3==+75+55+77BU83(37V7)+337B=77+2 A5amp+PC+252lt20+$0(0+2(0QRS(307+)02$+90102 320amp527+102)02$+amp+)-2$-+1062$)02$+T$-12+9 320amp+92amp+25UQESlt1amp1$0(0+$(30lt110+0++25050660amp6 )24+9320amp52+320amp5920amp)0+T$+020$+)0+55)-2amp1$++ +$-2+amp0)23-amp8 )8+32+57)+F327+B892+- F327832+(+7gt+4)3amp$amp64=)3amp3+7(D+(37MJKM-aR$+(+88gt3E(+78+ gt10655lt+amp40$20+00()62(5amp0+$-20-+302HCM+$-2+amp0H30 A0amp+RVWR970amp-$01020320amp520503$5amp+9+0+920660amp+ 10$506+$-2+amp0P XY)5++$93$amp-$$+$92+02)20+$69+36602+6)++$2 20amp((0+3+$+9+$-2+amp0amp4020$90)$-20$95($9)20(-($920$9 303-amp750$9)(0+)5+$92+102+$-2+amp0amp+2amp92)0+5+$-2+amp0 amp+2amp902($8 XZ0amp((0+3++3[234$+92-2+))5amp+$[)0+5))5amp+$[ )5amp15302$))5amp+$62+$-2+amp0amp40209)0+5))5amp+$62+$-2+amp0 amp402092)5amp15302$7-)2amp-52+$-2+amp0)5amp0$2+$-20lt1 )2amp-52amp()+0$2+$-202$8 X+3+6+$-2+amp0amp4020$8

D9()7B9B+395O+97+Z9A3(75(395O+7(32lt32+5734+5+2(-6 lt+7+8+2+8+739B)039532(+)38+lt23A57B+B5A(+7)+O987+883 78927(+32++389O=3D+32+5+2=75+5(+787B0+X=73775 (37797B+59(37)78(+27O+875255+A+3lt+5Ogt)+D+324+5+2+B932- )+2+87553737B37Blt23O+=)78927(+=2P+7BB+7(+8(+78+57 =9lt+8+83+27B29875+8+lt777B8+2A(+80I298amp8L)()(3789+8 )+979lt2((+30327)++2A+0)+9798)27B3+B++8)737Rgt+28-67+28+298=80=7gt3)+=3(+57$+A5)8=+07583=+297 Ogt32B73782+5gt7+532(+7892+573)+28+83lt+7gt83(78927(+B+78 75+7(392B+)+=398+O(PR53328+7B+()7Z9+87325+23B78+732(+78 298)+B)+27B8B7(777(732=37)+2O+98+538+ 779+832+78927(+lt2359(8-)8lt2((+82=lt775(3779+85+8lt+)+ 72359(3732+B937878+889()8F327-+5+2()8+287(37875lt+7+832A3378(3952+59(+32+=7+)+8+lt2((+8- 9)lt4$amp)=3)+)6)amp=64-amp3)4-64I )+2+8)395O+O23575(3=lt2+)+78A+lt23)O37378lt+(398+5+275+8+lt777B5+8B73780))+72359(3732+B93788=23)38+7F327-87F3270D+1+lt2=+7[83678927(+395lt2+lt2+83ltlt23A+5 5+8B7378753955+A+3ltA+7Blt23(+8837(95++X=7373+59(37 ++=+7802+A+7B)+)+2)++X=737lt23(+888lt23(32+5323lt+7O33P0)+)+2D+ltlt23A+5(37797B+59(3782+Z92+53=77322+7+7gt89()5+8B7370)+)+27gt5A(+BA+78537+837)+(lt(gt359(2gt075) lt3(+875lt23(+592+82+7lt(+3((+lt(3=lt7803258(lt7+)35+2837gt89()(+2(37875)+77+(+882gtlt23(+592+8322+A3(37752+lt327B358(lt72gtlt23(+592+83)+9)32+8-)8=75+(395O+=lt38+5)+5+2- C46lt46=ampD=6)+ampampC46lt46=ampD=64-Iamp 678927(+B+782+lt2+A+7+523=97B8lt+(398+5+275+8+lt777B5+8B73787325+23O2(+)+ltlt+27(+3+Xlt+28+08P+gt)+gt9273 )+37gt3)+2+AO+3)+=0)377(lt77+2-75)803(3928+0O27B8=+9(2(+3=gtlt2+A398(3==+7837)+7+(+88gt3()7B+7)+C732=67A+8=+75A8+28(-ID9lt2L)+2+32+6lt23lt38+))++2=77(lt77+27577(lt777BO+2+82(+5755+7+5975+2+5+203O+7(32lt32+5738+ 75)7gtlt+2837)3)35839877(lt77+2323+2877(lt777B8+2A(+8I833O+5+7+5LO+2+Z92+532+B8+2877A+8=+75A8+275lt23A5+ 89()5A(+859(2gt22+8lt+(A+3)+)+2)+gt833+27gt5A(+83)+A9+

37A+87B72+B9+58+(92+8-7+X+78A+895gt8lt+232=+52+5gtOgt)+i3A+27=+7((397Ogt(+37)+3lt(377(lt77+287577(lt777B I2+lt32()+5L750)+65373B2++))+2(37(983780)+gt=P+A+2gt89+3O8+2A3780)+7(+)+7(983732(37+X9lt92lt38+8087()=+73)82+lt32- 6O+)ltltgt3+Xlt75377gt3)+8+3lt(875lt23A5+5537732=3775 2+R++X=lt+8757+(53+89lt372+Z9+8-

+8lt+(9gtD9O=+50

gt32o883(+8 aJN-MdN-JJMd

$B+cgt320F4GH

Illegal Practices OfFee-Only Financial PlannersIn The Business Of Insurance

(Problems amp Solutions)

Prepared ByNigel Brian Taylor CFPreg

Santa Monica CA(Copyright copy2002 - 2009 Nigel Brian Taylor CFPreg All Rights Reserved)

Tel 310 260 1126 Website wwwiamafiduciarycom

Illegal Activities in the Business Of Insurance By Fee-Only Financial Planners (Problems And Solutions)

Prepared by Nigel Brian Taylor CFPreg

Santa Monica CA CA Insurance License Nr 0716446

INTRODUCTION

Overwhelming media focus on ldquomethods of compensationrdquo for financial services in the recent past rather than competence and regulatory compliance has fueled an ever increasing consumer-driven demand for FEE-ONLY advice in insurance planning Media and marketing hype has influenced the consumerrsquos perception and led many to conclude that ldquofee-only plannersrdquo are the only planners capable of giving objective unbiased advice relating to insurance matters because they receive no compensation from third parties are not affiliated with represent or take compensation from insurers and therefore have no conflicts of interest and loyalty that could impair their ability to provide objective and unbiased information Unfortunately however many fee-only financial planners in California and 38 other States with similar regulations are operating outside the law in order to provide this ldquoobjective and untaintedrdquo advice This discussion will highlight these illegal insurance activities and provide potential solutions (initially for California although the suggested solutions could be used as a model for other States) to increase compliance with current California insurance law It will also discuss developing trends in the business of offering insurance advice in California particularly in relation with the provision of insurance advice as a component of a ldquoComprehensive Financial Planrdquo All Statutes herein are California statutes unless otherwise indicated

INSURANCE LICENSING

The three most widely held insurance licenses issued to individuals who provide general advice to families and consumers on general insurance matters in California are The Life Agent License(LX) the Fire and Casualty Broker-Agent (FX) and to a negligible degree the Life and Disability Analyst License(LA) A full list of other licenses is available at wwwinsurancecagov

Life Agent (LX)

The licensing requirements for a Life Agent license are set forth in Chapter 5 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit I A Life Agent (LX) is defined as a person authorized by and on behalf of a life or disability or life and disability insurer to transact life disability or life and disability insurance1

Generally a life agent advises consumers as to the benefits and disadvantages of life health disability and long term care insurance etc and transact business on behalf of one or more insurance companies offering products to consumers A Life Agent must be compensated

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by the insurer on the sale of product in the form of commissions and cannot accept fees for service from the consumer There are approximately 154664 resident and non-resident LX agents serving Californians2

Fire amp Casualty Broker-Agent (FX)

A fire and casualty licensee is a person authorized to act as an insurance agent broker or solicitor and a fire and casualty broker-agent license is a license so to act The FX licenseersquos authority to act is determined by which documents are initially submitted

bull A $10000 Bond of Insurance Broker form 417-5 authorizes the licensee to act as an insurance broker An insurance broker is a person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurer

bull An Action Notice of Appointment form 447-54 authorizes the licensee to act as an insurance agent An insurance agent is a person authorized by and on behalf of an insurer to transact all classes of insurance except life insurance

bull An Action Notice of Solicitor form 417-31 authorizes the licensee to act as an insurance solicitor An insurance solicitor is a natural person employed to aid an insurance agent or insurance broker in transacting insurance other than life

There are approximately 88300 resident and non-resident FX agents serving Californians3

Life amp Disability Analyst (LA)

The licensing requirements for a Life and Disability Analyst license are set forth in Chapter 8 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit II A Life and Disability Insurance Analyst is defined as a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto4

Generally a LA is trained to a significantly higher level than a LX and can advise a consumer not only as to the advantages and disadvantages of all forms of insurance but can also provide competent unbiased comparative analysis of various policies for a fee as well as interpret the rights of consumers under any insurance contract The LA must among other things

bull Have been licensed as a Life Agent (LX) for a period of at least 5 years preceding a LA application5 and

bull Must complete a comprehensive course of education covering significantly more topics than the LX and

bull Pass a rigorous examination before obtaining the LA license

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It should be noted that the LA license currently authorizes a person to provide advice for a fee on all insurance related matters but does not currently require any training or examination in Long-Term Care insurance or require a minimum number of hours of continuing education credit in each licensing period In the past ten years the number of CA Life And Disability Analysts has remained stable at approximately 44 (forty four) for the entire Statersquos population6

ldquoFINANCIAL PLANNERSrdquo OFFERING INSURANCE ADVICE

There are over 34000 (thirty four thousand) Registered Investment Advisors and Investment Advisor Representatives in California7 An Investment Advisor in California is authorized under sect25009(b) California Corporations Code8 to utilize the title of ldquofinancial plannerrdquo (without any statutory requirement to substantiate his her competence to perform the tasks of a financial planner) and perform comprehensive financial planning services on a fee-only basis The examination and qualification requirements for the Series 65 (Uniform Investment Adviser Law Examination) are attached hereto as Exhibit III NO knowledge of insurance products or the business of insurance is required in order to register as an Investment Advisor ldquoFinancial Planningrdquo and ldquoFinancial Plannersrdquo are having an ever increasing and significant impact on the provision of insurance services in California It is important that State Agencies and boards such as the CA Dept of Insurance (CDI) Agent and Broker Advisory Committee (ABAC) provide input to regulators and legislators alike regarding allied ldquoprofessionsrdquo impacting the business of insurance to ensure that consumers are properly protected A copy of this discussion will therefore be forwarded to both the CDI and the ABAC for their consideration

Many fee-only planners offer ldquocomprehensiverdquo financial planning services that by definition include risk management analysis and recommendations as part of the planning process These recommendations include calculations regarding the amounts and types of life insurance recommendations with regard to the benefits and disadvantages of various individual and or group health insurance plans disability and long term care plans etc In some cases advice is provided on a fee basis regarding homeowners auto and other types of property casualty and general liability coverage

To avoid real and ldquoperceivedrdquo conflicts of interest many fee-only financial planners choose not to maintain affiliations or representation agreements with any insurer and therefore are unable to license themselves as LXrsquos or FXrsquos Some let their LX or FX licenses lapse when they transition to fee-only planning In both these cases California law is clear Any person accepting fees for insurance related matters from any third party other than an insurer unless otherwise exempt must be licensed as a LA9 In an attempt to circumvent the law other planners obtain a LX and or FX license to create the appearance of legal compliance but never have any intention of actually ldquotransacting businessrdquo or utilizing the license for the purpose for which it was originally issued or intended This practice is prohibited under CA law10 because it is the fee-only plannerrsquos true intention to charge the consumer for

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance advice rather than to be compensated by an ldquoinsurerrdquo as CA Insurance Code Sections 32 amp 1622 (supra) require

Many fee-only planners quote an often-abused section of Californias Insurance code Section 1831(e) which provides a limited exemption from insurance licensing for Registered Investment Advisers to justify their unlawful behavior The following is an excerpt from a letter originally addressed to Errold Moody CFPtrade (A California Life amp Disability Analyst who has concerned himself with the illegal activities of fee-only financial planners in insurance matters for over 10 years in California) on July 27 1995 by Patricia Staggs the then Assistant General Counsel and Chief Compliance Bureau of the Legal Division Compliance Bureau of the California Department of Insurance who wrote regarding the Investment Adviser exemption

That exemption appears at Insurance Code Section 1831(e) and provides an exemption to the chapter regarding life and disability analysts for an investment adviser as defined in section 25009 of the Corporations Code when acting in that capacity (Emphasis added) Section 25009 of the Corporations Code provides as follows

Investment adviser means any 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 regular business publishes analyzes or reports concerning securities Investment Adviser does not include (a) a bank trust company or savings and loan association (b) an attorney law accountant engineer or teacher whose performance of these services is solely incidental to the practice of his profession (c) a broker-dealer whose performance of the services is solely incidental to the conduct of his business as a broker-dealer and who receives no special compensation for them or (d) a publisher of any bona fide newspaper news magazine or business or financial publication of general regular and paid circulation and the agents and servants thereof but this clause (d) does not exclude any person who engages in any other activity which would constitute him as an investment adviser within meaning of this section

A life and disability insurance analyst is defined in insurance code 325 as follows

Life and disability insurance analyst means a person who for a fee or compensation paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as a beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The Departments view to that exemption set forth in insurance code 1831(e) is that an investment adviser need not submit to regulation by the Department of Insurance so long as the activities engaged in by the investment adviser fall within the defined activities of an investment advisor as set forth in Corporations Code section 25009 It is noteworthy that the definition of an investment adviser contains no reference to insurance related activities

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(Emphasis Added) Therefore any activities included within the definition of life and disability analyst such as advising as the life insurance products are clearly outside the capacity of an investment adviser and would subject the person to the provisions of law relating to life and disability insurance analysts

Very Truly Yours Patricia Staggs

Since as early as 1995 the CDI has taken the documented position that the Investment Advisor exemption applies ONLY when a Registered Investment Advisor acts ldquoin that capacityrdquo and as defined in section 25009 of the Corporations code It is the authorrsquos conclusion based on conversations with CDI staff counsel Jody Miller therefore that the only time a Registered Investment Advisor in the State of California may lawfully provide ldquoinsurancerdquo related advice to a consumer for a fee would be for example if he were advising a client as to the allocation of sub accounts containing regulated securities within an already existing variable life insurance or variable annuity policy

This exemption does NOT however permit a Registered Investment Advisor to discuss the merits or disadvantages of any type of insurance including Life Health Disability Long Term Care Property Casualty Homeowners General Liability Auto insurance etc that do not contain any elements related to the provision of investment advisory services Under current law then any Registered Investment Advisor who provides such advice and is compensated directly by the consumer without having first obtained a LA license is guilty of a misdemeanor11

The position of the CDI was illuminated in a letter addressed to representatives of the financial services sector who attended a series of meetings held with the Dept of Insurance in late 1997 In as letter dated February 3 1998 Assistant Ombudsman and Legislative Liaison Jeffrey Kenny wrote

February 3 1998

On July 30 1997 a discussion concerning the life and disability insurance analyst license was held between the California Department of Insurance (CDI) and members of the financial planning industry As you participated in this dialog I am writing to communicate CDIs policy on this matter

The focal point for this issue is consumer protection not the interests of the individual factions With all parties based in customer service it is sad that this detail has been lost in much of the discussion As defined by insurance code Section 325 a life and disability insurance analyst is

a person who for a fee or compensation of any kind paid by or derived from any person or source other than the insurer advises purports to advise or offers to advise any person

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insured under named as beneficiary of or have any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The fact that there are only 46 life and disability analyst in California is not a valid argument for repealing this code In fact the limited number of licensees and population in noncompliance begs for increased education and enforcement While the easy solution for those in noncompliance may be to repeal this law consumers who pay for fee advise on insurance matters deserve an analyst educated in insurance per CDI standards The current licensing requirements ensure that relationship Any legislative effort to repeal this law will likely be opposed on the basis that such action is harmful to consumers by consumer groups insurers agents and brokers and the California Department of Insurance

At the July 30 1997 meeting representatives from the financial planning industry raised two additional suggestions concerning CDIs examination requirement The first seeks to allow issuance of a Life and Disability Analyst license to Certified Financial Planners and Certified Public Accountants following the successful completion of their own professional examinations Again this is an idea that requires legislation and will certainly face opposition CDIs position remains at only those individuals who pass CDIs exam are to be issued a life and disability analyst license CDI is the agency charged with enforcing this license and will remain via its examination and related or regulatory functions the authorizing agency for this license

The final suggestion request a waiver of the requirement than an examinee must have five (5) years experience as a life licensee or employment experience under said licensee to sit for CDIs examination Again this is an idea that requires legislation CDI will reserve judgment until the full breadth of this proposal has been introduced to the state legislature

Despite some groups interest in changing current law there is an existing law which is and has always been quite clear While a financial planner may be illegally engaging in insurance analyst activities and may not be aware of their violation it is my hope that this the explanation of policy will provide them with the impetus to come into compliance or cease the illegal activity immediately Per insurance code Section 1844 any person who acts offers to acts assumes to act as a life and disability insurance analyst when not licensed by the commissioner per this article is guilty of a misdemeanor Consistent with current practice information obtained on individuals in noncompliance will be aggressively pursued

Sincerely

Jeffrey Kenny Assistant Ombudsman and Legislative Liaison

However successful criminal prosecutions for a violation of CIC sect1844 are apparently rare because the CDI must turn these matters over to local district attorneyrsquos offices Statewide Their failure to enforce the law is probably attributable to a lack of funding to prosecute

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non-violent misdemeanor counts of this nature where no victim can be produced Unfortunately and to the detriment of Californiarsquos consumers this lack of enforcement has had the effect of creating a Cavalier attitude towards compliance with State law that essentially seems to tolerate this unlawful activity permitting fee-only planners to operate almost with impunity

There are a number of fee-only financial planners who claim in their firms disclosure form that they have no affiliations or representation agreements with any insurance carriers and that they do not represent or offer for sale any kind of insurance products However in reality they maintain LX or FX licenses and have contracts with life insurance carriers who do not require a minimum annual production level without any intention of ldquotransactingrdquo on behalf of an insurer (a violation of CA Insurance code section 1668 sub (c) amp (g) supra) while making no disclosures anywhere on their disclosure statements or advertising materials as to their active insurance licenses which is in and of itself a violation of Section 17255 of the Insurance Code12

Other fee-only financial planners claim that any insurance advice given by them to their clients as part of a comprehensive financial plan is given ldquofree of chargerdquo They claim that a fee is charged for all the other elements (investment tax retirement amp estate planning) but not for the risk management portion of the plan They point to the fact that they never ldquoact in any of the capacities defined in Article 1 (commencing with Section 1621)rdquo because they do not appoint themselves with or represent an insurance company or any particular insurance product and do not actually ldquotransactrdquo insurance business (Thereby avoiding in their minds a licensing requirement under CIC Sections 32 amp 1622) Furthermore they claim they do not charge the consumer a fee for the advice they provide regardless of the complexity of that advice (Charging a fee would trigger a licensing requirement under section 325 Insurance Code) The result if the courts upheld this logic would be that the Dept of Insurance would lose all control and authority for the provision of insurance advice to consumers by fee-only financial planners in California to the California Dept of Corporations Worse still the only recourse damaged consumers would then have against fee-only financial planners in the business of insurance would be the California Dept of Corporations a state agency woefully equipped to enforce state insurance laws

One problem that requires statutory revision is the lack of a suitable definition for ldquotransactingrdquo in the business of insurance While the Dept of Insurance has considerable leeway in determining what constitutes ldquotransactingrdquo the code itself provides little or no useful information or guidance for fee-only planners who often feel based on the wording of the current definition that they acting inside the law when performing certain services Transaction is defined under sect35 of the Insurance code as

35 Transact as applied to insurance includes any of the following a) Solicitation b) Negotiations preliminary to execution c) Execution of a contract of insurance d) Transaction of matters subsequent to execution of the contract and arising out of it

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While the requirements under sub(s) b c amp d is self-explanatory ldquoSolicitationrdquo (sub A) Is not defined and the legislature has to date been loathe to define it leaving the interpretation to the CDI and creating a ldquofact at issuerdquo that requires administrative or judicial interpretation and determination in cases where fee-only planners dispute their activities as ldquotransactingrdquo This is not the first time the issue of defining ldquosolicitationrdquo has been brought to the attention of the Department of Insurance In a discussion paper dated September 25 1998 the Producer Licensing Working Group recommended defining ldquosolicitationrdquo in the following manner

Solicitation Any oral or written statement or image (1) made by any person either directly or by another person acting pursuant to the first persons authorization direction or control (2) which statement is made with the intention or likely effect of provoking directly or indirectly a recipients interest in potentially purchasing an insurance product

This author believes a clarification of what constitutes Solicitation under the Insurance Code will assist Registered Investment Advisors fee-only financial planners and others in assessing which license if any would be appropriate given their particular facts and circumstances If the legislature decides not to act the Dept of Insurance should issue authoritative guidelines or advisory opinions similar to those of other regulatory agencies such the SEC NASD and IRS in an effort to bolster compliance This is extremely important given recent trends and developments in the delivery methods and current practices of individuals providing insurance services in California

The issue of ldquotransactingrdquo and what constitutes ldquosolicitationrdquo aside and with regard to the practice of giving advice in insurance for free CIC Section 1631 does not mention compensation as a criteria for triggering a licensing requirement13 Even setting aside the current CDI determination of what constitutes ldquotransactingrdquo which is ambiguous Californiarsquos Insurance code for purposes of interpretation is also governed by Section 1858 of the California code of Civil Procedure (CCCP)14 There is voluminous precedent under CCCP section 1858 supporting the authorrsquos opinion that the interpretation of a statute that produces an absurd or anomalous result will not prevail when used as a defense In interpreting a statute Supreme Court avoids any construction that would produce absurd consequences15 In construing statute state Supreme Court will not parse each literal phrase of statute if doing so contravenes obvious underlying intent or leads to absurd or anomalous result16

Since it is already well settled in law that ldquoThe business of Insurance is a business affected with a public interestrdquo17 this author believes the circumvention of State Insurance licensing laws by fee-only financial planners in any manner irrespective of compensation or level of competence presents a clear and present danger to Californiarsquos consumers and is contrary to the public interest The intent and desire of the Legislature to require State licensure for insurance professionals is clearly set forth in CA Insurance Code Sections 1631 1633 amp 1633518 and is unambiguous in the authorrsquos opinion

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UNLICENSED INSURANCE ADVICE CURRENT REMEDIES

CA Insurance Code Section 1668 applies in the case of fee only planners who maintain a license but do not intend to actively transact business as LXrsquos The sole remedy for such conduct is that under this section ldquo the commissioner may deny an application for any license issued pursuant to this chapter if

helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this staterdquo

CA Insurance Code Section 1668 is problematic in that it is difficult if not impossible to enforce unless insurers are ldquorequiredrdquo to terminate all LXrsquos amp FXrsquos not actively ldquotransactingrdquo insurance business and unless the Dept of Insurance requires proof be provided to the department by the insurer that a LX or FX is in fact actively transacting business The code could require insurers to review commissions paid to appointed agents on an annual basis and terminate the appointments of all agents who do not ldquotransactrdquo over a period of 12 months unless valid cause can be shown Exceptions could be made for salaried employee of insurers and persons engaged in the regulation of insurance business in whatever form

CA Insurance Code Section 1844 is applicable to fee only planners who provide insurance advice for a fee or ldquofor freerdquo and provides that any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

Again this is difficult if not impossible to enforce because the Dept of Insurance must rely on local district attorneyrsquos offices most of which have no funds to prosecute non-violent misdemeanor counts particularly when most DArsquos offices consider this a matter for the Insurance Commissioner in the first place Therefore rather than seek prosecution under this section the Dept of Insurance should actively enforce State law against violators under the recently introduced CIC section 129218 (discussed below) It makes no sense for the Dept to refer these cases to local district attorneyrsquos offices if their decision to prosecute under the Statersquos criminal statutes is based on ldquofinancial considerationsrdquo rather than the evidence of malfeasance

There are two other remedies available to the Dept of Insurance The first is California Insurance Code (CIC) 790 et Seq The Unfair and Deceptive Trade Practices Act The second is the aforementioned and recently introduced CIC Section 129218

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Prosecution under CIC 790 et Seq does not require compensation because under section 79001 the Insurance Code applies to all persons engaged in the ldquobusinessrdquo of insurance19

Under section 79004 the Dept of Insurance is authorized to investigate any person engaged in the business of Insurance in California20 Transacting in the business of insurance without a valid license with or without compensation is clearly an unfair and deceptive competitive practice because violators seek to avoid and evade ascertainable standards in training examination licensing and continuing education required by the State for agents and brokers appointed by insurers who are performing essentially the same tasks while at the same time claiming to take the ldquoethical high groundrdquo in terms of the advice given State licensing places the agent at a competitive disadvantage because a licensed agent can only accept compensation from an insurer unless that agent is also a Life and disability Analyst Section 790035 provides substantial administrative penalties including fines and restraining orders for persons violating this Act21 The provision of unlicensed insurance advice whether for a fee or ldquofree of chargerdquo by fee-only planners is detrimental to the consumers of California because there is no ascertainable standard of education or requirement to keep current present unless such planners are subjected to the licensing requirements of the CA Dept of Insurance

The second remedy available is authorized under CIC Section 12921822 which provides for greater administrative remedies against those individuals who transact the business of insurance without proper licensure A CA Life amp Disability analyst whose business has been severely impacted filed complaints in early 2002 against prominent California fee-only planners who are flagrantly violating the law To date the CDI has taken no action against these planners and it remains unclear whether these new powers will be utilized on a proactive basis to seek out fee-only financial planners offering insurance advice or whether the Dept of Insurance will remain reactive to ldquoconsumerrdquo complaint only in the enforcement of Californiarsquos insurance laws

On a final note the CDI is considering proposed regulations pursuant to the authority granted to the Insurance Commissioner under the provisions of in SEC 8 of Assembly Bill 393 Chapter 321 Statutes of 2000 that among other things address the necessity for licensing These new regulations include a proposed section 21923

Draft

Section 21923 - Necessity of License

The following activities are not exempt from licensure under CIC Insurance Code Section 1631 because they are directly related to solicitation negotiation or effecting the sale of insurance

(a) Explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures

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limits premiums rates deductibles payment plans or any other insurance contract or potential insurance contract terms

(b) Recommending andor advising or urging applicantspotential applicantspolicyholders applicants for insurance coverage potential applicants for insurance coverage or policyholders to buy particular insurance policies or to insure with particular companies or insurers

(c) Binding of insurance coverages

Note Authority cited Section 8 of AB 393 Chapter 321 States of 2000 Reference Insurance Code Section 1631 of the Insurance Code

Should section 21923 be enacted any perceived ambiguities associated with the giving of ldquounlawfulrdquo advice by fee-only planners would be eliminated While the author applauds all these efforts to increase compliance through enforcement and regulation the consumerrsquos total ignorance of California Insurance law and the reactive nature of insurance enforcement will bring few if any real-world changes for consumers There have to date been few complaints regarding the illegal practices of fee-only financial planners by consumers because a) a licensed life insurance agent is always eventually involved in the ldquosalerdquo of a specific product to the consumer and b) the client has already received a written affirmation from the fee-only planner that he is acting in a fiduciary capacity as their trusted advisor The client therefore places greater value on the fee advice given by a fee-only planner than the advice of a licensed life agent ldquosellingrdquo the same product the fee-only planner recommends simply because the licensed individual is an agent of the insurer

Of course the consumer is paying twice for the same advice once in the form of fees and a second time in the form of commissions to a licensed ldquoagentrdquo Providing there is no relationship between the fee-only planner and the insurance agent and no referral fee is payable by the agent to the planner this fact is never disclosed to the client It is the authorrsquos personal experience that many fee-only financial planners refer these clients to out-of-state insurance agencies who have declared themselves willing to provide substantial discounts from their commissions While the author views these discounts are ldquoonly fair in light of the circumstancesrdquo it does not excuse the illegal conduct and the fact that the client is not receiving any favorable contractual benefits on their insurance policy such as shorter exclusion periods shorter surrender penalties lower mortality and expense fees or lower percentage monetary penalties for early termination of the product

The already established fiduciary relationship between a fee-only financial planner and his her client creates a bond of trust that implies by its very nature that the planner is fully complying with all federal and state laws In fact many fee-only planners subscribe to written codes of ethics established by credentialing bodies and professional membership organizations such as the CFP Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) which demand their members comply with all federal and state licensing laws However the aforementioned

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

professional membership and regulatory bodies are conflicted in their response to the problem of illegal activity because both organizations as mentioned previously on page 5 amp 6 of this report are lobbying for a change in the law that will allow such fee-only planners particularly those holding the CFPreg Certificate to qualify for a waiver from licensing These professional membership and regulatory bodies refuse to investigate or discipline such planners unless the State first prosecutes them The State of California for reasons stated elsewhere in this report have been loathe to take action against these fee-only planners despite repeated complaint filings by life and disability analysts over the most recent ten year period whose income is being severely impacted by such illegal activities

From a consumerrsquos perspective there would be absolutely no reason to question the integrity of their fee-only financial planner In fact organizations such as the National Association of Personal Financial Advisors (NAPFA) have marketed their fee-only planner members as the ldquoonlyrdquo planners capable of providing clear untainted unbiased advice on all financial matters including insurance and have disseminated brochures since the 1980rsquos claiming that commissioned based advice is somehow tainted and a totally flawed delivery method that could harm consumers NAPFArsquos position has been supported and publicized to a great extent by the media including magazines such as Bloomberg and Money to newspapers such as the Los Angeles Times which requires ldquofee-onlyrdquo as a pre-requisite ldquomethod of compensationrdquo for any planner participating in itrsquos popular ldquoMoney Makeoverrdquo series of consumer assistance feature articles It has also been supported by non-profit organizations such as the Consumer Federation of America Negative consumer perceptions of insurance licensed individuals has to a great extent been unfairly tainted by such media hype and marketing tactics

The recent introduction of section 12921822 coupled with an acceptance of proposed section 21923 would absolutely provide the CDI with additional needed powers to regulate the business of insurance It will not in the authorrsquos opinion however increase compliance in any meaningful manner Continued consumer ignorance of State insurance laws and reactive rather than pro-active enforcement by the CDI will almost certainly maintain the current status quo

This author applauds the sentiment of the recently introduced statute but believes it has no real-world practical value This license requirement will continue to be ignored by most fee-only planners because of the incredible burden it places on them in terms of initial compliance and qualification In addition the statute to date remains un-enforced because the CDI lacks the manpower and funding within the civil enforcement division to even begin to attack this widespread problem Simply stated this recently introduced legislation demands aggressive investigation large fines and numerous prosecutions to achieve even partial compliance The CA Department of Insurance has instigated a consumer-complaint driven ldquoreactiverdquo role rather than a consumer-protective ldquoproactiverdquo enforcement campaign even after the introduction of CIC section 129218

One major reason for continued non-compliance is the requirement that applicants be registered as LX agents for five years preceding their examination and licensure as LArsquos

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Fee-only planners view this as being forced to move back into a house they have already sold) Secondary reasons include fee-only planners view the LA license as an over-qualification to perform the tasks they desire to perform there are no schools or colleges currently teaching the course work required to become LArsquos because a total lack of enforcement by the CDI of this statute has created a total lack of interest on the part of fee-only planners Also there are no teaching materials or publications available for purchase to prepare for the examination These problems and potential solutions are discussed in more detail in the section below

Finally it is fascinating and significant to note that while many fee-only planners firmly believe State and SEC investment adviser regulations are outdated irrelevant and sorely in need of a complete revision and overhaul if they permit planners to ldquoperform comprehensive financial planningrdquo few if any fee-only financial planners actually violate the Investment advisory statutes One major reason for this almost total compliance is because of the rigorous enforcement efforts of the Dept of Corporations the NASD and the SEC in regards to the Investment Adviser Act of 1940 and the severe penalties including imprisonment it imposes for offenders

In light of the foregoing this author has concluded that the only way consumers will be substantially protected from unlicensed insurance activities is if (a) meaningful reforms are enacted that make statutory compliance desirable and (b) cooperation is sought with other State agencies such as the Dept of Corporations and private professional regulatory organizations such as the CFP Board of Standards (discussed later) who regulate activities in related financial service categories to facilitate the sharing of information crucial in establishing which activities fee-only financial planners are engaging in

RECOGNIZING NEW DELIVERY METHODS IN THE BUSINESS OF INSURANCE

It is the authorrsquos belief that licensing compliance in the business of insurance will only become a reality when States recognize the recent rapid developments in the ldquomethods of deliveryrdquo of insurance advice nationwide particularly those associated with the emerging profession of financial planning More and more consumers have recognized the advantages of employing one trusted advisor for all their financial affairs and view insurance advice as part of an overall financial plan Californiarsquos consumers are cognizant that conflicts of interest exist in insurance planning because LX amp FX agents are only compensated by insurers and represent the insurerrsquos interests to the client not the clientrsquos interests to the insurer Such agency relationships impact the fee-only plannerrsquos ability to honor hisher fiduciary obligation to act in the clientrsquos best interests at all times

Fee-only planners desire to perform the tasks and functions of an LX amp FX licensee Few if any desire to perform the more complex tasks and analysis normally expected of a Life and Disability Analyst Fee-only planners are committed to eliminating the conflicts of interests associated with representing an insurer and many consumers in California desire to employ one fee-only planner to handle all their affairs including the insurance planning portion of their financial plan rather than multiple professionals The net effect of this is that many

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

consumers seek out fee-only planners to reduce conflicts while ostensibly obtaining objective and untainted advice Unfortunately they are instead often given incompetent advice by unlicensed individuals In order then to benefit and protect consumers substantial but beneficial reform is necessary

Fee-only planners with established financial planning credentials equate obtaining the LA license with ldquomoving back into a house they are trying to sellrdquo They feel competent and qualified to assist consumers in insurance planning and may have held insurance licenses for years prior to allowing them to lapse State law however demands they be licensed for five years preceding their application for licensing as Analysts and during that time they would need to ldquotransactrdquo insurance as a licensed LX agent something they do not feel they can do

As the author sees it the State has two choices in this matter It can either crack down on fee-only planners and others offering unlicensed insurance advice for a fee (hardly feasible based on lack of funding staffing or voluminous consumer complaints) or seek ways to legalize regulate and supervise these plannerrsquos activities Currently financial planners are regulated at the state level under Section 25009(b) of Californiarsquos Corporations Code Which states

Section 25009 (b) (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part of another 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 publishes analyses or reports concerning securitieshelliphelliphelliphelliphelliphelliphelliprdquo

While consumers nationwide have embraced the concept of comprehensive financial planning California along with most other States has been slow to recognize that financial planning has developed far beyond the simple giving of ldquoinvestmentrdquo advice Financial planners in California are still regulated supervised and audited by the Dept of Corporations which while skilled in terms of overseeing regulated securities transactions is woefully under equipped to supervise the activities of a planner engaging in insurance investment tax retirement estate and asset protection planning The Series 65 Investment Advisor Examination is the only legal requirement for those who desire to use the term ldquofinancial plannerrdquo in California However as the Series 65 training and education requirements23 illustrate the current State educational requirements for ldquofinancial plannersrdquo are far removed from the level of competency actually required to practice ldquofinancial planningrdquo

RECOGNITION OF ldquoFINANCIAL PLANNINGrdquo AS A PROFESSION

The State of California is well known for its innovative and forward thinking and has a unique opportunity as the bell-weather State of this nation to lead the way for other States to follow It is time for Californiarsquos regulatory and licensing bodies such as the Dept of Insurance and Dept of Corporations to recognize ldquofinancial planningrdquo as an ldquoemerging

Confidential Page 14 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

allied professionrdquo that is having a significant impact on the provision of services traditionally regulated by their agencies Recognizing the emerging profession of financial planning and recommending to the legislature the necessity of developing regulations that will govern professionals who desire to practice the profession of financial planning is the only viable sensible and logical long-term solution for protecting Californiarsquos consumers from harm

As with any other emerging profession the State in developing any such regulations should recognize and seek the counsel of long established national and international organizations that have developed rules guidelines ethics and ascertainable standards of education examination criteria credentialing and continuing education requirements Consideration should also be given as to whether a new or existing State agency should regulate the activities of financial planners or whether these activities should be regulated independent of agencies in allied professions such as those agencies governing insurance and securities As an example lawyers accountants and bank employees etc are provided limited exemptions from registration under insurance and securities laws because the State has concluded that their existing professional State licensing requirements contained in the Business and Professions Code established standards of practice and a written codes of ethics and professional responsibility provide sufficient protection to consumers without requiring multiple State licensure

Regulations governing investment advisers are inadequate to address the multitude of tasks performed by comprehensive financial planners The question therefore arises as to whether a separate state license and new regulations should be developed within the Business amp Professions Code to govern comprehensive financial planners that is separate and distinct from investment advisory services in order to adequately protect Californiarsquos consumers Should the use of the commonly touted investment industry term ldquofinancial plannerrdquo be reserved for individuals who have been State certified as competent to perform comprehensive financial planning The greatest obstacle to the recognition of financial planning as an emerging profession requiring some form of licensure is by what standards should such a profession be measured Many fee-only financial planners have no professional accreditation whatsoever other than the investment adviser registration overseen by the CA Dept of Corporations Have ascertainable and acceptable standards been developed

FINANCIAL PLANNING AND THE CERTIFIED FINANCIAL PLANNERreg

CERTIFICANT

The most widely recognized professional financial planning designation worldwide is the CFPreg Certificate The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS INC24 (Hereafter CFP Board) has licensed its CFPreg and CERTIFIED FINANCIAL PLANNERreg trademarks to over 67000 individuals in 19 countries There are currently 4578 CERTIFIED FINANCIAL PLANNERreg Certificants licensed in California25 Most CFPreg Certificants hold multiple State or federal licenses (insurance securities Registered Investment Advisor etc) and are already supervised in their professional activities by

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

multiple federal and or state agencies Sadly not one auditor of any supervising federal or state agency possesses the knowledge base or skill sets to supervise the overall activities of a comprehensive fee-only financial planner It should be stated that while the CFP Board has established a code of ethics and uniform standards of practice for CFPreg Certificants that could be used as a yardstick by legislators the CFP Board does not currently supervise investigate or audit any CFPreg Certificantrsquos activities unless a formal complaint is filed against a Certificant with the Board

The CFP Board defines a ldquofinancial plannerrdquo as a person ldquowho is capable and qualified to offer objective integrated comprehensive financial advice to or for the benefit of individuals to help them achieve their financial objectivesrdquo A financial planning professional must have the ability to provide competent financial planning services to the client utilizing the ldquofinancial planning processrdquo26 which covers basic ldquofinancial planning subject areasrdquo 27

With specific regard to the business of insurance it is important to understand the benefits provided by the CFPreg Certificate course of education as well as its shortcomings The CFP Board has developed a course curriculum (Attached as Exhibit IV) in insurance planning as an integral part of the CFPreg Certificate examination requirement This educational requirement exceeds the training currently required by the California Department of Insurance on all levels There are however shortcomings to the CFP Boardrsquos program that cannot be overlooked There is no training in State insurance regulations or any Statersquos insurance code provisions governing the business of insurance Furthermore while there is a mandatory requirement that each CFPreg Certificant complete 30 hours of continuing education for each two year certification period there is currently no requirement that all of these hours be approved by the CDI for insurance continuing education credits

The CFP Board of Standards is willing to cooperate with the CDI to address and correct the shortcomings in its program Once these problems have been corrected there are two potential solutions that if implemented could encourage full compliance with State licensing laws certainly on the part of CFPreg Certificant fee-only planners not currently licensed

SOLUTION 1 PROVIDE A FULL EXEMPTION FROM INSURANCE EXAMINATION AND LICENSING TO CFPreg CERTIFICANTS WHO ARE LICENSED AS REGISTERED INVESTMENT ADVISORS

Currently section 1831(e) provides a limited exemption from insurance licensing for Registered Investment Advisors (RIArsquos) but only ldquowhen acting in that capacityrdquo (Discussed in detail earlier) This suggestion would expand the relevant code section and remove any limitation from RIArsquos performing the tasks of a LX or FX agent providing the following conditions are met

1 The person is and remains a licensed Registered Investment Advisor either with the State or by the SEC AND

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

2 The person remains a CFPreg Certificant in good standing AND

3 The person in addition to any continuing education requirements of the CFP Board of Standards in other areas of financial planning completes no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

4 The person provide to the CA Dept of Insurance proof of his current licensing status as a Registered Investment Advisor and CFPreg Certificant together with a list of all approved continuing education courses completed for each two year period or whenever required to do so by the Dept of Insurance AND

5 Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

6 Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS EXEMPTION

As previously illustrated the Registered Investment Advisor license alone does not qualify a person to offer insurance advice for a fee The CFPreg Certificate alone even once enhanced to provide training in statutory law and the regulation of the business of insurance in California would be insufficient because the CFPreg Certificate is not an official State regulated license However a combination of the CFPtrade Certificate and the Registered Investment Advisor license coupled with the other suggestions made above will provide a sound educational basis for any person desiring to offer insurance advice for a fee while protecting the public from harm to a far greater degree than they are protected under current law In addition this proposed exemption would alleviate the need for fee-only CFPreg Certificants to become licensed LArsquos in order to be compensated by the consumer thereby eliminating the requirement that they license themselves as LXrsquos for 5 years before meeting licensing qualification requirements By NOT forcing fee-only planners to move into a house theyrsquove already moved out of BUT RATHER demanding competence in return for a waiver from LA licensing requirements the CA Dept of Insurance would protect the consumer while facilitating an opportunity for immediate compliance without expensive investigation of illegal activities prosecution and supervision of future activities Compliance would go up the cost of supervision investigation and prosecution would go down

It is important to note that any advice given would be limited under this proposed change to the typical advice offered by LX or FX licensees who generally provide explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures limits premiums rates deductibles payment plans and

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance contract or potential insurance contract terms as well as recommending andor advising potential applicantspolicyholders on insurance coverage to buy particular insurance policies or to insure with particular companies or insurers The advice given should not be allowed to encroach on the more complex tasks a Life amp Disability Analyst provides

This exemption will

bull Permit Registered Investment Advisors with a CFPreg Certificate to offer insurance advice without the need for appointment by an insurer and allow them to be compensated by a third party other than the insurer for that advice (A Variant of this model already exists in Connecticut and New Hampshire A very POORLY structured derivative (that this author does NOT support) has just been signed into law in Idaho The Idaho statute gives a Registered Investment Advisor carte blanche to offer insurance advice for a fee without any training examination or continuing education requirement in insurance planning a clear violation of the public trust In addition CFPreg Certificants will shortly be given an exemption from registration as Insurance Counselors (LA equivalent license for Texas) in Texas The author finds this unacceptable because again no instruction will be mandatory in insurance regulation and insurance law)

bull Require the candidate to complete a comprehensive course of education in among other things all aspects of insurance planning and demand state licensing (as an investment adviser) before qualifying for the exemption

bull Require continuing education of 30 hours in insurance planning a significant improvement over the LA license which requires NO continuing education currently

bull Leaves intact the State Insurance Commissionerrsquos authority (under CICsect790 et Seq And CICsect129218 (supra)) to supervise audit fine punish and bar from the business of insurance in CA any person who violates the publicrsquos trust

COMPARISON OF THE ldquoCFPreg PLUS REGISTERED INVESTMENT ADVISORrdquo EXEMPTION TO THE LIFE AND DISABILITY ANALYST LICENSE REQUIREMENT

There will still be a need for the Life amp Disability Analyst license in California LArsquos provide a valuable service to the public by

bull Offering expert testimony in court regarding all insurance related matters

bull Providing complex expert comparative analysis and interpretation of the terms and conditions of various insurance contracts to consumers accountants and lawyers

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

bull Explanation of the rights of the parties under an insurance contract a service otherwise reserved exclusively to members of the Bar

The proposed exemption would not obviate the need for LA licensees It will provide a means for fee-only Registered Investment Advisor financial planners who have earned the CFPreg Certificate a professional financial planning credential that has course work superior to the current minimum standard requirement by the CA Dept of Insurance (with the noted exceptions listed above which must be addressed before an exemption would be granted) to serve their clients basic insurance needs without appointment by an insurer and the inherent conflicts of interest this may represent

EFFECT OF THIS PROPOSED EXEMPTION ON CONSUMERS

This proposed exemption would have a substantially positive effect on consumers with no negative impact whatsoever They will be able to seek out a professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education It will further provide greatly enhanced protections for the public against wrongdoing by requiring a bond in the amount of $100000 (one hundred thousand dollars) and mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CA Department of Insurance (It should however be noted that most if not all CFPreg Certificants meet all the above criteria already in terms of EampO insurance etc and obtaining a $100000 bond would not place an undue burden on any fee-only CFPreg Certificant planner) Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their insurance matters

POTENTIAL PROBLEMS ASSOCIATED WITH THE GRANTING OF AN EXEMPTION FOR CFPreg CERTIFICANTS MEETING THE ABOVE CRITERIA

One possible problem would of course be that other financial service professionals with professional insurance or financial planning credentials would seek to block any such legislation unless their credential were to be included Some other designations worthy of exemption would be

The Chartered Life Underwriter (CLU) The Chartered Financial Consultant (ChFC)

The author based on the knowledge and skill sets required to hold such designations has no objections to the inclusion of these designations for purposes of the aforementioned suggested exemption providing these professionals meet ALL the other criteria

SOLUTION 2 PERMIT STATE LICENSING AS A LX OR FX WITHOUT INSURANCE COMPANY APPOINTMENT AND AUTHORIZE PLANNERS TO BILL CLIENTS DIRECTLY

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

Under California law a person who ldquofor a fee or compensation of any kind paid by or derived from any person or source other than an insurerrdquo(emphasis added) must register a Life and Disability Insurance Analyst under CIC Section 325 As previously illustrated in this discussion however Life and Disability Insurance Analysts are required to

bull Pass an antiquated examination that has not been substantially revised since 1983 bull Self-Study in some cases already repealed statutes because no examination

revisions have been undertaken since 1983 Furthermore no educational courses are available from any college school or professional educational institution because there is simply no demand for the license due to a complete lack of enforcement of LA laws by the CDI

bull Self Study to familiarize themselves with many topics including Long Term Care and other more recently introduced exotic and hybrid insurance products because candidates are not tested on these products due to lack of LA examination revision

Oddly once licensed Life and Disability Insurance Analysts are NOT required to complete any continuing education requirements of any kind There is no requirement other than one imposed by ldquopotential liabilityrdquo through civil action for a LA to ldquoremain currentrdquo as a LA licensee

In light of the foregoing a far more sensible alternative and second potential solution would be to allow all LX amp FX agents to be licensed with the CDI without the requirement for appointment to transact on behalf of an insurer LX or FX agents desiring to be compensated directly from the consumer (for purposes of this discussion the author will refer to such agents as FLX amp FFX agents) would subject themselves to the same CDI licensing and examination requirements as traditional LX amp FX agents FLX amp FFX agents would also be subject to the same continuing education requirements as traditional LX amp FX agents The function of FLX amp FFX licensed individuals would be to act ldquoquasirdquo in the capacity of a personal representative of the client with the authority to negotiate and effect all insurance coverages on their behalf at the best possible terms with any company they choose (As fiduciaries such FLX ampFFX licensees would be subject to regulations similar to the NASDrsquos ldquobest executionrdquo rules They would be required to perform extensive due diligence and seek the best coverages at the most reasonable prices on behalf of their clients)

Currently such activities allowed under CIC sect33 are restricted to ldquoa person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurerrdquo (Emphasis added) In essence then a similar but new and distinct section would be created expanding the role of an ldquoinsurance brokerrdquo as defined under CIC sect33 to that of a FLX amp FFX who would be authorized to solicit and negotiate all forms of insurance including property casualty life health disability long-term-care and other forms of insurance

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

This new Code section would make additional demands on any person seeking to license himherself as a FLX amp FFX licensee to protect consumers from harm Among other things such licensees would be required to

bull Complete BOTH LX and FX courses of education and the appropriate licensing examinations (Based on the CFP Boardrsquos program of education in insurance planning fee-only comprehensive financial planners provide information regarding all aspects of a consumerrsquos risk management needs

bull Be a licensed Registered Investment Advisor with the State AND

bull Complete no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

bull Provide to the CA Dept of Insurance proof of current licensing status as a Registered Investment Advisor together with a list of all approved continuing education courses completed each two year period or whenever required to do so by the Dept of Insurance AND

bull Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

bull Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS NEW LICENSE

This proposed license would have a substantially positive effect on consumers with no negative impact whatsoever Consumers will be able to seek out a ldquolicensedrdquo professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education The examination requirement supports the CDIrsquos position as stated in the February 8 1998 letter written by Jeffrey Kenny (Supra) that only those individuals who pass CDIrsquos exams are to be issued licenses and that the CDI will remain ldquovia its examination and related or regulatory functions the authorizing agencyhelliphelliprdquo in the business of insurance It will further provide greatly enhanced protections for consumers against wrongdoing by requiring a California surety bond in the amount of $100000 (one hundred thousand dollars) in addition to mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CDI Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their basic insurance needs on a fee-only basis

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

SUMMARY AND CONCLUSIONS

The California Dept of Insurance has essentially four choices

1 Maintain a Status Quo approach do nothing to address the illegal activities of fee-only financial planners remaining a reactive rather than proactive regulator of the business of insurance

2 Implement a program of rigorous investigation and enforcement of illegal activities in the business of insurance utilizing current and newly introduced sections of the California Insurance Code to stamp out the widespread and growing problem of illegal activities on the part of fee-only financial planners offering advice in insurance matters for a fee in California

3 Consider implementation of one or more of the solutions suggested in this discussion

4 Develop meaningful initiatives such as those suggested herein to combat andor provide solutions to illegal activities in the business of insurance

Maintaining the status quo and doing nothing to address the illegal activities of fee-only planners will eventually cause the CDI to lose control and regulatory authority over the business of providing insurance advice to consumers to other state agencies such as the Dept of Corporations an agency ill equipped and hardly qualified to supervise and monitor such activities More and more broker-dealer registered financial planners and life agents are transitioning to the more profitable fee-only model Without aggressive enforcement of the law many of these planners may eventually surrender their insurance licenses to avoid multiple state licensure layering of regulation supervision and audit The current lack of any enforcement by the CDI against prominent planners who have already been reported to CDIrsquos investigations division by Errold Moody CFPreg and others over the past ten years is an encouragement to other transitioning planners to ignore and violate State law Inaction equates to state condoned tolerance and silent approval in the eyes and minds of many fee-only financial planners

Rigorous investigation and enforcement while preferable is also the most difficult policy to enforce The CDI has neither the manpower nor the consumer driven complaints necessary to actively enforce insurance laws against fee-only planners violating state law Simply put these planners are ldquooff the radarrdquo and rarely generate complaints Since they are not licensed they do not fall under the authority of the CDI and unless they are brought to the attention of the CDI by virtue of consumer complaints these planners will continue to remain extremely difficult to find Additionally the CDI lacks proper funding and manpower to effectively enforce Insurance laws in California at this time Therefore any consideration for rigorous investigation and enforcement must be viewed as impractical given the current budget deficit and the apparent lack of will on the part of the CDI and local district attorneyrsquos offices to prosecute violators when they are reported

Confidential Page 22 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

By implementing one or more of the suggestions contained in this discussion the CDI will facilitate voluntary and willing compliance with state law while ensuring that their mandate to protect consumers from harm by insisting that CDI established examination licensing and continuing education requirements would be met Fee-only planners would be able to offer the advice they desire to offer on a fee basis with direct client billing the CDI would be in a far better position to supervise control audit and discipline these planners if and when the need arises More importantly consumers would be able to turn to the CDI for assistance without hearing the phrase ldquoIrsquom sorry that individual is not licensed and does not fall under our jurisdictionrdquo

In conclusion the CDI has the opportunity to solicit opinions and suggestions from state sponsored agencies and boards such as the CA Agent and Broker Advisory Commission to the Dept of Insurance Some members of the CDI Agent and Broker Advisory committee are fee-only CFPreg Certificants and have an understanding of the issues involved These professionals and other insurance professionals whose livelihoods also depend in part on ethical conduct in the business of insurance are in a position to provide valuable input to the CDI regarding these suggestions

It is hoped that this discussion will generate concern and renewed scrutiny of the illegal activities of fee-only planners in California and that this in turn will lead to a necessary beneficial and long overdue overhaul of Californiarsquos insurance licensing laws for the benefit of not only Californiarsquos consumers but eventually Consumers nationwide who reside in States with similar insurance advisory statutes

Respectfully submitted

Nigel B Taylor is a Certified Financial Plannerreg Certificant General Securities Principal and CA Life Agent associated with Royal Alliance Securities Inc He is a former President of the Award Winning Institute of Certified Financial Planners Los Angeles Society (1999) and Former Chairman of the Financial Planners Association ndash Los Angeles Chapter (2000) Mr Taylor has published numerous articles regarding proposed regulation compliance ethics and professionalism for financial planners and CFPreg Certificants He is based in Santa Monica California

1 CA Insurance Code Sections 32 amp 1622 2 Source Dept of Insurance Annual Report 2000 3 Source Dept of Insurance Annual Report 2000 4 CA Insurance Code Section 325 5 CA Insurance Code Sections 1849 6 Source CA Dept of Insurance March 2002 7 Source CA Dept of Corporations March 2002 8 25009 (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part

Confidential Page 23 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

of another business of advising others either directly or through publications or writings as to the value of securitieshelliphellip(Excerpt) 9 CA Insurance Code Section 325 10 CA Insurance Code Section 1668 The commissioner may deny an application for any license issued pursuant to this chapter if helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this state 11 CA Insurance Code Section 1844 Any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

12 CA Insurance Code 17255 (a) For purposes of Sections 325 1625 1626 17245 17581 1765 1800 14020 14021 and 15006 every licensee shall prominently affix type or cause to be printed on business cards written price quotations for insurance products and print advertisements distributed exclusively in this state for insurance products its license number in type the same size as any indicated telephone number address or fax number

CIC 17255 (c) Any person in violation of this section shall be subject to a fine levied by the commissioner in the amount of two hundred dollars ($200) for the first offense five hundred dollars ($500) for the second offense and one thousand dollars ($1000) for the third and subsequent offenses The penalty shall not exceed one thousand dollars ($1000) for any one offense These fines shall be deposited into the Insurance Fund

13 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the commissioner authorizing the person to act in that capacity 14 1858 In the construction of a statute or instrument the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein not to insert what has been omitted or to omit what has been inserted and where there are several provisions or particulars such a construction is if possible to be adopted as will give effect to all 15 Flannery v Prentice (2001) 110CalRptr2d 809 26Cal 4th 572 28P3d 860 16 People v Martinez (1995) 45CalRptr2d 905 11Cal4th 434 903P2d 1037 17 Caminetti v State Mut Life Ins Co (1942) 126P2d80926Cal 4th 572 28P3d 860 18 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the

Confidential Page 24 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

commissioner authorizing the person to act in that capacity The issuance of a certificate of authority to an insurer does not exempt an insurer from complying with this article

1633 Any person who acts offers to act or assumes to act in a capacity for which a license is required without a valid license so to act is guilty of a misdemeanor

16335 It is hereby declared to be the intent of the Legislature in enacting this chapter that the regulations prescribed herein be the exclusive regulations relating to the conduct of insurance business by persons licensed to act in any of the capacities defined hereunder any local regulations or ordinances notwithstanding 19 79001 This article applies to reciprocal and interinsurance exchanges Lloyds insurers fraternal benefit societies fraternal fire insurers grants and annuities societies insurers holding certificates of exemptions motor clubs nonprofit hospital associations life agents broker-agents surplus line brokers and special lines surplus line brokers as well as all other persons engaged in the business of insurance (color amp emphasis added)

20 79004 The commissioner shall have power to examine and investigate into the affairs of every person engaged in the business of insurance in the State in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 79003 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance Such investigation may be conducted pursuant to Article 2 (commencing at Section 11180) of Chapter 2 Part 1 Division 3 Title 2 of the Government Code

21 790035 (a) Any person who engages in any unfair method of competition or any unfair or deceptive act or practice defined in Section 79003 is liable to the state for a civil penalty to be fixed by the commissioner not to exceed five thousand dollars ($5000) for each act or if the act or practice was willful a civil penalty not to exceed ten thousand dollars ($10000) for each act The commissioner shall have the discretion to establish what constitutes an act However when the issuance amendment or servicing of a policy or endorsement is inadvertent all of those acts shall be a single act for the purpose of this section

22 129218 (a) The commissioner shall have the authority to issue a cease and desist order against any person acting as or holding himself herself or itself out as an insurance agent or broker without being so licensed and against any person holding out that person as transacting or transacting the business of insurance without having been issued a certificate of authority The commissioner may issue a cease and desist order without holding a hearing prior to issuance of the order The commissioner may impose a fine of up to five thousand dollars ($5000) for each day the order is violated

22 Supra 23 See Exhibit III of this memorandum

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

24 CFP Board a 501(c)(3) certifying organization fosters professional standards in

personal financial planning so that the public values has access to and benefits from competent financial planning CFP Board owns the certification marks CFPtrade CERTIFIED FINANCIAL PLANNERtrade and federally registered CFP (with flame) logo which it awards to individuals who successfully complete initial and ongoing certification requirements CFP Board has currently authorized more than 39214 individuals to use these marks in the United States and 27343 individuals outside the United States For more about CFP Board visit wwwCFPnet 25 Source CFP Board of Standards Inc Colorado 26 Financial Planning Process denotes the process which typically includes but is not limited to the six elements of establishing and defining the client-planner relationship gathering client data including goals analyzing and evaluating the clientrsquos financial status developing and presenting financial planning recommendations and monitoring the financial planning recommendations (CFPtrade Board Code of Ethics ndash Definitions) 27 Financial planning subject areas denotes the basic subject fields covered in the financial planning process which typically include but are not limited to financial statement preparation and analysis (including cash flow analysis planning and budgeting) investment planning (Including portfolio design ie asset allocation and portfolio management) income tax planning education planning Risk Management (emphasis added) retirement planning and estate planning (CFPtrade Board Code of Ethics ndash Definitions)

Confidential Page 26 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

EXHIBIT I

Confidential Page 27 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life Agent License Information

LIFE AGENT (LX) Licensing Information

TABLE OF CONTENTS

Authorizing acts and with definitions Qualifications Filing Requirements

Individual -- Residents Organization -- Residents Individual -- Non-Residents Organization -- Non-Residents

License Term Renewal of License Additional Information

APPLICABLE FORMS

Individual Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Action Notice of Appointment (Form 447-54) Organization Endorsement (Form 411-8A) Non-Resident Insurance License Stipulation and Agreement (Form 447-68)

These forms are also included in the Individual and Business Entity applications

AUTHORIZING ACT

California State Insurance Code Chapter 5 Part 2 Division 1

A life agent (LX) is a person authorized by and on behalf of a life disability or life and disability insurer to transact life disability or life and disability insurance

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

Prelicensing ExperienceEducation

1) Require a minimum of 40 hours of approved prelicensing classroom study A new California resident applicant who had a current life license in another state and completed 40 hours of prelicensing education for life insurance in order to obtain that license or an applicant holding either a Life Underwriter Training Council Fellowship (LUTCF) or Chartered Life Underwriter (CLU) designation is exempt from the 40 hours of prelicensing education

2) Require 12 hours of approved prelicensing classroom study on ethics and the California Insurance Code Where an applicant seeks both the Fire and Casualty broker-agent license and the Life agent license the applicant shall only be required to complete one 12-hour course on ethics and the California Insurance Code

Continuing Education

1) During each of the first four 12-month periods following the date of original issue of license satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to a minimum of 25 hours

2) Any licensee who has complied with the above or was licensed as of 123191 shall satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to 30 hours of instruction during each two-year license period

3) Any agent that markets long-term care insurance must complete an 8-hour California specific long-term care continuing education course Check with your insurer regarding long-term care insurance requirements

4) Effective January 01 1998 any person who is 70 years of age or older and who has been licensed for 30 continuous years as a licensee in good standing in this state may be exempt from continuing education requirement Any licensee that markets individual long-term care contracts is still required to meet the specific education requirements for marketing such contracts

The agent who is limited by the terms of a written agreement with the insurer to transact only specific life insurance policies or annuities having an initial face amount of $10000 or less that are designated by the purchaser for the payment of funeral or burial expenses will be exempted from the prelicensing and continuing education requirements The commissioner may require the insurer appointing those life agents to certify as to the limitation of the agents representations

FILING REQUIREMENTS INDIVIDUAL - RESIDENTS

Application Application for Insurance License form 441-9

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to CaliforniaThis form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants If an examination is required fingerprint impressions will be taken at the California examination sites

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Prelicensing Certificate Of Completion Original certificate(s) of completion signed by both classroom instructorprovider director and applicant for life agent course andor Ethics and Code course

Examination Applicants who do not hold an active Life (LX) California resident license and whose eligibility for that license without examination has expired must pass the written examination prepared and administered by the Department

Fees - Individual Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice or an Organization Endorsement $21 per notice Examination $35 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 all applicants must appear at the designated exam site with a check in the amount of $74 made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal Fee $124 (2-year term)

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 1

Life Agent License Information

FILING REQUIREMENTS ORGANIZATION - RESIDENTS

Organization Application

Corporation partnership unincorporated association limited liability company or nonprofit corporation applicants must submit the Application for Organization License form 441-11

NOTE The organization must have at least one California resident LX endorsee to establish and maintain the license

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each endorsee who holds an active California non-resident LX license Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Fees - Organization Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS INDIVIDUAL - NON-RESIDENTS

Application Application for Insurance License form 441-9 must be completed by applicants who do not hold an active California LX license

NOTE Licensed non-resident agents whose state of residence does not have continuing education must meet the same requirements as a California resident in order to renew their license Licensed non-resident agents who comply with the continuing education requirements of their state of residence are exempt from California continuing education requirements If licensees transact long term care products they must meet California specific long term care education requirements

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California This form is also included in the Individual and Business Entity applications

Stipulation and Agreement Non-resident Insurance Licensee Stipulation and Agreement form 447-68

Certification Of License Status From Resident State

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Examination Not required except if the applicants state commonwealth or Canadian province of residence has no reciprocal agreement for waiving of examination

Fees - Individual Non-Resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS ORGANIZATION - NON-RESIDENTS

Organization Application

Corporation partnership unincorporated association or nonprofit corporation applicants must submit the Application for Business Entity License form 441-11

Note A California resident cannot be endorsed on a non-resident organization

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each natural person who holds an active California non-resident LX license This form is also included in the Individual and Business Entity applications Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Stipulation and Agreement Non-resident Insurance License Stipulation and Agreement as required by law form 447-68 signed by an officer or partner of the organization

Certification Of License Status From Resident State Must be in the organization name

Fees - Organization Non-resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 2

Life Agent License Information

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed to the mailing address of record approximately 90 days prior to the expiration date of the license Individuals will receive a renewal application showing total fees due for all license types held and the total number of continuing education hours completed at the time the renewal form is printed If the continuing education requirement has not been met the renewal will indicate how many hours are needed If renewal application is not received refer to the back of the permanent license for renewal instructions

All licensees that renew their licenses late will be required to file new company appointments organization endorsements or solicitor appointments Late is defined as any renewal for which the requirements to renew (this includes completing the continuing education hours) are not met until after the expiration date of the previous license term

ADDITIONAL INFORMATION

The Commissioner may grant authority to transact variable contracts to a person or an organization licensed as a Life Agent which is appointed by an admitted insurer which is required to register itself or to register a separate account or fund with the United States Securities and Exchange Commission or to register its variable policies or contracts with the Securities and Exchange Commission The person must submit acceptable proof of registration with NASD or SECO before authority to transact variable contracts can be granted

If currently licensed as a resident of another state upon becoming a California resident a clearance letter from the former state of residence is required

Limited liability company applicants are required to submit the following information to demonstrate compliance with Section 16475 of the California Insurance Code

1 A statement as to the number of licensees rendering professional services on behalf of the Limited Liability Company

2 The aggregate dollar amount of E amp O Liability Insurance Cash Bonds Bank Certificates of Deposit US Treasury obligations etc held to provide security for claims against the Limited Liability Company (The amount required over the minimum of $500000 is at least $100000 multiplied by the number of licensees rendering professional services on behalf of the company however the maximum amount is not required to exceed $5000000)

3 For purposes of satisfying the security requirements of California Insurance Code Section 16475 we will require one or more of the following

(A) A copy of the declaration page for each liability insurance policy used to satisfy the minimum security requirement

(B) Verification by the bank or escrow holder listing the type and current dollar value of the assets used to satisfy the minimum security requirements

Limited liability company licensees must file at least once each year an annual confirmation with the commissioner in the above format to demonstrate continuing compliance with the financial security requirements of Section 16475 of the California Insurance Code

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 644A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - January 16 2002 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 3

EXHIBIT II

Confidential Page 31 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life and Disability Insurance Analyst License Information

LIFE AND DISABILITY INSURANCE ANALYST (LA) License Information

APPLICABLE FORMS

Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Organization Endorsement (Form 441-8A) Request For Live Scan Service (form 442-39A)

This form is also included in the Individual and Business Entity applications

AUTHORIZING ACT California State Insurance Code Chapter 8 Part 2 Division 1

A Life and Disability Insurance Analyst is a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is required

Prelicensing ExperienceEducation Must have worked as a life licensee as defined under Chapter 5 Part 2 Division 1 of the Insurance Code for five years preceding the date of the examination or as an employee of such a licensee

Continuing Education

Not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

FILING REQUIREMENTS - INDIVIDUAL

Application Application for Insurance License form 441-9

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants You must call SYLVANIDENTIX at 1-(800) 315-4507 to schedule an appointment to have your fingerprint impressions taken prior to submitting your application Fingerprint impressions will not be accepted from any other source A copy of your Request For Live Scan Service (form 442-39A) must be submitted with your application verifying your prints were taken by SYLVANIDENTIX

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

FEES - Individual

License Filing $418 (2-year term) Examination $103 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 this fee must be paid at the designated site when the fingerprint impressions are taken You may pay by check made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal $418 (2-year term )

EXAMINATION

The applicant must pass the written examination prepared and administered by the Department

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 1

Life and Disability Insurance Analyst License Information

STUDY MATERIAL

Although the Department does not recommend any particular text method or course of study listed below is a study guide to assist in the preparation for the examination 1) The life and disability laws of this state are contained in the California Insurance Code Those sections on which an applicant might be tested are

General Provisions Sections 1 - 46 Division 1 Part 1 Chapter 1 Sections 100 - 123 Division 1 Part 1 Chapter 2 Article 1 Sections 150 - 151 Division 1 Part 1 Chapter 2 Article 3 Sections 250 - 252 Division 1 Part 1 Chapter 2 Article 4 Sections 280 - 287 Division 1 Part 1 Chapter 2 Article 5 Sections 300 - 305 Division 1 Part 1 Chapter 3 Article 1 Sections 330 - 339 Division 1 Part 1 Chapter 3 Article 2 Sections 350 - 361 Division 1 Part 1 Chapter 4 Article 1 Sections 380 - 393 Division 1 Part 1 Chapter 4 Article 3 Section 430 Division 1 Part 1 Chapter 4 Article 4 Sections 440 - 449 Division 1 Part 1 Chapter 4 Article 5 Section 460 Division 1 Part 1 Chapter 5 Sections 480 - 489 Division 1 Part 1 Chapter 6 Article 3 Sections 550 - 5575 Division 1 Part 2 Chapter 1 Article 1 Section 680 Division 1 Part 2 Chapter 1 Article 3 Sections 669 - 726 Division 1 Part 2 Chapter 1 Article 5 Sections 750 - 767 Division 1 Part 2 Chapter 1 Article 55 Sections 770 - 776 Division 1 Part 2 Chapter 1 Article 57 Sections 7771 - 7773 Division 1 Part 2 Chapter 1 Article 6 Sections 780 - 784 Division 1 Part 2 Chapter 1 Article 65 Sections 790 - 79010 Division 1 Part 2 Chapter 1 Article 75 Sections 815 - 816 Division 1 Part 2 Chapter 2 Article 5 Sections 1220 - 1221 Division 1 Part 2 Chapter 4 Article 2 Sections 1580 - 1599 Division 1 Part 2 Chapter 5 Sections 1621 - 17585 Division 1 Part 2 Chapter 5A Sections 1759 - 175910 Division 1 Part 2 Chapter 8 Sections 1831 - 1849 Division 2 Part 2 Chapters 1-13 Sections 10110 - 11533 Division 2 Part 61 Sections 12670 - 12691 Division 3 Chapters 1 and 2 Sections 12900 - 12977

2) The provisions terms and conditions of a life and disability insurance contract that might be tested are but not limited to the following Life Insurance Disability Insurance

Insuring Agreement Insurance Clause Reinstatement Schedule Incontestability Renewal Provisions Settlement Options Benefit Provisions Dividend Options Co-Insurance Ownership Provisions Waiting Periods Nonforfeiture Provisions Elimination Periods Grace Periods Deductibles Loan Provisions Waivers Suicide Exclusions Assignments of Transfers Restrictions Aviation Clause Pre-existing Conditions Beneficiaries Provisions Other Insurance

Additionally the applicants are expected to be thoroughly familiar with the types of contracts being issued in this state including but not necessarily limited to Life Disability

Individual Contracts Individual ContractsGroup Contracts Group ContractsIndustrial Contracts Blanket ContractsOrdinary Life Basic Hospital ExpenseLimited Payment Life Basic Medical-Surgical ExpenseModified and Graded Premium Basic Hospital and Medical-Surgical ExpenseEndowment Insurance Hospital Confinement IndemnityImmediate Annuities Major Medical ExpenseDeferred Annuities Comprehensive Major Medical ExpenseVariable Annuities Disability Income ProtectionLevel Term Life Accident OnlyIncreasing Term Life Specified DiseaseDecreasing Term Life Specified AccidentRe-entry Term Life Medicare SupplementUniversal Life 3) A thorough and complete knowledge of life and disability insurance may include

a Application and consequences of various policies b Applications and consequences of federal and estate taxes c Interrelationship with other investment vehicles d Interrelationship with other regulatory agencies including but not limited to SEC RIA etc e Interrelationship with contract business probate and investment laws in California f Insurance companys financial and organization analysis g Rate calculations and risk transfer

FILING REQUIREMENTS - ORGANIZATION

Organization Application

Corporation partnership nonprofit corporation or unincorporated association applicants must submit the Application for Business Entity License form 441-11

Natural Person Named On Organization

Application for insurance license form 441-9 and Organization Endorsement form 411-8A must be completed by each natural person who does not hold an active California LX license (individual filing requirements must be met)

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 2

Life and Disability Insurance Analyst License Information

Organization Endorsement form 441-8A (this form is also included in the Business Entity application) must be completed for each natural person who holds an active California LX license

FEES - ORGANIZATION

Fees are not required for the organization license Each natural person named on the organization must pay individual fees

License filing $418 (2-year term) Renewal Fee $418 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed approximately 60 days prior to the expiration date of the license and will show total fees due for all license types held If this application is not received refer to the back of the permanent license for renewal instructions

ADDITIONAL INFORMATION

The following persons are exempt from the requirements of this license

a Active members of the State Bar of California

b Any person who has passed all of the qualifying examinations necessary to become an Associate of the Society of Actuaries

c An officer or employee of any bank or trust company who receives no compensation from sources other than the bank or trust company for activities connected with his employment which would otherwise subject him to licensing requirements

d Any person employed by an employer who on behalf of his or her employer or any employee of his or her employer transacts life or disability insurance with but not on behalf of an insurer or advises his or her employer or any employee of his or her employer in any manner concerning life or disability insurance if

1 the employer receives no compensation by reason of such transactions or advice and 2 such person receives no compensation from any source other than his or her employer for such transactions or advice

e An investment advisor as defined in Section 25009 of the Corporations Code when acting in that capacity

NOTE An employee or officer of any insurer is not eligible for a license as a Life and Disability Insurance Analyst

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 765A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - December 18 2000 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 3

EXHIBIT III

Confidential Page 35 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Series 65 Exam

The Uniform Investment Adviser Law Examination and the available study outline were developed by the North American Securities Administrators Association Inc (NASAA) The examination called the Series 65 exam is designed to qualify candidates as investment adviser representatives The exam covers topics that have been determined to be necessary to understand in order to provide investment advice to clients The study outline is designed to provide an overview of the exams general content and format

The study outline is divided into corresponding sections to aid in preparing for the examination

The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline Applicants are allowed 180 minutes to complete the examination At least 89 (685) of the questions must be answered correctly for an individual to pass the Series 65 exam

The examination is conducted as a closed book test Upon completion of the examination the score for each section and the overall test score will immediately be made available to the candidate

The examination is administered by the National Association of Securities Dealers Inc (NASD) To schedule a candidate for the examination an individuals firm should file a Form U-4 or the individual should file a Form U-10 and pay the $11000 examination fee to the NASD at the following address

NASD Regulation Inc Attention Exams Dept 9509 Key West Avenue Rockville MD 20850 301590-6500

Once registered NASD will open a 120-day window within which an individual may schedule the exam A link to the NASD Forms can be found at httpwwwnasdrcom3400asp More information on exam sites can be found at httpwwwnasdrcom2630asp

The questions in the examination the examination study outline and the method by which the examination is administered have been designed by Chauncey Group International for NASAA and approved by NASAA and the Competency Exam Project Group In addition each examination question is statistically analyzed to insure reliability

Any attempt to compromise the examination may serve to destroy its validity and usefulness Therefore NASAA intends to bring appropriate action against persons who attempt to compromise the examination in whole or in part In addition such conduct may subject a candidate to further action by state administrators

Successful completion of the Uniform Investment Adviser Law Examination does not relieve a candidate of the personal responsibility to know and to abide by the specific requirements of the securities laws and regulations of the states in which the candidate transacts business Furthermore although successful completion of the examination may satisfy a portion of the requirements of a particular state it does not convey the right to transact business prior to being granted a license or registration by that state

NASAA believes that the Uniform Investment Adviser Law Examination will significantly benefit the industry and state regulators alike by such uniformity The investing public will be afforded a greater degree of protection through enhanced uniform qualification standards

NASAA Uniform Investment Adviser Law Exam (Series 65)

Exam Specifications

CONTENT AREA

OF ITEMS

I Economics and Analysis

20

A B Understand basic economic concepts

1 Inflationdeflation a Definitions b Causes of inflationdeflation

2 Interest rates and yield curves a Graphs b Definitions c Interest rate = cost of money

3 Basic economic indicators a GDP b Employment indicators c Trade deficit d Balance of payments e CPI

A

determine investment merits A Income statement

a Revenues b Cost of goods sold c Pre-tax margins d Cash flow

B Balance sheet a Assets b Liabilities c Working capital d Owners equity e Footnotes

A

C Demonstrate understanding of quantitative methods to evaluate investments

A Time value of money B Expected return C Net present value D Internal rate of return E Inflation-adjusted return (real return) F After-tax returnyield G Risk-adjusted return H Total return I Holding period return J Yield-to-maturity K Yield-to-call L Current yield M Risk measurements (eg Beta standard deviation duration) N Valuation ratios (eg PE price-to-book) O Benchmark portfolios P Annualized return

D E Identify risks (ie definitions impact on the market companies

and personal investments) D Business E Market F Interest rate G Inflation H Regulatory (eg tax law changes) I Liquidity

J Opportunity cost

II Investment Vehicles

26

A B Evaluate cash and cash equivalents

A Types and characteristics of cash and cash equivalents a Certificates of deposit b Money market funds c Treasury bills

B Benefitsrisks of owning cash and cash equivalents

B C Evaluate fixed income securities

B Types and characteristics of fixed income securities a US government and agency securities b Mortgage-backed securities c Corporate bonds (ie investment grade and high yield) d Convertible bonds e Municipal bonds f Zero-coupon bonds

C Benefitsrisks of owning fixed income securities

C D Evaluate equity securities

C Types and characteristics of equity securities a Common stock (eg voting rights etc) b Preferred stock c Convertible preferred stock

D Methods used to determine the value of equity securities (eg technical and fundamental analyses dividend discount)

E Benefitsrisks of owning equity securities

D E Evaluate investment company securities

D Types and characteristics of investment companies a Open-end investment companies

(mutual funds)

b Closed-end investment companies c Classes of shareholders expense ratios sales load

breakpoints 12b-1 fees E Benefitsrisks of owning investment company securities

E Recognize derivative securities and their benefitsrisks

F G Understand unique aspects of international investing

F Emerging vs developed markets G American Depository Receipts (ADRs) H Currency influences (concept of risk)

G H Understand real estate partnerships and investment trusts

(REITs) and variable annuities G Definitions H Benefitsrisks

III Investment Recommendations and Strategies

39

A B Determine and analyze the financial profile of the client to

develop a suitable investment policy and strategy A Type of client

a Individual b Sole proprietorship c General partnership d Limited partnership (including family limited

partnership) e Limited liability company f C corporation g S corporation h Trust i Estate

B Financial goals C Current financial status (eg cash flow balance sheet) D Capital needs (eg current retirement death disability)

E Current investments and strategies F Time horizon G Non-financial investment considerations (eg values

attitudes experience demographic characteristics) H Risk tolerance I Tax situation

B C Understand portfolio management strategies styles and

techniques (fixed income and equities) B Portfolio management styles and strategies

a Strategic and tactical asset allocation (eg style asset class rebalancing)

b Active vs passive c Growth vs value d Market capitalization (micro small mid large) e Buyhold f Indexing g Diversification

C Funding techniques a Dollar-cost averaging b Income reinvestment (eg dividend interest cap gain)

C D Recognize fundamental taxation issues

C Individual income tax (eg capital gains tax basis retirement distribution alternative minimum tax)

D Corporate trust and estate income tax E Estate and gift tax

D E Recognize types of retirement plans and related issues

D Retirement plans a Individual Retirement Arrangements (IRA) b 403(b) plans c Qualified retirement plans (eg pension and profit

sharing 401(k)) d Nonqualified retirement plans

E Important ERISA issues a Fiduciary responsibility (eg 404(c)) b Investment policy statement

c Prohibited transactions

E F Define the fundamental terms and concepts of trading securities

E Terminology (eg bids offers quotes) F Role of broker-dealers specialists market-makers G Types of orders (eg market limit stop short sale) H Types of accounts (eg cash margin option) I Commissions markups spread

F G Calculate performance

F Calculate performance a Total return (ie yield plus growth) b Inflation-adjusted return c After-tax returnyield d Current yield

IV Ethics and Legal Guidelines

45

A B Understand relevant aspects of securities acts and other rules and

regulations in order to comply as an investment adviser representative

A Investment Company Act of 1940 B Investment Advisers Act of 1940 C Securities Act of 1933 and Securities Exchange Act of 1934

(as applicable to investment adviser issues) D SEC Release No IA-1092 (applicability of the Investment

Advisers Act to financial planners and others) E State securities laws (ie Blue Sky) F NASAA rules prohibiting dishonest and unethical business

practices G Limitations on permissible practice (ie technical licensing

requirements)

B C Demonstrate ability to apply ethical practices

B Fiduciary responsibility C Conflict of interest D Prudent Investor standards E Limitations on advice and activities (ie when to consult other

professionals)

EXHIBIT IV

Confidential Page 44 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

CFP Required subject matter for ldquoInsurance Planning and Risk Managementrdquo

CFPreg Candidates must complete comprehensive training in the following subject areas at a college or university whose program has been inspected and approved by the CFP Board This course represents approximately 20 of the educational requirement for CFP Candidates Other courses include ldquoFinancial Planning Fundamentalsrdquo ldquoInvestment Planningrdquo ldquoTax Planningrdquo ldquoRetirement Planning amp Qualified Plansrdquo and ldquoEstate Planningrdquo

Principles of insurance

A Definit ions and application of

principles

1) Risk

2) Peril

3) Hazard

4) Law of large numbers

5) Adverse selection

B Response to risk

1) Retain

2) Transfer

3) Control

4) Reduce

5) Avoid

C Mortality vs morbidity

Analysis and evaluation of risk

exposures

A Personal Insurance l ines

1) Death

2) Disability

3) Poor health

4) Unemployment

5) Outliving onersquos capital

B Property Insurance l ines

1) Real

2) Personal

3) Auto

C Liability Issues

1) Negligence

2) Libel

3) Slander

4) Malpractice

D Business-related risks

E Calculation of benefits

23 Legal aspects of insurance

A Indemnity

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Insurable interest

C Contract requirements

D Contract characterist ics

Property and casualty insurance

(individual and business)

A Real property

B Automobile and recreational

vehicles

C Business

D Business activity

E Personal property

F Umbrella liability

General business liability

A Professional l iabili ty

B Errors and omissions

D Product liability

Health insurance (individual)

A Hospital-surgical

B Major medical

C Traditional indemnity

D Preferred Provider Organization

(PPO)

E Health Maintenance Organization

(HMO)

F Medicare supplemental insurance

G Other

Disability income insurance

(individual)

A Occupational definit ions and

application

1) Total

2) Partial

3) Residual

C Directors and officers

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Benefit period

C Elimination period

D Benefit amount

E Riders

F Taxation of benefits

Long-term care insurance (individual

and joint)

A Basic provisions

B Eligibility

C Benefit amount and period

D Elimination period

E Inflation protection

F Nursing home and in-home care

G Comparing and selecting policies

H Tax implications and qualification

I Appropriateness of coverage

Life insurance

A Fundamentals

B Types

C Contractual provisions

D Dividend options

E Non-forfeiture and other options

F Settlement options

G Policy replacement

H Tax issues and strategies

I Policy ownership issues and

strategies including split-dollar

Viatical settlements

A Legal principles

B Requirements

C Tax implications

D Planning

E Ethical concepts and planning

Insurance needs analysis and

rationale

A Life insurance amount required

1) Liquidity and survivor income needs

2) Human life value

3) Capital retention

B Disabili ty insurance

C Long-term care insurance

D Health insurance

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

E Property insurance E Reinsurance

F Liabili ty insurance F Investments

Taxation of l ife disability and long- G Underwriting

term care insurance H Federal and state law

A Income

B Gift

C Estate

D Generation-Skipping Transfer

Tax (GSTT)

E Ownership issues

F Beneficiary issues

G Withdrawals

Insurance policy selection

A Purpose of coverage

B Length of t ime required

C Risk tolerance

D Cash flow constraints

Insurance company selection and due

diligence

A Financials

B Ratios

C Ratings

D Mutual vs stock

Source CFP Board of Standards Inc Denver CO

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

CURRENT ISSUE

PAST ISSUES

RIA Survey 2011 Click Here

ADVISOR SERVICES Broker-Dealers

CustodianFee-Only

Technology

ADVICE 401(k) plans

Annuities

Business Transitions

ComplianceFraud

Economy

Education529

Estate Planning

Insurance

Practice Management

Retirement Planning

Retirement Income

Social Media

Tax Planning

Women in Planning

INVESTING Alternative Investments

Analysis

Commodities

ETFs

Fixed Income

International

Mutual Funds

Free Site RegistrationgtgtLogin Logout

SEARCH GO December 10 2011

HOME CE CENTER WEBCASTS CONFERENCES EVENTS SUBSCRIBE

November 23 2011

SEC OFFICIAL SCRUTINIZED FOR lsquoCRASH-PROOF RETIREMENTrsquo INTERVIEW WITH ADVISOR

(Bloomberg News) The US Securities and Exchange Commissionrsquos internal watchdog has come under scrutiny for comments he made in a 75-minute videotaped interview about the agency and the stock market to a man who markets a ldquocrash-proof retirementrdquo plan through the Internet and a paid radio program

SEC Inspector General H David Kotz has been contacted about the matter by the agencyrsquos general counselrsquos office which also has briefed the SECrsquos commissioners over concerns the interview could be construed as investment advice or an endorsement of financial services

Phillip Cannella III chief executive officer of First Senior Financial Group in King of Prussia Pennsylvania edited the interview he conducted at SEC headquarters in late July into more than a dozen video segments He posted them on YouTube and his website wwwcrashproofretirementcom and plays them on the radio as well as during his seminars about insurance products for retirees

The SEC doesnrsquot ban its employees from interviews with people connected to commercial ventures Kotz said he cleared the matter in advance with the SECrsquos internal ethics counsel He told SEC officials he would ask an outside group the Council of Inspectors General on Integrity and Efficiency to look into whether he said or did anything improper in the interview according to two people briefed on the situation

The Federal Bureau of Investigation which oversees the panel within the inspector generalrsquos group that deals with integrity matters doesnrsquot comment on its inquiries said William Carter an FBI spokesman

lsquoAppropriate Caveatsrsquo

Kotz said in an e-mailed statement to Bloomberg News that he provided ldquoall the appropriate caveats and disclaimersrdquo to Cannella and ldquospecifically stated in the radio interview that I was not in a position to nor was I providing investment advicerdquo

SEC Chairman Mary Schapiro said in a statement that she appreciated that Kotz requested an independent review

ldquoDavid Kotz is an experienced professional with expertise in the ethics rules who I

believe would not intentionally create an appearance issuerdquo Schapiro said

The SEC didnrsquot say if it was taking further action on the matter The agencyrsquos ethics counsel Shira Pavis Minton didnrsquot respond to a request for comment

In the interview segments posted on the website Kotz discusses issues ranging from the Bernard Madoff fraud to the difficulties the SEC faces policing Wall Street A press release issued by Cannellarsquos company headlined Kotzrsquos suggestion that retirees consider cutting their investments in stocks

lsquoTurbulent Timesrsquo

ldquoSo much money is in the stock market where peoplersquos lives are so affected by it that sometimes it may make sense to take things out in turbulent times to ensure that yoursquore not living and dying so to speak by the Dow Jones going up and downrdquo Kotz told Cannella as the two sat in the agencyrsquos Washington offices in front of the SEC seal ldquoParticularly with whatrsquos occurred over the last several yearsrdquo

Kotz also discusses the SECrsquos past shortcomings and says the agency has improved being a ldquofundamentally different place now than when I first started at the SEC and before we issued our Madoff reportrdquo

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 1 of 2

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

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Cannella said in a phone interview that he was contacted by an SEC attorney several weeks ago asking that he put a disclaimer on the videos to make clear that neither the agency nor Kotz endorse sponsor or promote his firm Cannella said he quickly complied Kotz said he supported efforts by the SECrsquos general counselrsquos office ldquoto ensure that my interview is not being used to endorse any productrdquo

lsquoNot a Journalistrsquo

Cannella said he was pleased to be able to interview a high-level government official like Kotz -- a man he said he greatly respects While it costs him $12000 a week to air the radio show on two Philadelphia area stations Cannella said he treats it like a consumer advocacy program not an infomercial

ldquoI canrsquot believe myselfrdquo Cannella said ldquoIrsquom not a journalist and I got over a 75-minute interview with Kotz inside the SEC buildingrdquo

Besides the radio program Cannella said he holds ldquoeducational eventsrdquo in restaurants where he teaches people in their 50s and older about ldquosafe investment alternatives in the insurance industryrdquo His website has clips of prospective clients being asked about their reaction to watching the Kotz interview

One woman who wasnrsquot identified in the video said that Cannellarsquos interview with the inspector general shows that the host is ldquostanding up for the little people and very admirable and thatrsquos one of the reasons that Irsquom very anxious to proceed with Philrdquo

Probes

In another clip an unidentified man said ldquoIt was incredible to find out that the SEC feels like it canrsquot police the securities industry because it doesnrsquot have the funding or the manpowerrdquo

The fracas adds a new chapter to Kotzrsquos contentious four-year tenure at the SEC In recent months current and former officials have spoken out about what they say are his overly aggressive probes and their negative impact on the agencyrsquos ability to police the markets Earlier this month the Justice Department declined to open an investigation into Kotzrsquos allegations that former SEC General Counsel David Becker violated ethics laws

Kotz and his supporters have dismissed the complaints saying his oversight has done much to help the SEC burnish its image after it was widely attacked for missing massive frauds like Madoffrsquos and the alleged Ponzi scheme run by R Allen Stanford

Commissions

In his interview with Cannella Kotz said victims of investment schemes ldquodeserve a strong vibrant effective aggressive SEC that goes after those people gets their money back as possible and puts them in jailrdquo

Because he doesnrsquot sell securities Cannella isnrsquot regulated by the SEC He said he is licensed to sell insurance in over 40 states His company puts together individual plans for clients and then earns commission on products they buy from an insurance company He described the investments as ldquoguaranteed tax-deferred contractual agreements with income options from a statutory corporationrdquo

The investments are ldquooutside of the securities industryrdquo and ldquomany of them have outperformed the markets since their inception with no market risk no market fees no upfront commissions or sales costsrdquo he added

The trade magazine Senior Market Advisor in January 2008 reported that Cannella said he wrote about $25 million in premiums in 2007 for fixed index annuities Cannella said he didnrsquot want to put a specific name on the investments he sells because he thinks the media has misreported on the products

ldquoIrsquom not well-liked among securities guys because I am speaking truth and logic to a deceptive industryrdquo Cannella said ldquoYou canrsquot beat the sword of truthrdquo

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 2 of 2

United States Government Accountability Office

Report to Congressional AddresseesGAO

January 2011 CONSUMER FINANCE

Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

GAO-11-235

January 2011

CONSUMER FINANCE Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

Accountability bull Integrity bull Reliability

Highlights of GAO-11-235 a report to congressional addressees

Why GAO Did This Study

Consumers are increasingly turning for help to financial plannersmdash individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products and managing tax and estate planning The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners This report examines (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of this regulation and (3) the advantages and disadvantages of alternative regulatory approaches To address these objectives GAO reviewed federal and state statutes and regulations analyzed complaint and enforcement activity and interviewed federal and state government entities and organizations representing financial planners various other arms of the financial services industry and consumers

What GAO Recommends

GAO recommends that (1) NAIC assess consumersrsquo understanding of the standards of care associated with the sale of insurance products (2) SEC assess investorsrsquo understanding of financial plannersrsquo titles and designations and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers NAIC said it would consider GAOrsquos recommendation and SEC provided no comments

View GAO-11-235 or key components For more information contact Alicia Puente Cackley at (202) 512-8678 or cackleyagaogov

What GAO Found

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level but various laws and regulations apply to most of the services they provide Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners

The regulatory structure applicable to financial planners covers the great majority of their services but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain First consumers may be unclear about when a financial planner is required to serve the clientrsquos best interest particularly when the same financial planner provides multiple services associated with different standards of care SEC is studying these issues with regard to securities transactions but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products Second financial planners can adopt numerous titles and designations which vary greatly in the expertise or training that they signify but consumers may not understand or be able to distinguish among them SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed Finally the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole A regulatory system should have data to identify risks and problem areas and given that financial planning is a growing industry that has raised certain consumer protection issues regulators could benefit from better information on the extent of problems specifically involving financial planning services

A number of stakeholders have proposed different approaches to the regulation of financial planners including (1) creation of a federally chartered board overseeing financial planners as a distinct profession (2) augmenting oversight of investment advisers with a self-regulatory organization (3) extending the fiduciary standard of care to more financial services professionals and (4) specifying standards for financial planners and the designations that they use While the views of stakeholder interests vary a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities Given available information an additional layer of regulation specific to financial planners does not appear to be warranted at this time

United States Government Accountability Office

Contents

Letter 1

Background 2 Various Federal and State Laws and Regulations Apply to Financial

Planners and Their Activities 3 Regulatory Structure for Financial Planners Covers Most Activities

but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited 11

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed 28

Conclusions 33 Recommendations 34 Agency Comments 35

Appendix I Scope and Methodology

Appendix II Comments from the National Association of

Insurance Commissioners

Appendix III Comments from the North American Securities

Administrators Association

Appendix IV GAO Contact and Staff Acknowledgments

Figures

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act 5

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners 12

Figure 3 Differences in the Standards of Care Required of Financial Planners 17

Page i GAO-11-235 Consumer Finance

37

41

42

46

Abbreviations

Advisers Act Investment Advisers Act of 1940 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer

Protection Act FINRA Financial Industry Regulatory Authority Form ADV Uniform Application for Investment Adviser

Registration FTC Federal Trade Commission NAIC National Association of Insurance Commissioners NASAA North American Securities Administrators Association SEC Securities and Exchange Commission

This is a work of the US government and is not subject to copyright protection in the United States The published product may be reproduced and distributed in its entirety without further permission from GAO However because this work may contain copyrighted images or other material permission from the copyright holder may be necessary if you wish to reproduce this material separately

Page ii GAO-11-235 Consumer Finance

United States Government Accountability Office

Washington DC 20548

January 18 2011

Congressional Addressees

Consumers are increasingly turning for help to professionals who describe themselves as financial planners for assistance with a broad range of services such as selecting the right balance of stocks and bonds for an investment portfolio choosing among insurance products and tax and estate planning Although there is no statutory or single definition of financial planning it can be broadly defined as a systematic process that individuals use to achieve their financial goals Between 2000 and 2008 the number of financial planners more than doubled and may continue to climb as more individuals are asked to take responsibility for their retirement savings and must choose among a growing array of investment options

Some financial planning organizations have raised concerns that no single law governs providers of financial planning services broadly describing this situation as a regulatory gap Concerns also exist that financial planners may have an inherent conflict of interest in recommending products they may stand to benefit from selling In addition some consumer advocates believe consumers may be confused by the numerous titles and designations that financial planners can use This report responds to a mandate included in Section 919C of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that directed GAO to conduct a study on the oversight and regulation of financial planners Our objectives are to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

To address these objectives we reviewed federal and selected state statutes and regulations applicable to financial planners We also reviewed regulations issued by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) and model laws developed by the National Association of Insurance Commissioners (NAIC) and by the North American Securities Administrators Association (NASAA) In addition we reviewed applicable securities and insurance laws and regulations of five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texas We also interviewed representatives of and

Page 1 GAO-11-235 Consumer Finance

gathered documentation from SEC FINRA the Federal Trade Commission (FTC) NAIC and organizations representing the interests of consumers financial planners and various arms of the financial services industry In addition we gathered information on complaints and enforcement activity as available from SEC FINRA FTC and selected state regulators and organizations A more extensive discussion of our scope and methodology appears in appendix I

We conducted this performance audit from June 2010 to January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Background Financial planning typically involves a variety of services including preparing financial plans for clients based on their financial circumstances and objectives and making recommendations for specific actions clients may take In many cases financial planners also help implement these recommendations by for example providing insurance products securities or other investments Individuals who provide financial planning services may call themselves a variety of different titles such as financial planner financial consultant financial adviser trust advisor or wealth manager In addition many financial planners have privately conferred professional designations or certifications such as Certified Financial Plannerreg Chartered Financial Consultantreg or Personal Financial Specialist

The number of financial planners in the United States rose from approximately 94000 in 2000 to 208400 in 2008 according to the Bureau of Labor Statistics The bureau projects the number will rise to 271200 by 2018 because of the need for advisers to assist the millions of workers expected to retire in the next 10 years1 According to the bureau 29 percent of financial planners are self-employed and the remaining 71

1While the Bureau of Labor Statistics reports these statistics using the term ldquofinancial adviserrdquo bureau officials said that this term could be used interchangeably with financial planner The bureau broadly defined a ldquopersonal financial adviserrdquo as an individual who provides financial planning services and that private bankers or wealth managers would also be categorized as financial advisers

Page 2 GAO-11-235 Consumer Finance

percent are employees of firms some of them large entities with offices nationwide that provide a variety of financial services The median annual wage for financial planners was $68200 in May 2009

According to an analysis of the 2007 Survey of Consumer Finances the most recent year for which survey results are available in 2007 about 22 percent of US households used a financial planner for investment and saving decisions and about 12 percent of US households used a financial planner for making credit and borrowing decisions Those households most likely to use a financial planner were those with higher incomes For example 37 percent of households in the top income quartile used a financial planner to make investment and saving decisions compared to 10 percent of households in the bottom quartile2

Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities

Financial planners are primarily regulated by federal and state investment adviser laws because planners typically provide advice about securities as part of their business In addition financial planners that sell securities or insurance products are subject to applicable laws governing broker-dealers and insurance agents Certain laws and regulations can also apply to the use of the titles designations and marketing materials that financial planners use

Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level However the activities of financial planners are primarily regulated under federal and state laws and regulations governing investment advisersmdashthat is individuals or firms that provide investment advice about securities for compensation According to SEC staff financial planning normally includes making general or specific recommendations about securities insurance savings and anticipated retirement3 SEC has issued guidance that broadly interprets the Investment Advisers Act of 1940 (Advisers Act) to apply to most financial planners because the advisory services they offer clients typically include

2Our percentage estimates based on the 2007 Survey of Consumer Finances have 95 percent confidence intervals of +- 25 percentage points or less For example we are 95 percent confident that between 82 and 118 percent of households in the bottom quartile used financial planners for investment decisions See appendix I for additional information

3Investment Adviser Act Release No 1092 52 Fed Reg 38400 38401 (Oct 16 1987) (IA Rel No 1092)

Page 3 GAO-11-235 Consumer Finance

providing advice about securities for compensation4 Similarly NASAA representatives told us that states take a similar approach on the application of investment adviser laws to financial planners and as a result generally register and oversee financial planners as investment advisers As investment advisers financial planners are subject to a fiduciary standard of care when they provide advisory services so that the planner ldquo[is] held to the highest standards of conduct and must act in the best interest of [the adviserrsquos] clientsrdquo5

SEC and state securities departments share responsibility for the oversight of investment advisers in accordance with the Advisers Act6 Under that act SEC generally oversees investment adviser firms that manage $25 million or more in client assets and the states that require registration oversee those firms that manage less7 However as a result of section 410 of the Dodd-Frank Act as of July 2011 the states generally will have registration and oversight responsibilities for investment adviser firms that manage less than $100 million in client assets instead of firms that manage less than $25 million in assets as under current law8 This will result in the states gaining responsibility for firms with assets under management between $25 million and $100 million As shown in figure 1 as of October 2010 of the approximately 16000 investment adviser firms providing

4The Advisers Act defines an investment adviser as any person (ie individual or firm) who is in the business of providing advice or issuing reports or analyses regarding securities for compensation 15 USC sect 80b-2(a)(11) IA Rel No 1092 In addition to applicable securities law investment advice related to a retirement savings plan such as a 401(k) plan may also be subject to the Employee Retirement Income Security Act The requirements under that act are outside the scope of this study A forthcoming GAO report GAO-11-119 will provide more information on investment advice in 401(k) plans

5In SEC v Capital Gains Research Bureau Inc 375 US 180 189-192 (1963) the US Supreme Court recognized that the Advisers Act imposes a fiduciary duty on investment advisers This standard imposes an affirmative duty to act solely in the best interests of the client The investment adviser also must eliminate or disclose all conflicts of interest

615 USC sect 80b-3a The term investment adviser can refer to a person or firm Investment adviser firms generally register with SEC or state securities departments as registered investment advisers According to NASAA certain natural persons that are employed by firms generally register with the state securities departments as investment adviser representatives

7Id Under 17 CFR sect 275203A-1 SEC registration has been optional for certain

investment advisers having assets under management between $25 and $30 million Firms also may have a different basis for registering with SEC (other than the amount of client assets the firm has under management) such as whether the principal office and place of business are within a state that has no registration requirement

8Pub L No 111-203 sect 410 124 Stat 1376 1576-77 (2010)

Page 4 GAO-11-235 Consumer Finance

financial planning services the states were overseeing about 11100 firms and SEC was overseeing about 4900 such firms9 However in July 2011 about 2400 of investment adviser firms that provided financial planning services (15 percent of the 16000 firms) may shift from SEC to state oversight10

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act

SECrsquos supervision of investment adviser firms includes evaluating their compliance with federal securities laws by conducting examinations of firmsmdashincluding reviewing disclosures made to customersmdashand investigating and imposing sanctions for violations of securities laws According to SEC staff in its examinations the agency takes specific steps to review the financial planning services of investment advisers For example SEC may review a sample of financial plans that the firm prepared for its customers to check whether the firmrsquos advice and investment recommendations are consistent with customersrsquo goals the contract with the firm and the firmrsquos disclosures

9In registering with SEC or a state investment adviser firms are required to report whether they provide financial planning services in Part 1A of the Uniform Application for Investment Adviser Registration Item 5 G(1) SEC does not provide a definition of financial planning services for firms to use when completing the registration form The total number of investment adviser firms overseenmdashincluding both those that do and do not provide financial planning servicesmdashis 15016 for the states and 11873 for SEC For data on investment adviser firms firms that were registered with both SEC and the states were counted with SEC-registered investment adviser firms

10See 75 Fed Reg 77052 (Dec 10 2010) (SEC proposed rule which if finalized would give advisers until August 20 2011 to report the market value of their assets under management to the SEC as the first step in the process)

Page 5 GAO-11-235 Consumer Finance

However the frequency with which SEC conducts these examinations varies largely because of resource constraints faced by the agency11 SEC staff told us that the agency examined only about 10 percent of the investment advisers it supervises in 2009 In addition they noted that generally an investment adviser is examined on average every 12 to 15 years although firms considered to be of higher risk are examined more frequently In 2007 we noted that harmful practices could go undetected because investment adviser firms rated lower-risk are unlikely to undergo routine examinations within a reasonable period of time if at all12

According to NASAA state oversight of investment adviser firms generally includes activities similar to those undertaken by SEC including taking specific steps to review a firmrsquos financial planning services According to NASAA states generally register not just investment adviser firms but also investment adviser representativesmdashthat is individuals who provide investment advice and work for a state- or federally registered investment adviser firm13

Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities

In addition to providing advisory services such as developing a financial plan financial planners generally help clients implement the plan by making specific recommendations and by selling securities insurance products and other investments SEC data show that as of October 2010 19 percent of investment adviser firms that provided financial planning

11GAO Securities and Exchange Commission Steps Being Taken to Make Examination

Program More Risk-Based and Transparent GAO-07-1053 (Washington DC Aug 14 2007) As we noted since the detection of mutual fund trading abuses in late 2003 in light of limited resources SEC has shifted its approach to examinations of investment advisers from one that focused on routinely examining all registered firms regardless of risk to one that focuses on more frequently examining those firms and industry practices at higher risk for compliance issues

12GAO-07-1053 SEC reported in February 2010 that it is now placing a greater emphasis on fraud detection in addition to identifying potential violations of securities laws and rules strengthening procedures and internal controls to maximize limited resources recruiting examiners with specialized skills and increasing expertise through enhanced training

13According to NASAA New York Minnesota and Wyoming do not register investment adviser representatives although New York and Minnesota do have certain examination and other requirements that must be met

Page 6 GAO-11-235 Consumer Finance

services also provided brokerage services and 27 percent provided insurance14

Financial planners that provide brokerage services such as buying or selling stocks bonds or mutual fund shares are subject to broker-dealer regulation at the federal and state levels At the federal level SEC oversees US broker-dealers and SECrsquos oversight is supplemented by self-regulatory organizations (SRO)15 The primary SRO for broker-dealers is FINRA State securities offices work in conjunction with SEC and FINRA to regulate securities firms Salespersons working for broker-dealers are subject to state registration requirements including examinations About half of broker-dealers were examined in 2009 by SEC and SROs Under broker-dealer regulation financial planners are held to a suitability standard of care when making a recommendation to a client to buy or sell a security meaning that they must recommend those securities that they reasonably believe are suitable for the customer16

Financial planners that sell insurance products such as life insurance or annuities must be licensed by the states to sell these products and are subject to state insurance regulation In contrast to securities entities (other than national banks) that are subject to dual federal and state oversight the states are generally responsible for regulating the business of insurance When acting as insurance agents financial planners are

14The brokerage and insurance services provided by these investment adviser firms are not necessarily a part of their financial planning services In addition many financial planners may sell securities- or insurance-related products through affiliated brokers or agents

15The primary law for regulating broker-dealers is the Securities Exchange Act of 1934 codified at 15 USC sectsect 78a-78oo Brokers effect transactions for the account of others while dealers buy and sell securities for their own accounts 15 USC sect 78c The term registered representative is generally used to refer to certain employees of a broker-dealer firm who are engaged in providing securities recommendations Broker-dealers must be members of a qualifying self-regulatory organization (either a national exchange or a registered securities association) 15 USC sect 78o(b)(8)

16Under NASD Conduct Rule 2310 a FINRA member making an investment recommendation to a customer must have grounds for believing that the recommendation is suitable for that customerrsquos financial situation and needs In November 2010 SEC approved FINRArsquos proposed new consolidated rules governing the suitability obligations of its members 75 Fed Reg 71479 (Nov 23 2010) This rule proposed FINRA Rule 2111 requires salespersons to have a reasonable basis for believing based on adequate due diligence that a recommendation of a transaction or strategy is suitable for at least some investors that the recommendation is suitable for a specific customer based on that customerrsquos profile and that a series of recommended transactions is not excessive and unsuitable for the customer

Page 7 GAO-11-235 Consumer Finance

subject to state standard of care requirements which can vary by product and by state As of October 2010 32 states had adopted a previous version of the NAIC Suitability in Annuities Transactions Model Regulation according to NAIC17 In general this regulation requires insurance agents to appropriately address consumersrsquo insurance needs and financial objectives at the time of an annuity transaction18 Thirty-four states had also adopted the Life Insurance Disclosure Model Regulation in a uniform and substantially similar manner as of July 2010 according to NAIC This regulation does not include a suitability requirement although it does require insurers to provide customers with information that will improve their ability to select the most appropriate life insurance plan for their needs and improve their understanding of the policyrsquos basic features

Financial planners that sell variable insurance products such as variable life insurance or variable annuities are subject to both state insurance regulation and broker-dealer regulation because these products are regulated as both securities and insurance products When selling variable insurance financial planners are subject to FINRA sales practice standards requiring that such sales be subject to suitability standards19 In addition other FINRA rules and guidance such as those governing standards for communication with the public apply to the sale of variable insurance products20 In addition as previously discussed 32 states also generally require insurance agents and companies to appropriately address a consumerrsquos insurance needs and financial objectives at the time of an annuity transaction However in the past we have reported that the effectiveness of market conduct regulationmdashthat is examination of the sales practices and behavior of insurersmdashmay be limited by a lack of

17NAIC amended this model regulation in March 2010 according to NAIC one state has adopted the updated model and additional states are expected to do so

18According to NAIC in 4 of these 32 states the regulation applies only when the consumers are senior citizens

19NASD Notice to Members 96-86 outlines that variable contracts for insurance products are subject to suitability requirements

20NASD Interpretive Material 2210-2 outlines guidance concerning communications with the public about variable life insurance and variable annuities FINRA has proposed that this guidance be replaced by a separate new FINRA Rule 2211 See FINRA Rule Filing No SR-FINRA-2009-070

Page 8 GAO-11-235 Consumer Finance

reciprocity and uniformity which may lead to uneven consumer protection across states21

Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations

At the federal level SEC and FINRA have regulations on advertising and standards of communication that apply to the strategies investment adviser firms and broker-dealers use to market their financial planning services For example SEC-registered investment advisers must follow SEC regulations on advertising and other communications which prohibit false or misleading advertisements and these regulations apply to investment advisersrsquo marketing of financial planning services22 FINRA regulations on standards for communication with the public similarly prohibit false exaggerated unwarranted or misleading statements or claims by broker-dealers and broker-dealer advertisements are subject to additional approval filing and recordkeeping requirements and review procedures23 According to many company officials we spoke with their companies responded to these requirements by putting procedures in place to determine which designations and titles their registered representatives may use in their marketing materials such as business cards

SEC and state securities regulators also regulate information that investment advisers are required to disclose to their clients In the Uniform Application for Investment Adviser Registration (Form ADV) regulators have typically required investment adviser firms to provide new and prospective clients with background information such as the basis of the advisory fees types of services provided (such as financial planning services) and strategies for addressing conflicts of interest that may arise

21GAO Insurance Reciprocity and Uniformity NAIC and State Regulators Have Made

Progress in Producer Licensing Product Approval and Market Conduct Regulation but

Challenges Remain GAO-09-372 (Washington DC Apr 6 2009) Reciprocity refers to the extent to which state regulators accept other statesrsquo regulatory actions Uniformity refers to the extent to which states have implemented either the same or substantially similar regulatory standards and procedures

2217 CFR sect 275206(4)-1

23NASD Rule 2210

Page 9 GAO-11-235 Consumer Finance

from their business activities24 Recent changes to Form ADV are designed to improve the disclosures that firms provide to clients For example firms must now provide clients with information about the advisory personnel on whom they rely for investment advice including the requirements and applicability of any professional designations or certifications advisers may choose to include in their background information

Most states regulate the use of the title ldquofinancial plannerrdquo and state securities and insurance laws can apply to the misuse of this title and other titles For example according to NASAA at least 29 states specifically include financial planners in their definition of investment adviser25 According to NAIC in many states regulators can use unfair trade practice laws to prohibit insurance agents from holding themselves out as financial planners when in fact they are only engaged in the sale of life or annuity insurance products However as noted earlier the effectiveness of the regulation of insurersrsquo market conduct varies across states In particular in 2010 we noted inconsistencies in the state regulation of life settlements a potentially high-risk transaction in which financial planners may participate26

In addition we were told some states had adopted regulations limiting the use of ldquosenior-specific designationsrdquomdashthat is designations that imply expertise or special training in advising senior citizen or elderly investors According to NAIC as of December 2010 25 states had adopted in a uniform and substantially similar manner the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities which limits the use of senior-specific designations by insurance agents According to NASAA as of December 2010 31 states had adoptedmdashand at least 9 other states were

24SEC and the states use Form ADV to register investment adviser firms and collect information from them Part 2 of Form ADV provides information about the investment adviser and its business for use of the clients and is publicly available on the Investment Adviser Public Depository Web site The SEC adopted amendments to Form ADV that were effective October 12 2010 requiring Part 2 of Form ADV be written in a plain English narrative format See Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (to be codified at 17 CFR pt 275 and 279)

25The District of Columbia and Puerto Rico also include financial planners in their definitions of investment adviser according to NASAA

26GAO Life Insurance Settlements Regulatory Inconsistencies May Pose a Number of

Challenges GAO-10-775 (Washington DC July 9 2010)

Page 10 GAO-11-235 Consumer Finance

planning to adoptmdashthe NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations which prohibits the misleading use of senior-specific designations by investment adviser representatives and other financial professionals

Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited

The regulatory system for financial planners covers most activities in which they engage However enforcement of regulation may be inconsistent and some questions exist about consumersrsquo understanding of the roles standards of care and titles and designations that a financial planner may have The ability of regulators to identify potential problems is limited because they do not specifically track complaints inspections and enforcement actions specific to financial planning services

Existing Regulation Covers Most Financial Planning Services

Although there is no single stand-alone regulatory body with oversight of financial planners the regulatory structure for financial planners covers most activities in which they engage As discussed earlier and summarized in figure 2 the primary activities a financial planner performs are subject to existing regulation at the federal or state level primarily through regulation pertaining to investment advisers broker-dealers and insurance agents As such SEC FINRA and NASAA staff a majority of state securities regulators financial industry representatives consumer groups and academic and subject matter experts with whom we spoke said that in general they believe the regulatory structure for financial planners is comprehensive although as discussed below the attention paid to enforcing existing regulation has varied

Page 11 GAO-11-235 Consumer Finance

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners

Financial planner

Capacity Investment adviser Broker-dealer Insurance agent

Applicable federal and state laws

Federal bull Investment Advisers Act of 1940 and rules from SEC

State bull State securities laws

Federal bull Securities and Exchange Act of 1934 and rules of SEC and FINRA

State bull State securities laws

State bull State insurance laws

Financial planning service covered by regulation

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for specific securities products bull Purchase or sale of securities products

bull Recommendations for insurance products

bull Sale of insurance products

bull Sale of variable insurance (variable annuities variable life insurance) bull

Federal and state regulators enforcing laws

Federal bull SEC

State bull State securities agencies

Federal bull SEC and FINRA

State bull State securities agencies

State bull State insurance agencies

Customer

Source GAO

Note This figure highlights three major areas of regulatory oversight but is not comprehensive and does not include other regulatory regimes or practice standards that may be applicable to financial planners In addition not all investment advisers broker-dealers or insurance agents are financial planners

As noted earlier the activities a financial planner normally engages in generally include advice related to securitiesmdashand such activities make financial planners subject to regulation under the Advisers Act One industry association and an academic expert noted that it would be very difficult to provide financial planning services without offering investment

Page 12 GAO-11-235 Consumer Finance

advice or considering securities SEC staff told us that financial planners holding even broad discussions of securitiesmdashfor example what proportion of a portfolio should be invested in stocksmdashwould be required to register as investment advisers or investment adviser representatives In theory a financial planner could offer only services that do not fall under existing regulatory regimesmdashfor example advice on household budgetingmdashbut such an example is likely hypothetical and such a business model may be hard to sustain SEC and NASAA staff a majority of the state securities regulators we spoke with and many representatives of the financial services industry told us that they were not aware of any individuals serving as financial planners who were not regulated as investment advisers or regulated under another regulatory regime Some regulators and industry representatives also said that to the extent that financial planners offered services that did not fall under such regulation the new Bureau of Consumer Financial Protection potentially could have jurisdiction over such services27

However not everyone agreed that regulation of financial planners was comprehensive One group the Financial Planning Coalition has argued that a regulatory gap exists because no single law governs the delivery of the broad array of financial advice to the public28 According to the coalition the provision of integrated financial advicemdashwhich would cover topics such as selecting and managing investments income taxes saving for college home ownership retirement insurance and estate planningmdash is unregulated Instead the coalition says that there is patchwork regulation of financial planning advice and it views having two sets of lawsmdashone regulating the provision of investment advice and another regulating the sale of productsmdashas problematic

27Section 1011 of the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate ldquothe offering and provision of consumer financial products or services under the Federal consumer financial lawsrdquo A financial product or service is defined in section 1002(15)(A)(viii) of the act to include financial advisory services to consumers on individual financial matters with the exception of advisory services related to securities provided by a person regulated by SEC or a state securities commission to the extent that such person acts in a regulated capacity Accordingly it appears that the bureau may have jurisdiction over financial planners to the extent that they may offer services that would not be under the jurisdiction of SEC or a state securities commission

28The members of this coalition include the Certified Financial Planner Board of Standards Inc the Financial Planning Association and the National Association of Personal Financial Advisors

Page 13 GAO-11-235 Consumer Finance

In addition although the regulatory structure itself for financial planners may generally be comprehensive attention paid to enforcing existing statute and regulation has varied For example as noted earlier due to resource constraints the examination of SEC-supervised investment advisers is infrequent Further as also noted earlier market conduct regulation of insurersmdashwhich would include the examination of the sales practices and behavior of financial planners selling insurance productsmdash has been inconsistent Some representatives of industry associations told us that they believed that a better alternative to additional regulation of financial planners would be increased enforcement of existing law and regulation particularly related to fraud and unfair trade practices

Certain professionalsmdashincluding attorneys certified public accountants broker-dealers and teachersmdashwho provide financial planning advice are exempt from regulation under the Advisers Act if such advice is ldquosolely incidentalrdquo to their other business activities29 According to an SEC staff interpretation this exemption would not apply to individuals who held themselves out to the public as providing financial planning services and would apply only to individuals who provided specific investment advice on anything other than ldquorare isolated and non-periodic instancesrdquo30 Banks and bank employees are also excluded from the Advisers Act and are subject to separate banking regulation31 The American Bankers Association told us that the financial planning activities of bank employees such as trust advisors or wealth managers were typically utilized by clients with more than $5 million in investable assets The association noted that these activities were subject to a fiduciary standard and the applicable supervision of federal and state banking regulators

Most regulators and academic experts and many financial services industry representatives we spoke with told us that there is some overlap in the regulation of individuals who serve as financial planners because

2915 USC sect 80b-2(a)(11) IA Rel No 1092(II)(B) at 38403 Under 15 USC sect 80bshy2(a)(11)(C) brokers and dealers also cannot receive any special compensation for their services in order to be exempt from registration as an investment adviser

30Id

31Id The Advisers Act excludes bank and bank holding companies from the definition of

investment adviser Further a bank and a bank holding company is an investment adviser under the act to the extent that the bank or bank holding company serves or acts as an adviser to a registered investment company If such services are performed in a separate department or division of a bank the department or division and not the bank itself is the investment adviser

Page 14 GAO-11-235 Consumer Finance

such individuals might be subject to oversight by different regulatory bodies for the different services they provide For example a financial planner who recommends and sells variable annuities as part of a financial plan is regulated as a registered representative of a broker-dealer as well as an insurance agent under applicable federal and state laws However some state regulators we spoke with told us that such overlap may be appropriate since the regulatory regimes cover different functional areas

Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products

As seen in figure 3 financial planners are subject to different standards of care in their capacities as investment advisers broker-dealers and insurance agents

bull Fiduciary Standard of Care As noted earlier investment advisers are subject to a fiduciary standard of caremdashthat is they must act in their clientrsquos best interest ensure that recommended investments are suitable for the client and disclose to the client any material conflicts of interest32

According to SEC and NASAA representatives the fiduciary standard applies even when investment advisers provide advice or recommendations about products other than securities such as insurance in conjunction with advice about securities

bull Suitability Standard of Care When Recommending Security Products FINRA regulation requires broker-dealers to adhere to a suitability standard when rendering investment recommendationsmdashthat is they must recommend only those securities that they reasonably believe are suitable for the customer33 Unlike the fiduciary standard suitability rules do not necessarily require that the clientrsquos best interest be served According to FINRA staff up-front general disclosure of a broker-dealerrsquos business activities and relationships that may cause conflicts of interest is not

32The SEC has in effect established rules of conduct for investment advisers including requirements for disclosing conflicts of interest obtaining the best execution on behalf of clients allocating investments among clients fairly ensuring that investments are suitable for clients and ensuring that there is a reasonable basis for recommendations SEC also requires investment advisers to maintain records pertaining to client accounts and business operations

33A broker-dealer must have an adequate and reasonable basis for any recommendation and must make recommendations based on a customerrsquos financial situation needs and other securities holdings

Page 15 GAO-11-235 Consumer Finance

required34 However according to SEC broker-dealers are subject to many FINRA rules that require disclosure of conflicts in certain situations although SEC staff also note that those rules may not cover every possible conflict of interest and disclosure may occur after conflicted advice has already been given35

bull Suitability Standard of Care When Recommending Insurance Products Standards of care for the recommendation and sale of insurance products vary by product and by state For example as seen earlier NAICrsquos model regulations on the suitability standard for annuity transactions adopted by some states but not others require consideration of the insurance needs and financial objectives of the customer while NAICrsquos model regulation for life insurance does not include a suitability requirement per se

34Letter from Marc Menchel Executive Vice President and General Counsel FINRA to Elizabeth M Murphy Secretary SEC 4 (Aug 25 2010) available at httpwwwfinraorgwebgroupsindustryipregguidedocumentsindustryp121983p df

35The standards of conduct for broker-dealers may also be based on antifraud provisions of the securities law and agency principles Broker-dealers also have a duty of fairness in their contracts with a customer which requires them to disclose material information that the customer would consider important as an investor In addition broker-dealers that handle discretionary accounts are generally thought to owe fiduciary obligations to their customers

Page 16 GAO-11-235 Consumer Finance

Figure 3 Differences in the Standards of Care Required of Financial Planners

Financial planner

Capacity

Investment adviser Broker-dealer Insurance agent

Fiduciary Suitability Varies by product and by state insurance law

Standard of care

bull Person has an affirmative duty to render services solely in the best interests of clients

bull Requires advisers to disclose material conflicts of interest to clients

bull Rules require standard of care that includes among other things rendering

investment recommendations that are suitable for customers

bull Requires insurance agents to follow suitability standards when state has adopted such standards for products

Financial planning service covered by standard of care

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for the purchase or sale of specific securities products

bull Recommendations for the purchase of insurance products

bull Recommendations for the purchase of variable insurance (variable annuities variable life insurance)

Customer

Source GAO

Note This figure is illustrative and is not comprehensive financial planners may serve in capacities other than those shown here and not all investment advisers broker-dealers and insurance agents serve as financial planners

Conflicts of interest can exist when for example a financial services professional earns a commission on a product sold to a client Under the fiduciary standard applicable to investment advisers financial planners must mitigate any potential conflicts of interest and disclose any that remain But under a suitability standard applicable to broker-dealers conflicts of interest may exist and generally may not need to be disclosed

Page 17 GAO-11-235 Consumer Finance

up-front36 For example as confirmed by FINRA financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission as long as the product is suitable and the broker-dealer complies with other requirements Because the same individual or firm can offer a variety of services to a clientmdasha practice sometimes referred to as ldquohat switchingrdquomdashthese services could be subject to different standards of care As such representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care if any applies to a financial professional As shown above the standards of caremdashand the extent to which conflicts of interest must be disclosedmdashcan vary depending on the capacity in which the individual serves37 A 2007 report by the Financial Planning Association stated that ldquoit would be difficult if not impossible for an individual investor to discern when the adviser was acting in a fiduciary capacity or in a non-fiduciary capacityrdquo38 A 2008 SEC study conducted by the RAND Corporation consisting of a national household survey and six focus group discussions with investors found that consumers generally did not understand not only the distinction between a suitability and fiduciary standard of care but also the differences between broker-dealers and investment advisers39 Similarly a 2010 national study of investors found that most were confused about which financial professionals are required to operate under a fiduciary standard that requires professionals to put their clientrsquos interest ahead of their own40

36FINRA officials have stated that they believe that the regulation of broker-dealersmdashwhile lacking an express fiduciary dutymdashprescribes in great detail the conduct and supervision of broker-dealers who provide investment advice to retail customers

37Blackrsquos Law Dictionary (9th ed 2009) defines the term ldquoconflict of interestrdquo as a ldquoreal or seeming incompatibility between onersquos private interests and onersquos public or fiduciary dutiesrdquo

38Final Report on Financial Planner Standards of Conduct FPA Fiduciary Task Force

June 2007

39Angela A Hung et al RAND Institute for Civil Justice Investor and Industry

Perspectives on Investment Advisers and Broker-Dealers (2008)

40Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010 The survey was conducted among a sample of 2012 adults living in the continental United States including 1319 who identified themselves as investors The survey was sponsored by AARP the Consumer Federation of America NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors

Page 18 GAO-11-235 Consumer Finance

Representatives of financial services firms that provide financial planning told us they believe that clients are sufficiently informed about the differing roles and accompanying standards of care that a firm representative may have They noted that when they provide both advisory and transactional services to the same customer each servicemdashsuch as planning brokerage or insurance salesmdashis accompanied by a separate contract or agreement with the customer These agreements disclose that the firmrsquos representatives have different obligations to the customer depending on their role In addition once a financial plan has been provided some companies told us that they have customers sign an additional agreement stating that the financial planning relationship with the firm has ended

Recent revisions by SEC to Form ADV disclosure requirements were designed to address among other things consumer understanding of potential conflicts of interest by investment advisers and their representatives Effective October 12 2010 SEC revised Form ADV Part 2 which financial service firms must provide to new and prospective clients41 The new form which must be written in plain English is intended to help consumers better understand the activities and affiliations of their investment adviser It requires additional disclosu res about a firmrsquos conflicts of interest compensation business activities and disciplinary information that is material to an evaluation of the adviser rsquos integrity Similarly in October 2010 FINRA issued a regulatory notice requesting comments on a concept proposal regarding possible new disclosure requirements that would among other things detail for consumers in plain English the conflicts of interest that broker-dealers may have associated with their services42

Section 913 of the Dodd-Frank Act requires SEC to study the substantive differences between the applicable standards of care for broker-dealers and investment advisers the effectiveness of the existing legal or regulatory standards of care for brokers dealers and investment advisers and consumersrsquo ability to understand the different standards of care SEC

41Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (requires investment advisers registered with SEC to provide new and prospective clients with a brochure and brochure supplements clearly setting forth a meaningful current disclosure of the business practices conflicts of interest and background of the investment adviser and its advisory personnel and requires the brochures to be filed with SEC electronically which will make them available to the public through its Web site)

42FINRA Regulatory Notice 10-54

Page 19 GAO-11-235 Consumer Finance

will also consider the potential impact on retail customers of imposing the same fiduciary standard that now applies to investment advisers on broker-dealers when they provide personalized investment advice Under the act SEC may promulgate rules to address these issues and is specifically authorized to establish a uniform fiduciary duty for broker-dealers and investment advisers that provide personalized investment advice about securities to customers As a result further clarification of these standards may be forthcoming FINRA officials told us that they support a fiduciary standard of care for broker-dealers when they provide personalized investment advice to retail customers

Consumer confusion on standards of care may also be a source of concern with regard to the sale of some insurance products A 2010 national survey of investors found that 60 percent mistakenly believed that insurance agents had a fiduciary duty to their clients43 Some insurance products such as annuities are complex and can be difficult to understand and annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators as well as SEC and FINRA for many years44 According to NAIC many states have requirements that insurance salespersons sell annuities only if the product is suitable for the customer However NAIC notes that some states do not have a suitability requirement for annuities Consumer groups and others have stated that high sales commissions on certain insurance products including annuities may provide salespersons with a substantial financial incentive to sell these products which may or may not be in the consumerrsquos best interest As a result of section 989J of the Dodd-Frank Act one type of annuitymdashthe indexed annuitymdashis to be regulated by states as an insurance product rather than regulated by SEC as a security under certain conditions45

SECrsquos pending study related to the applicable standards of care for broker-dealers and investment advisers will not look at issues of insurance that

43Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010

44See for example Securities and Exchange Commission Rule 151A and Annuities Issues and Legislation CRS Report for Congress 7-7500 (July 29 2010)

45State regulation applies so long as a state has adopted NAICrsquos Suitability in Annuity Transactions model regulation or if an insurance company adopts and implements practices on a nationwide basis that meet or exceed the minimum requirements established by NAICrsquos model regulation Indexed annuities are products that guarantee a purchaserrsquos principal and a certain rate of return and offer a chance for additional returns linked to a securities index or indices

Page 20 GAO-11-235 Consumer Finance

fall outside of SECrsquos jurisdiction NAIC has not undertaken a similar study regarding consumer understanding of the standard of care for insurance agents As we reported in the past financial markets function best when consumers understand how financial service providers and products work and know how to choose among them46 Given the evidence of consumer confusion about differing standards of care and given the increased risks that certain insurance products can pose there could be benefits to an NAIC review of consumersrsquo understanding of standards of care for high-risk insurance products

Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public

Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public including financial planner financial consultant and financial adviser among many others However evidence suggests that the different titles financial professionals use can be confusing to consumers The 2008 RAND study found that even experienced investors were confused about the titles used by broker-dealers and investment advisers including financial planner and financial adviser Similarly in consumer focus groups of investors conducted by SEC in 2005 as part of a rulemaking process participants were generally unclear about the distinctions among titles including broker investment adviser and financial planner47 In addition a representative of one consumer advocacy group has expressed concern that some financial professionals may use as a marketing tool titles suggesting that they provide financial planning services when in fact they are only selling products One industry group the Financial Planning Coalition also has noted that some individuals may hold themselves out as financial planners without meeting minimum training or ethical requirements Federal and state regulators told us they generally focused their oversight and enforcement actions on financial plannersrsquo activities rather than the titles they use Moreover NASAA has said that no matter what title financial planners use most are required to register as investment adviser representatives and must satisfy certain competency requirements

46GAO Financial Regulation A Framework for Crafting and Assessing Proposals to

Modernize the Outdated US Financial Regulatory System GAO-09-216 (Washington DC Jan 8 2009)

47Results of Investor Focus Group Interviews About Proposed Brokerage Account

Disclosures Report to the Securities and Exchange Commission by Siegel amp Gale LLC and Gelb Consulting Group Inc Mar 10 2005

Page 21 GAO-11-235 Consumer Finance

including passing an examination or obtaining a recognized professional designation48

Financial plannersrsquo professional designations are typically conferred by a professional or trade organization These designations may indicate that a planner has passed an examination met certain educational requirements or had related professional experience Some of these designations require extensive classroom training and examination requirements and include codes of ethics with the ability to remove the designation in the event of violations State securities regulators view five specific designations as meeting or exceeding the registration requirements for investment adviser representatives according to NASAA and allow these professional designations to satisfy necessary competency requirements for prospective investment adviser representatives49 For example one of these five designations requires a bachelorrsquos degree from an accredited college or university 3 years of full-time personal financial planning experience a certification examination and 30 hours of continuing education every 2 years

The criteria used by organizations that grant professional designations for financial professionals vary greatly FINRA has stated that while some designations require formal certification procedures including examinations and continuing professional education credits others may merely signify that membership dues have been paid The Financial Planning Coalition and The American College a nonprofit educational institution that confers several financial designations similarly told us that privately conferred designations range from those with rigorous competency practice and ethical standards and enforcement to those that can be obtained with minimal effort and no ongoing evaluation

48According to NASAA all but three statesmdashNew York Minnesota and Wyomingmdashregister investment adviser representatives and require that they pass either the Series 65 (Uniform Investment Adviser Law Examination) or the Series 66 (Uniform Combined State Law Examination) or obtain a recognized professional designation While New York and Minnesota do not register individual investment adviser representatives their state laws require that the representatives meet other requirements such as passing certain examinations or obtaining a professional designation accepted by the state

49The five designations recognized as such are Certified Financial Plannerreg Chartered Financial Consultantreg Personal Financial Specialist Chartered Financial Analyst and Chartered Investment Counselor

Page 22 GAO-11-235 Consumer Finance

As noted earlier designations that imply expertise or special training in advising senior citizen or elderly investors have received particular attention from regulators A joint report of SEC FINRA and NASAA described cases in which financial professionals targeted seniors by using senior-specific designations that implied that they had a particular expertise for senior investors when in fact they did not as noted earlier NASAA and NAIC have developed a model rule to address the issue50 The report also noted these professionals targeted seniors through the use of so-called free-lunch seminars where free meals are offered in exchange for attendance of a financial education seminar However the focus of the seminars was actually on the sale of products rather than the provision of financial advice

Given the large number of designations financial planners may use concerns exist that consumers may have difficulty distinguishing among them To alleviate customer confusion FINRA has developed a Web site for consumers that provides the required qualifications and other information about the designations used by securities professionals The site lists more than 100 professional designations 5 of which include the term ldquofinancial plannerrdquo and 24 of which contain comparable terms such as financial consultant or counselor51 The American College told us that it had identified 270 financial services designations Officials from NASAA NAIC and a consumer advocacy organization told us that consumers might have difficulty distinguishing among the various designations Officials from The American College told us that the number of designations itself was not necessarily a cause for concern but rather consumersrsquo broadly held misperception that all designations or credentials are equal

To help address these concerns FINRA plans to expand its Web site on professional designations to include several dozen additional designations related to insurance However FINRA officials noted that consumersrsquo use of this tool has been limited For example in 2009 the site received only 55765 visits A recent national study of the financial capability of American adults sponsored by FINRA found that only 15 percent of adults

50Protecting Senior Investors Report of Examinations of Securities Firms Providing

ldquoFree Lunchrdquo Sales Seminars by the Office of Compliance Inspections and Examination Securities and Exchange Commission North American Securities Administrators Association and the Financial Industry Regulatory Authority September 2007

51See httpappsfinraorgDataDirectory1prodesignationsaspx

Page 23 GAO-11-235 Consumer Finance

who had used a financial professional in the last 5 years claimed to have checked the background registration or license of a financial professional52 In addition SEC staff acknowledged that there have been concerns about confusing designations and SECrsquos October 2010 changes to investment adviser disclosure requirements mandate that investment adviser representatives who list professional designations and certifications in their background information also provide the qualifications needed for these designations so that the consumer can understand the value of the designation for the services being provided

Section 917 of the Dodd-Frank Act includes a requirement that SEC conduct a study identifying the existing level of financial literacy among retail investors including the most useful and understandable relevant information that they need to make informed financial decisions before engaging a financial intermediary While the section does not specifically mention the issue of financial plannersrsquo titles and designations the confusion we found to exist could potentially be addressed or mitigated if SEC incorporated this issue into its overall review of financial literacy among investors SEC staff told us that at this time its review would not likely address this issue although it would address such things as the need for conducting background checks on financial professionals Financial markets function best when consumers have information sufficient to understand and assess financial service providers and products53

Including financial plannersrsquo use of titles and designations in SECrsquos financial literacy review could provide useful information on the implications of consumersrsquo confusion on this issue

Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners

Available data do not show a large number of consumer complaints and enforcement actions involving financial planners but the exact extent to which financial planners may be a source of problems is unknown We were able to find limited information on consumer complaints from various agencies For example representatives of FTC and the Better Business Bureau said that they had received relatively few complaints related to financial planners FTC staff told us that a search in its Consumer Sentinel Network database for the phrase ldquofinancial plannerrdquo

52Applied Research amp Consulting LLC Financial Capability in the United States Initial

Report of the Research Findings from the 2009 National Survey prepared for the FINRA Investor Education Foundation (New York December 2009)

53GAO-09-216

Page 24 GAO-11-235 Consumer Finance

found 141 complaints in the 5-year period from 2005 through 2010 but that only a handful of these appeared to actually involve activity connected to the financial planning profession54 The staff added that additional searches on other titles possibly used by financial planners such as financial consultant and personal financial adviser did not yield significant additional complaints In addition a representative of the Better Business Bureau told us that it had received relatively few complaints related to financial planners although the representative noted that additional complaints might exist in broader categories such as ldquofinancial servicesrdquo

Consumer complaint data may not be an accurate gauge of the extent of problems Complaints may represent only a small portion of potential problems and complaints related to ldquofinancial plannersrdquo may not always be recorded as such As we have previously reported consumers also may not always know where they can report complaints55 At the same time some complaints that are made may not always be valid

SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm The agency does record and track whether federally and state-registered investment adviser firms provide financial planning services but its data tracking systems for complaints examination results and enforcement actions are not programmed to readily determine and track whether the complaint result or action was specifically related to a financial planner or financial planning service For example SEC staff told us the number of complaints about financial planners would be undercounted in their data system that receives and tracks public inquiries known as the Investor Response Information System because this code would likely be used only if it could not be identified whether the person (or firm) was an investment adviser or broker-dealer In addition the data system that SEC uses to record examination results known as the Super Tracking and Reporting System

54The Consumer Sentinel Network database is a secure online database of millions of consumer complaints available only to law enforcement In addition to storing complaints received by FTC the Consumer Sentinel Network also includes complaints filed with the Internet Crime Complaint Center Better Business Bureaus Canadarsquos PhoneBusters the US Postal Inspection Service the Identity Theft Assistance Center and the National Fraud Information Center among others

55GAO Telecommunications FCC Needs to Improve Oversight of Wireless Phone Service GAO-10-34 (Washington DC November 2009) p 18

Page 25 GAO-11-235 Consumer Finance

does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers

However SEC staff told us that a review of its Investor Response Information System identified 51 complaints or inquiries that had been recorded using their code for issues related to ldquofinancial plannersrdquo between November 2009 and October 2010 SEC staff told us that the complaints most often involved allegations of unsuitable investments or fraud such as misappropriation of funds56 A review of a separate SEC database called Tips Complaints and Referralsmdashan interim system that was implemented in March 2010mdashfound 124 allegations of problems possibly related to financial planners from March 2010 to October 201057

SEC staff told us that they did not have comprehensive data on the extent of enforcement activities related to financial planners per se In addition NASAA said that states generally do not track enforcement data specific to financial planners At our request SEC and NASAA provided us with examples of enforcement actions related to individuals who held themselves out as financial planners Using a keyword search SEC identified 10 such formal enforcement actions between August 2009 and August 2010 According to SEC documents these cases involved allegations of such activities as defrauding clients through marketing schemes receiving kickbacks without making proper disclosures and misappropriation of client funds Although NASAA also did not have comprehensive data on enforcement activities involving financial planners representatives provided us with examples of 36 actions brought by 30 states from 1986 to 2010 These cases involved allegations of such things as the sale of unsuitable products fraudulent misrepresentation of qualifications failure to register as an investment adviser and misuse of client funds for personal expenses

56Of these 51 complaints or inquiries 29 involved allegations of fraud 9 involved allegations of unsuitable investments and the remaining 13 represented questions on a variety of topics

57Of these 124 allegations 13 were coded as ldquofraudulent or unregistered offer or sale of securities including Ponzi schemes high yield investment programs or other investment programsrdquo 12 as ldquomanipulation of a securityrsquos price or volumerdquo 6 as ldquotheft or misappropriation of funds or securitiesrdquo 5 as ldquofalse or misleading statements about a companyrdquo 3 as ldquoproblems with my brokerage or advisory accountrdquo and 2 as ldquoinsider tradingrdquo An additional 14 were coded as ldquoother fraudulent conductrdquo and 69 were coded simply as ldquootherrdquo

Page 26 GAO-11-235 Consumer Finance

Because of limitations in how data are gathered and tracked SEC and state securities regulators are not currently able to readily determine the extent to which financial planning services may be causing consumers harm NASAA officials told us that as with SEC state securities regulators did not typically or routinely track potential problems specific to financial planners SEC and NASAA representatives told us that they had been meeting periodically in recent months to prepare for the transition from federal to state oversight of certain additional investment adviser firms as mandated under the Dodd-Frank Act but they said that oversight of financial planners in particular had not been part of these discussions SEC staff have noted that additional tracking could consume staff time and other resources They also said that because there are no laws that directly require registration recordkeeping and other responsibilities of ldquofinancial plannersrdquo per se tracking such findings relating to those entities would require expenditure of resources on something that SEC does not have direct responsibility to oversee Yet as we have reported in the past while we recognize the need to balance the cost of data collection efforts against the usefulness of the data a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking58 Given the significant growth in the financial planning industry ongoing concerns about potential conflicts of interest and consumer confusion about standards of care regulators may benefit from identifying ways to get better information on the extent of problems specifically involving financial planners and financial planning services

58GAO Managing for Results Using GPRA to Help Congressional Decisionmaking and

Strengthen Oversight GAOT-00-95 (Washington DC March 2000) p 13 GAO Executive

Guide Effectively Implementing the Government Performance and Results Act GAOGGD-96-118 (Washington DC June 1996) p 27

Page 27 GAO-11-235 Consumer Finance

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed

Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners

Creation of a Board to Oversee Financial Planners

Over the past few years a number of stakeholdersmdashincluding consumer groups FINRA and trade associations representing financial planners securities firms and insurance firmsmdashhave proposed different approaches to the regulation of financial planners Following are four of the most prominent approaches each of which has both advantages and disadvantages

In 2009 the Financial Planning Coalitionmdashcomprised of the Certified Financial Planner Board of Standards Financial Planning Association and the National Association of Personal Financial Advisorsmdashproposed that Congress establish a professional standards-setting oversight board for financial planners According to the coalition its proposed legislation would establish federal regulation of financial planners by allowing SEC to recognize a financial planner oversight board that would set professional standards for and oversee the activities of individual financial planners although not financial planning firms For example the board would have the authority to establish baseline competency standards in the areas of education examination and continuing education and would be required to establish ethical standards designed to prevent fraudulent and manipulative acts and practices It would also have the authority to require registration or licensing of financial planners and to perform investigative and disciplinary actions Under the proposal states would retain antifraud authority over financial planners as well as full oversight for financial plannersrsquo investment advisory activity However states would not be allowed to impose additional licensing or registration requirements for financial planners or set separate standards of conduct Supporters of a new oversight board have noted that its structure and governance would be analogous to the Public Company Accounting Oversight Board a private nonprofit organization subject to SEC oversight that in turn oversees the audits of public companies that are subject to securities laws

Page 28 GAO-11-235 Consumer Finance

Augmenting Oversight of Investment Advisers with an SRO

According to the Financial Planning Coalition a potential advantage of this approach is that it would treat financial planning as a distinct profession and would regulate across the full spectrum of activities in which financial planners may engage including activities related to investments taxes education retirement planning estate planning insurance and household budgeting Proponents argue that a financial planning oversight board would also help ensure high standards and consistent regulation for all financial planners by establishing common standards for competency professional practices and ethics

However many securities regulators and financial services trade associations with whom we spoke said that they believe such a board would overlap with and in many ways duplicate existing state and federal regulations which already cover virtually all of the products and services that a financial planner provides Some added that the board would entail unnecessary additional financial costs and administrative burdens for the government and regulated entities In addition some opponents of this approach question whether ldquofinancial planningrdquo should be thought of as a distinct profession that requires its own regulatory structure noting that financial planning is not easily defined and can span multiple professions including accounting insurance investment advice and law One consumer group also noted that the regulation of individuals and professions is typically a state rather than a federal responsibility Finally we note that the analogy to the Public Company Accounting Oversight Board may not be apt That board was created in response to a crisis involving high-profile bankruptcies and investor losses caused in part by inadequacies among public accounting firms In the case of financial planners there is limited evidence of an analogous crisis or as noted earlier of severe harm to consumers

A number of proposals over the years have considered having FINRA or a newly created SRO supplement SEC oversight of investment advisers These proposals date back to at least 1963 when an SEC study recommended that all registered investment advisers be required to be a

Page 29 GAO-11-235 Consumer Finance

member of an SRO59 In 1986 the National Association of Securities Dealers a predecessor to FINRA explored the feasibility of examining the investment advisory activities of members who were also registered as investment advisers The House of Representatives passed a bill in 1993 that would have amended the Advisers Act to authorize the creation of an ldquoinspection onlyrdquo SRO for investment advisers although the bill did not become law60 In 2003 SEC requested comments on whether one or more SROs should be established for investment advisers citing among other reasons concerns that the agencyrsquos own resources were inadequate to address the growing numbers of advisers61 However SEC did not take further action Section 914 of the Dodd-Frank Act required SEC to issue a study in January 2011 on the extent to which one or more SROs for investment advisers would improve the frequency of examinations of investment advisers62

According to FINRA the primary advantage of augmenting investment adviser oversight with an SRO is that doing so would allow for more frequent examinations given the limited resources of states and SEC The Financial Services Institute an advocacy organization for independent broker-dealers and financial advisers has stated that an industry-funded SRO with the resources necessary to appropriately supervise and examine all investment advisers would close the gap that exists between the regulation of broker-dealers and investment advisers FINRA said that it finds this gap troubling given the overlap between the two groups (approximately 88 percent of all registered advisory representatives are also broker-dealer representatives) FINRA adds that any SRO should operate subject to strong SEC oversight and that releasing SEC of some of its responsibilities for investment advisers would free up SEC resources for other regulatory activities

59See Securities and Exchange Commission News Digest Issue No 63-4-3 8 (1963) which describes SECrsquos report to Congress regarding the adequacy of the rules of national securities exchanges and national securities associations pursuant to Pub L No 87-196 75 Stat 465 (1961) wherein SEC points out that the framework of industry self-regulation permitted many broker-dealer firms and registered investment advisers to remain outside of any official self-regulatory group According to the SEC News Digest the report suggested that membership in an SRO should be a prerequisite to registration with SEC as a broker-dealer or investment adviser

60HR 578 103rd Cong (1993)

61Investment Advisers Act Release No 2107 68 Fed Reg 7038 (Feb 11 2003)

62SEC is required to report the results of its study within 180 days of enactment of the Dodd-Frank Act

Page 30 GAO-11-235 Consumer Finance

Extending Coverage of the Fiduciary Standard

However NASAA some state securities regulators and one academic with whom we spoke opposed adding an SRO component to the regulatory authority of investment advisers NASAA said it believed that investment adviser regulation is a governmental function that should not be outsourced to a private third-party organization that lacks the objectivity independence expertise and experience of a government regulator Further NASAA said it is concerned with the lack of transparency associated with regulation by SROs because unlike government regulators they are not subject to open records laws through which the investing public can obtain information Two public interest groups including the Consumer Federation of America have asserted that one SROmdashFINRAmdash has an ldquoindustry mindsetrdquo that has not always put consumer protection at the forefront In addition the Investment Adviser Association and two other organizations we interviewed have noted that funding an SRO and complying with its rules can impose additional costs on a firm63

Proposals have been made to extend coverage of the fiduciary standard of care to all those who provide financial planning services Some consumer groups and others have stated that a fiduciary standard should apply to anyone who provides personalized investment advice about securities to retail customers including insurance agents who recommend securities The Financial Planning Coalition has proposed that the fiduciary standard apply to all those who hold themselves out as financial planners Proponents of extending the fiduciary standard of care which also include consumer groups and NASAA generally maintain that consumers should be able to expect that financial professionals they work with will act in their best interests They say that a fiduciary standard is more protective of consumersrsquo interests than a suitability standard which requires only that a product be suitable for a consumer rather than in the consumerrsquos best interest In addition the Financial Planning Coalition notes that extending a fiduciary standard would somewhat reduce consumer confusion about financial planners that are covered by the fiduciary standard in some capacities (such as providing investment advice) but not in others (such as selling a product)

However some participants in the insurance and broker-dealer industries have argued that a fiduciary standard of care is vague and undefined They say that replacing a suitability standard with a fiduciary standard could

63The Investment Adviser Association is a not-for-profit association that represents the interests of SEC-registered investment adviser firms

Page 31 GAO-11-235 Consumer Finance

Clarifying Financial Plannersrsquo Credentials and Standards

actually weaken consumer protections since the suitability of a product is easier to define and enforce Opponents also have argued that complying with a fiduciary standard would increase compliance costs that in turn would be passed along to consumers or otherwise lead to fewer consumer choices

The American College has proposed clarifying the credentials and standards of financial professionals including financial planners In particular it has proposed creating a working group of existing academic and practice experts to establish voluntary credentialing standards for financial professionals As noted previously consumers may be unable to distinguish among the various financial planning designations that exist and may not understand the requirements that underpin them Clarifying the credentials and standards of financial professionals could conceivably take the form of prohibiting the use of certain designations as has been done for senior-specific designations in some states or establishing minimum education testing or work experience requirements needed to obtain a designation The American College has stated that greater oversight of such credentials and standards could provide a ldquoseal of approvalrdquo that would generally raise the quality and competence of financial professionals including financial planners help consumers distinguish among the various credentials and help screen out less qualified or reputable players

However the ultimate effectiveness of such an approach is not clear since the extent to which consumers take designations into account when selecting or working with financial planners is unknown as is the extent of the harm caused by misleading designations In addition implementation and ongoing monitoring of financial plannersrsquo credentials and standards could be challenging Further the issue of unclear designations has already been addressed to some extentmdashfor example as noted earlier some states regulate the use of certain senior-specific designations and allow five professional designations to satisfy necessary competency requirements for prospective investment adviser representatives State securities regulators also have the authority to pursue the misleading use of credentials through their existing antifraud authority

Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners

In general a majority of the regulatory agencies consumer groups academics trade associations and individual financial services companies with which we spoke did not favor substantial structural change in the regulation of financial planners In particular few supported an additional oversight body which was generally seen as duplicative of existing regulation Some stakeholders in the securities and insurance industries

Page 32 GAO-11-235 Consumer Finance

Conclusions

noted that given the dynamic financial regulatory environment under way as a result of the Dodd-Frank Actmdashsuch as creation of a new Bureau of Consumer Financial Protectionmdashmore time should pass before additional regulatory changes related to financial planning services were considered Several industry associations also noted that opportunities existed for greater enforcement of existing law and regulation as discussed earlier

Existing statutes and regulations appear to cover the great majority of financial planning services and individual financial planners nearly always fall under one or more regulatory regimes depending on their activities While no single law governs the broad array of activities in which financial planners may engage given available information it does not appear that an additional layer of regulation specific to financial planners is warranted at this time At the same time as we have previously reported more robust enforcement of existing laws could strengthen oversight efforts In addition there are some actions that can be taken that may help address consumer protection issues associated with the oversight of financial planners

First as we have reported financial markets function best when consumers understand how financial providers and products work and know how to choose among them Yet consumers may be unclear about standards of care that apply to financial professionals particularly when the same individual or firm offers multiple services that have differing standards of care As such consumers may not always know whether and when a financial planner is required to serve their best interest While SEC is currently addressing the issue of whether the fiduciary standard of care should be extended to broker-dealers when they provide personalized investment advice about securities the agency is not addressing whether this extension should also apply to insurance agents who generally fall outside of SECrsquos jurisdiction Sales practices involving some high-risk insurance products such as annuities have drawn attention from federal and state regulators A review by NAIC of consumersrsquo understanding of the standards of care with regard to the sale of insurance products could provide information on the extent of consumer confusion in the area and actions needed to address the issue

Second we have seen that financial planners can adopt a variety of titles and designations The different designations can imply different types of qualifications but consumers may not understand or distinguish among these designations and thus may be unable to properly assess the qualifications and expertise of financial planners SECrsquos recent changes in this areamdashrequiring investment advisers to disclose additional information

Page 33 GAO-11-235 Consumer Finance

on professional designations and certifications they listmdashshould prove beneficial Another opportunity lies in SECrsquos mandated review of financial literacy among investors Incorporating issues of consumer confusion about financial plannersrsquo titles and designations into that review could assist the agency in assessing whether any further changes are needed in disclosure requirements or other related areas

Finally SEC has limited information about the nature and extent of problems specifically related to financial planners because it does not track complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole However a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking SEC staff have noted that additional tracking could require additional resources but other opportunities may also exist to gather additional information on financial planners Because financial planning is a growing industry and has raised certain consumer protection issues regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services

Recommendations We recommend that the National Association of Insurance Commissioners in concert with state insurance regulators take steps to assess consumersrsquo understanding of the standards of care with regard to the sale of insurance products such as annuities and take actions as appropriate to address problems revealed in this assessment

We also recommend that the Chairman of the Securities and Exchange Commission direct the Office of Investor Education and Advocacy Office of Compliance Inspections and Examinations Division of Enforcement and other offices as appropriate to

bull Incorporate into SECrsquos ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumersrsquo investment decisions and

bull Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services and take actions to address any problems that are identified

Page 34 GAO-11-235 Consumer Finance

Agency Comments We provided a draft of this report for review and comment to FINRA NAIC NASAA and SEC These organizations provided technical comments which we incorporated as appropriate In addition NAIC provided a written response which is reprinted in appendix II NAIC said it generally agreed with the contents of the draft report and would give consideration to our recommendation regarding consumersrsquo understanding of the standards of care with regard to the sale of insurance products

NASAA also provided a written response which is reprinted in appendix III In its response NASAA said it agreed that a specific layer of regulation for financial planners was unnecessary and provided additional information on some aspects of state oversight of investment advisers NASAA also said that it welcomed the opportunity to continue to collaborate with SEC to identify methods to better understand and address problems specifically involving financial planners as we recommended In addition NASAA expanded upon the reasons for its opposition to proposals that would augment oversight of investment advisers with an SRO

We are sending copies of this report to interested congressional committees the Chief Executive Officer of FINRA Chief Executive Officer of NAIC Executive Director of NASAA and the Chairman of SEC In addition the report will be available at no charge on GAOrsquos Web site at httpwwwgaogov

If you or your staffs have any questions about this report please contact me at (202) 512-8678 or cackleyagaogov Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report GAO staff who made major contributions to this report are listed in appendix IV

Alicia Puente Cackley Director Financial Markets

and Community Investment

Page 35 GAO-11-235 Consumer Finance

List of Congressional Addressees

The Honorable Bob Corker The Honorable Tim Johnson The Honorable Herbert Kohl The Honorable Richard C Shelby United States Senate

The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives

Page 36 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

Appendix I Scope and Methodology

Our reporting objectives were to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

For background information we obtained estimates for 2000 and 2008 and projections for 2018 from the Bureau of Labor Statistics on the number of individuals who reported themselves as ldquopersonal financial advisersrdquo a term that the agency said was interchangeable with ldquofinancial plannerrdquo The bureau derived these estimates from the Occupational Employment Statistics survey and the Current Population Survey1

According to the bureau the Occupational Employment Statisticsrsquo estimates for financial planners have a relative standard error of 19 percent and the median wage estimate for May 2009 has a relative standard error of 15 percent Because the overall employment estimates used are developed from multiple surveys it was not feasible for the bureau to provide the relative standard errors for these financial planner employment statistics To estimate the number of households that used financial planners we analyzed 2007 data from the Board of Governors of the Federal Reserversquos Survey of Consumer Finances This survey is conducted every three years to provide detailed information on the finances of US households2 Because the survey is a probability sample based on random selections the sample is only one of a large number of samples that might have been drawn Since each sample could have provided different estimates we express our confidence in the precision of our particular samplersquos results as a 95 percent confidence interval (eg plus or minus 25 percentage points) This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn In this report for this survey all percentage

1As explained by the Bureau of Labor Statistics the Occupational Employment Statistics program produces employment and wage estimates for over 800 occupations These are estimates of the number of people employed in certain occupations and estimates of the wages paid to them Since self-employed persons are not included in the estimates the bureau also considers information from the Current Population Survey a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics to derive its occupation estimates

2Additional information on the sample design and data collected by the Survey of Consumer Finances is available at httpwwwfederalreservegovpubsossoss2abouthtml

Page 37 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

estimates have 95 percent confidence intervals that are within plus or minus 25 percentage points from the estimate itself

To identify how financial planners are regulated and overseen at the federal and state levels we identified and reviewed on the federal level federal laws regulations and guidance applicable to financial planners the activities in which they engage and their marketing materials titles and designations We also reviewed relevant SEC interpretive releases such as IA Rel No 1092 Applicability of the Investment Advisers Act to

Financial Planners Pension Consultants and Other Persons Who

Provide Investment Advisory Services as a Component of Other

Financial Services We also discussed the laws and regulations relevant to financial planners in meetings with staff of the Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) Department of Labor and Internal Revenue Service We also interviewed two legal experts and reviewed a legal compendium on the regulation of financial planners At the state level we interviewed representatives from the North American Securities Administrators Association (NASAA) and the National Association of Insurance Commissioners (NAIC) and reviewed model regulations developed by these agencies In addition we selected five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texasmdashfor a more detailed review We chose these states because they had a large number of registered investment advisers and varying approaches to the regulation of financial planners and represented geographic diversity For each of these states we reviewed selected laws and regulations related to financial planners which included those related to senior-specific designations and insurance transactions and we interviewed staff at each statersquos securities and insurance agencies

To identify what is known about the effectiveness of the regulation of financial planners and what regulatory gaps or overlap may exist we reviewed relevant federal and state laws regulations and guidance In addition we spoke with representatives of the federal and state agencies cited above as well as FINRA and organizations that represent or train financial planners including the Financial Planning Coalition The American College and the CFA Institute organizations that represent the financial services industry including the Financial Services Institute Financial Services Roundtable Securities Industry and Financial Markets Association Investment Advisers Association American Society of Pension amp Professional Actuaries National Association of Insurance and Financial Advisors American Council of Life Insurers Association for Advanced Life Underwriting American Institute of Certified Public Accountants American Bankers Association and organizations

Page 38 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

representing consumer interests including the Consumer Federation of America and AARP We also spoke with selected academic experts knowledgeable about these issues In addition we reviewed relevant studies and other documentary evidence including a 2008 study of the RAND Corporation that was commissioned by SEC ldquoInvestor and Industry Perspectives on Investment Advisers and Broker-Dealersrdquo ldquoResults of Investor Focus Group Interviews About Proposed Brokerage Account Disclosuresrdquo sponsored by SEC results of the FPA Fiduciary Task Force ldquoFinal Report on Financial Planner Standards of Conductrdquo ldquoUS Investors amp The Fiduciary Standard A National Opinion Surveyrdquo sponsored by AARP the Consumer Federation of America the NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors and the 2009 National Financial Capability Study commissioned by FINRA We determined that the reliability of these studies was sufficient for our purposes In addition we reviewed relevant information on the titles and designations used by financial planners including FINRArsquos Web site that provides the required qualifications and other information about the designations used by securities professionals

We also obtained and reviewed available data on complaints and selected enforcement actions related to financial planners from the Federal Trade Commission Better Business Bureau and SEC We collected from the Federal Trade Commission complaint data from its Consumer Sentinel Network database using a keyword search of the term ldquofinancial plannerrdquo for complaints filed from 2005 to 2010 From the Better Business Bureau we collected the number of complaints about the financial planning industry received in 2009 From SEC we collected complaints from the agencyrsquos Investor Response Information System that had been coded as relating to ldquofinancial plannersrdquo from November 2009 to October 2010 We also reviewed data from SECrsquos Tips Complaints and Referrals database that resulted from a keyword search for the terms ldquofinancial plannerrdquo ldquofinancial adviserrdquo ldquofinancial advisorrdquo ldquofinancial consultantrdquo and ldquofinancial counselorrdquo from March 2010 to October 2010 In addition at our request SEC and NASAA provided us anecdotally with examples of enforcement actions related to individuals who held themselves out as financial planners SEC identified 10 formal enforcement actions between August 2009 and August 2010 and NASAA provided us selected examples of state enforcement actions involving financial planners from 1986 to 2010 from 30 states We gathered information on SEC- and state-registered investment advisers from SECrsquos Investment Adviser Registration Database FINRA did not provide us with data on complaints examination results or

Page 39 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

enforcement actions specific to financial planners FINRA officials told us they do not track these data specific to financial planners

To identify alternative approaches for the regulation of financial planners and their advantages and disadvantages we conducted a search for legislative and regulatory proposals related to financial planners which have been made by Members of Congress consumer groups and representatives of the financial planning securities and insurance industries We identified and reviewed position papers studies public comment letters congressional testimonies and other documentary sources that address the advantages and disadvantages of these approaches In addition we solicited views on these approaches from representatives of the wide range of organizations listed above including organizations that represent financial planners financial services companies and consumers as well as state and federal government agencies and associations and selected academic experts

We conducted this performance audit from June 2010 through January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Page 40 GAO-11-235 Consumer Finance

Appendix II Comments from the National

Association of Insurance Commissioners

Appendix II Comments from the National Association of Insurance Commissioners

Page 41 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Appendix III Comments from the North American Securities Administrators Association

Page 42 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 43 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 44 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 45 GAO-11-235 Consumer Finance

Appendix IV

A

GAO Contact and Staff

cknowledgments

Appendix IV GAO Contact and Staff Acknowledgments

Alicia Puente Cackley (202) 512-8678 or cackleyagaogov GAO Contact

In addition to the contact named above Jason Bromberg (Assistant Staff Director) Sonja J Bensen Jessica Bull Emily Chalmers Patrick Dynes

Acknowledgments Ronald Ito Sarah Kaczmarek Marc Molino Linda Rego and Andrew Stavisky made key contributions to this report

(250550) Page 46 GAO-11-235 Consumer Finance

The Government Accountability Office the audit evaluation and GAOrsquos Mission investigative arm of Congress exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people GAO examines the use of public funds evaluates federal programs and policies and provides analyses recommendations and other assistance to help Congress make informed oversight policy and funding decisions GAOrsquos commitment to good government is reflected in its core values of accountability integrity and reliability

The fastest and easiest way to obtain copies of GAO documents at no cost Obtaining Copies of is through GAOrsquos Web site (wwwgaogov) Each weekday afternoon GAO GAO Reports and posts on its Web site newly released reports testimony and

correspondence To have GAO e-mail you a list of newly posted products Testimony go to wwwgaogov and select ldquoE-mail Updatesrdquo

Order by Phone The price of each GAO publication reflects GAOrsquos actual cost of production and distribution and depends on the number of pages in the publication and whether the publication is printed in color or black and white Pricing and ordering information is posted on GAOrsquos Web site httpwwwgaogovorderinghtm

Place orders by calling (202) 512-6000 toll free (866) 801-7077 or TDD (202) 512-2537

Orders may be paid for using American Express Discover Card MasterCard Visa check or money order Call for additional information

ContactTo Report Fraud Web site wwwgaogovfraudnetfraudnethtm Waste and Abuse in E-mail fraudnetgaogov

Federal Programs Automated answering system (800) 424-5454 or (202) 512-7470

Ralph Dawn Managing Director dawnrgaogov (202) 512-4400 Congressional US Government Accountability Office 441 G Street NW Room 7125 Relations Washington DC 20548

Chuck Young Managing Director youngc1gaogov (202) 512-4800 Public Affairs US Government Accountability Office 441 G Street NW Room 7149 Washington DC 20548

Please Print on Recycled Paper

  • GAO Doc d11235pdf
    • Letter
    • Background
    • Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities
      • Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws
      • Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities
      • Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations
        • Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited
          • Existing Regulation Covers Most Financial Planning Services
          • Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products
          • Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public
          • Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners
            • Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed
              • Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners
                • Creation of a Board to Oversee Financial Planners
                • Augmenting Oversight of Investment Advisers with an SRO
                • Extending Coverage of the Fiduciary Standard
                • Clarifying Financial Plannersrsquo Credentials and Standards
                  • Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners
                    • Conclusions
                    • Recommendations
                    • Agency Comments
                      • Appendix I Scope and Methodology
                      • Appendix II Comments from the National Association of Insurance Commissioners
                      • Appendix III Comments from the North American Securities Administrators Association
                      • Appendix IV GAO Contact and Staff Acknowledgments
                        • GAO Contact
                        • Staff Acknowledgments
                        • Obtaining Copies of GAO Reports and Testimony
                          • Order by Phone

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 BGR 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 CHS ltFEFF4f7f75288fd94e9b8bbe5b9a521b5efa7684002000410064006f006200650020005000440046002065876863900275284e8e9ad88d2891cf76845370524d53705237300260a853ef4ee54f7f75280020004100630072006f0062006100740020548c002000410064006f00620065002000520065006100640065007200200035002e003000204ee553ca66f49ad87248672c676562535f00521b5efa768400200050004400460020658768633002gt CHT ltFEFF4f7f752890194e9b8a2d7f6e5efa7acb7684002000410064006f006200650020005000440046002065874ef69069752865bc9ad854c18cea76845370524d5370523786557406300260a853ef4ee54f7f75280020004100630072006f0062006100740020548c002000410064006f00620065002000520065006100640065007200200035002e003000204ee553ca66f49ad87248672c4f86958b555f5df25efa7acb76840020005000440046002065874ef63002gt CZE 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 DAN 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 DEU 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 ESP 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 ETI 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 FRA 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 GRE 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 HEB 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 HRV (Za stvaranje Adobe PDF dokumenata najpogodnijih za visokokvalitetni ispis prije tiskanja koristite ove postavke Stvoreni PDF dokumenti mogu se otvoriti Acrobat i Adobe Reader 50 i kasnijim verzijama) HUN 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 ITA 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 JPN ltFEFF9ad854c18cea306a30d730ea30d730ec30b951fa529b7528002000410064006f0062006500200050004400460020658766f8306e4f5c6210306b4f7f75283057307e305930023053306e8a2d5b9a30674f5c62103055308c305f0020005000440046002030d530a130a430eb306f3001004100630072006f0062006100740020304a30883073002000410064006f00620065002000520065006100640065007200200035002e003000204ee5964d3067958b304f30533068304c3067304d307e305930023053306e8a2d5b9a306b306f30d530a930f330c8306e57cb30818fbc307f304c5fc59808306730593002gt KOR ltFEFFc7740020c124c815c7440020c0acc6a9d558c5ec0020ace0d488c9c80020c2dcd5d80020c778c1c4c5d00020ac00c7a50020c801d569d55c002000410064006f0062006500200050004400460020bb38c11cb97c0020c791c131d569b2c8b2e4002e0020c774b807ac8c0020c791c131b41c00200050004400460020bb38c11cb2940020004100630072006f0062006100740020bc0f002000410064006f00620065002000520065006100640065007200200035002e00300020c774c0c1c5d0c11c0020c5f40020c2180020c788c2b5b2c8b2e4002egt LTH 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 LVI 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 NLD (Gebruik deze instellingen om Adobe PDF-documenten te maken die zijn geoptimaliseerd voor prepress-afdrukken van hoge kwaliteit De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 50 en hoger) NOR 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 POL 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 PTB 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 RUM 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 RUS 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 SKY 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can be opened with Acrobat and Adobe Reader 50 and later) gtgt Namespace [ (Adobe) (Common) (10) ] OtherNamespaces [ ltlt AsReaderSpreads false CropImagesToFrames true ErrorControl WarnAndContinue FlattenerIgnoreSpreadOverrides false IncludeGuidesGrids false IncludeNonPrinting false IncludeSlug false Namespace [ (Adobe) (InDesign) (40) ] OmitPlacedBitmaps false OmitPlacedEPS false OmitPlacedPDF false SimulateOverprint Legacy gtgt ltlt AddBleedMarks false AddColorBars false AddCropMarks false AddPageInfo false AddRegMarks false ConvertColors ConvertToCMYK DestinationProfileName () DestinationProfileSelector DocumentCMYK Downsample16BitImages true FlattenerPreset ltlt PresetSelector MediumResolution gtgt FormElements false GenerateStructure false IncludeBookmarks false IncludeHyperlinks false IncludeInteractive false IncludeLayers false IncludeProfiles false MultimediaHandling UseObjectSettings Namespace [ (Adobe) (CreativeSuite) (20) ] PDFXOutputIntentProfileSelector DocumentCMYK PreserveEditing true UntaggedCMYKHandling LeaveUntagged UntaggedRGBHandling UseDocumentProfile UseDocumentBleed false gtgt ]gtgt setdistillerparamsltlt HWResolution [2400 2400] PageSize [612000 792000]gtgt setpagedevice

                              1. identify B Identify components of a businesss financial statements to
Page 7: Input on the Report to Congress on How To Modernize and Improve

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<777BV>Hh99amp()amp6=amp)+amp6384<)amp4quotampY)<$+44)ZS67>mailto3+2832+7BB+87U77(lt777BVgtHh99amp()amp6=amp)+amp6384lt)amp4ampY)lt$+44)ZS67

+5)46$2=-67F327+80lt295+7+Xlt+287525(7O+88+2+5B7877(lt777B()278975+2D+(37aalM3)+FA(35+-^3+A+20353830)+5=B+5lt2gt7++58389+7(A(39275)+Z9+837gt88P+580)8)++X+73)+5=B+875)lt78)38+B++X(++58lNRebgt+287=7gt(8+80)3=7gtgt+28lt238+(9+)+(8+0lt2(92gt87(+)+2+8 75537++=+73(3785+2h S)++Z9gt75+X779+8)JJgt+283lt+7+8=gtO+3gt7ltlt23lt2+32=7gt8+732(+78lt2(92gt)+2B+95+7(+33A+2lbgt+2358=7gtB+788++P 390)+((397A9+8O+32+8922+75+2()2B+882++()+77A+8=+7-C7)+(3789=+2+X8)+(372()+2+2+735=B+8-67)8(8+0822+)gt+2P+89()(8+37(377B+7(gt75)+(383B3732lt3325A(+23=737R59(2gt77(lt77+2Q78927(+B+78lt23)OA+BA+7)+Ult+2(+A+5V(P35=B+8-)+D+327+gti+7+2[83(+753(582(327+gt82+3)+3lt238+(9+89()(8+8O+(98+)+8+7+7(+8)+gt(7+Xlt+(3()+A+23=89((+889lt238+(937789())B)ltlt+2(2=+2+lt2gt75)+2O95B+82+O++28lt+737=32+8+2398(2=+8-5537gt0gt+282+3+7O+33O72+8(883737)+(372(75)+2+927397583)+(+7)7389+50O98373(3=lt7+5B78)+UB+7V0)3=gt(3779+8+7Blt2359(97O+5- W+(A+gt0)+8+3(+283)+(392(+)+(2=+8lt+2lt+2+5Ogt97+)(lt77+28)239B)7(3775)+(P389lt+2A837753A+28B)389()23B9+lt77+28 Ogt)+1+lt3F32lt32378751+lt3678927(++A+8=38(3789=+283)+2375+A(+8O+(98+)+2+2+73++(A+5=782A+2+=+5+8AO+750)++B8gt8+=+7892+)+(3759((3779+8O+(98+)+(+778)+2=37+gtO(P)393=9()988- (378O+7BP+778+875Ogt46$38+=)+5+397+)(lt2((+87)875982gt-amp382+(+7gt046$889+52+B93782+Z927Bc23P+21++2889lt+2A8+8+83+Z9gt75+X779+8=5+Ogt)+22+B8+2+52+lt2+8+7A+8-82+890=7gt3)++88+)(2+lt2+8+7A+82++A7BO23P+25++280523ltlt7B)+2 8+(92+8(+78+83+X(98A+gt3+275+Xlt2359(83985+346$[889lt+2A832gt829(92+-C73297+gt0)+33lt)3+87F327[8875(P32+B9373UV 77(lt77+280+A+8F327[8(3789=+28)+=+2(gt3)+8+97+)(75A598- 5537gt0F6FD+(37MJKM-a+8)+839)+(922+77+(+88gt3(+7892+758lt+83977+(+882gt5+0)(3789+8U5A(+7)+O987+88378927(+V073)+2(37+7398889+=37B77(lt77+280)()O839+gt7++583O+552+88+5075(395O++5+2+A+3=P+)+2+B9379732=(2388bN8+8-)8O27B8 =+3 amp

1()amp$4)ampamp4$+6lt)amp4ampamp63)X$6)=amp3)4)3Iamp c+32+Y1()ampA$4)ampVamp$+6lt)Z(7O+++(A+gt75+(+7gt2+B9+5 7375+0=9828O+5+Z9+gt5+7+57=7gtD+8- +5+2((395(2++9732=5+737832U83(37V0U7+B337V0U278(37V7505537gt0U7+(+88gt3(+7892+Q2+B8237V3275A598)353737+753 U8+V78927(+8B+783)+7892+20O92)+207+753lt23A5+5A(+327+B3+5++75Q32389lt+2A8+75ltlt23A+)+(3783(+78+578927(+B+7 )=99(+7O+(98+37+X87B2+378)lt75+2+7(lt(gt-IWX=lt+87(95+83(PO23P+28077(lt77+2807A+8=+75A8+2875FG[8L7+X(983723= 2+B8237395O+gt+280)3=gt5A8+378lt+(83(372(75)3 lt+28378)395)35+388+8- 6758(98837ltlt+25+5D+lt+=O+2Mb0JKKe0)+F327G2359(+2E(+787B S32P7Bi239lt2+(3==+75+55+77BU83(37V7)+337B=77+2 A5amp+PC+252lt20+$0(0+2(0QRS(307+)02$+90102 320amp527+102)02$+amp+)-2$-+1062$)02$+T$-12+9 320amp+92amp+25UQESlt1amp1$0(0+$(30lt110+0++25050660amp6 )24+9320amp52+320amp5920amp)0+T$+020$+)0+55)-2amp1$++ +$-2+amp0)23-amp8 )8+32+57)+F327+B892+- F327832+(+7gt+4)3amp$amp64=)3amp3+7(D+(37MJKM-aR$+(+88gt3E(+78+ gt10655lt+amp40$20+00()62(5amp0+$-20-+302HCM+$-2+amp0H30 A0amp+RVWR970amp-$01020320amp520503$5amp+9+0+920660amp+ 10$506+$-2+amp0P XY)5++$93$amp-$$+$92+02)20+$69+36602+6)++$2 20amp((0+3+$+9+$-2+amp0amp4020$90)$-20$95($9)20(-($920$9 303-amp750$9)(0+)5+$92+102+$-2+amp0amp+2amp92)0+5+$-2+amp0 amp+2amp902($8 XZ0amp((0+3++3[234$+92-2+))5amp+$[)0+5))5amp+$[ )5amp15302$))5amp+$62+$-2+amp0amp40209)0+5))5amp+$62+$-2+amp0 amp402092)5amp15302$7-)2amp-52+$-2+amp0)5amp0$2+$-20lt1 )2amp-52amp()+0$2+$-202$8 X+3+6+$-2+amp0amp4020$8

D9()7B9B+395O+97+Z9A3(75(395O+7(32lt32+5734+5+2(-6 lt+7+8+2+8+739B)039532(+)38+lt23A57B+B5A(+7)+O987+883 78927(+32++389O=3D+32+5+2=75+5(+787B0+X=73775 (37797B+59(37)78(+27O+875255+A+3lt+5Ogt)+D+324+5+2+B932- )+2+87553737B37Blt23O+=)78927(+=2P+7BB+7(+8(+78+57 =9lt+8+83+27B29875+8+lt777B8+2A(+80I298amp8L)()(3789+8 )+979lt2((+30327)++2A+0)+9798)27B3+B++8)737Rgt+28-67+28+298=80=7gt3)+=3(+57$+A5)8=+07583=+297 Ogt32B73782+5gt7+532(+7892+573)+28+83lt+7gt83(78927(+B+78 75+7(392B+)+=398+O(PR53328+7B+()7Z9+87325+23B78+732(+78 298)+B)+27B8B7(777(732=37)+2O+98+538+ 779+832+78927(+lt2359(8-)8lt2((+82=lt775(3779+85+8lt+)+ 72359(3732+B937878+889()8F327-+5+2()8+287(37875lt+7+832A3378(3952+59(+32+=7+)+8+lt2((+8- 9)lt4$amp)=3)+)6)amp=64-amp3)4-64I )+2+8)395O+O23575(3=lt2+)+78A+lt23)O37378lt+(398+5+275+8+lt777B5+8B73780))+72359(3732+B93788=23)38+7F327-87F3270D+1+lt2=+7[83678927(+395lt2+lt2+83ltlt23A+5 5+8B7378753955+A+3ltA+7Blt23(+8837(95++X=7373+59(37 ++=+7802+A+7B)+)+2)++X=737lt23(+888lt23(32+5323lt+7O33P0)+)+2D+ltlt23A+5(37797B+59(3782+Z92+53=77322+7+7gt89()5+8B7370)+)+27gt5A(+BA+78537+837)+(lt(gt359(2gt075) lt3(+875lt23(+592+82+7lt(+3((+lt(3=lt7803258(lt7+)35+2837gt89()(+2(37875)+77+(+882gtlt23(+592+8322+A3(37752+lt327B358(lt72gtlt23(+592+83)+9)32+8-)8=75+(395O+=lt38+5)+5+2- C46lt46=ampD=6)+ampampC46lt46=ampD=64-Iamp 678927(+B+782+lt2+A+7+523=97B8lt+(398+5+275+8+lt777B5+8B73787325+23O2(+)+ltlt+27(+3+Xlt+28+08P+gt)+gt9273 )+37gt3)+2+AO+3)+=0)377(lt77+2-75)803(3928+0O27B8=+9(2(+3=gtlt2+A398(3==+7837)+7+(+88gt3()7B+7)+C732=67A+8=+75A8+28(-ID9lt2L)+2+32+6lt23lt38+))++2=77(lt77+27577(lt777BO+2+82(+5755+7+5975+2+5+203O+7(32lt32+5738+ 75)7gtlt+2837)3)35839877(lt77+2323+2877(lt777B8+2A(+8I833O+5+7+5LO+2+Z92+532+B8+2877A+8=+75A8+275lt23A5+ 89()5A(+859(2gt22+8lt+(A+3)+)+2)+gt833+27gt5A(+83)+A9+

37A+87B72+B9+58+(92+8-7+X+78A+895gt8lt+232=+52+5gtOgt)+i3A+27=+7((397Ogt(+37)+3lt(377(lt77+287577(lt777B I2+lt32()+5L750)+65373B2++))+2(37(983780)+gt=P+A+2gt89+3O8+2A3780)+7(+)+7(983732(37+X9lt92lt38+8087()=+73)82+lt32- 6O+)ltltgt3+Xlt75377gt3)+8+3lt(875lt23A5+5537732=3775 2+R++X=lt+8757+(53+89lt372+Z9+8-

+8lt+(9gtD9O=+50

gt32o883(+8 aJN-MdN-JJMd

$B+cgt320F4GH

Illegal Practices OfFee-Only Financial PlannersIn The Business Of Insurance

(Problems amp Solutions)

Prepared ByNigel Brian Taylor CFPreg

Santa Monica CA(Copyright copy2002 - 2009 Nigel Brian Taylor CFPreg All Rights Reserved)

Tel 310 260 1126 Website wwwiamafiduciarycom

Illegal Activities in the Business Of Insurance By Fee-Only Financial Planners (Problems And Solutions)

Prepared by Nigel Brian Taylor CFPreg

Santa Monica CA CA Insurance License Nr 0716446

INTRODUCTION

Overwhelming media focus on ldquomethods of compensationrdquo for financial services in the recent past rather than competence and regulatory compliance has fueled an ever increasing consumer-driven demand for FEE-ONLY advice in insurance planning Media and marketing hype has influenced the consumerrsquos perception and led many to conclude that ldquofee-only plannersrdquo are the only planners capable of giving objective unbiased advice relating to insurance matters because they receive no compensation from third parties are not affiliated with represent or take compensation from insurers and therefore have no conflicts of interest and loyalty that could impair their ability to provide objective and unbiased information Unfortunately however many fee-only financial planners in California and 38 other States with similar regulations are operating outside the law in order to provide this ldquoobjective and untaintedrdquo advice This discussion will highlight these illegal insurance activities and provide potential solutions (initially for California although the suggested solutions could be used as a model for other States) to increase compliance with current California insurance law It will also discuss developing trends in the business of offering insurance advice in California particularly in relation with the provision of insurance advice as a component of a ldquoComprehensive Financial Planrdquo All Statutes herein are California statutes unless otherwise indicated

INSURANCE LICENSING

The three most widely held insurance licenses issued to individuals who provide general advice to families and consumers on general insurance matters in California are The Life Agent License(LX) the Fire and Casualty Broker-Agent (FX) and to a negligible degree the Life and Disability Analyst License(LA) A full list of other licenses is available at wwwinsurancecagov

Life Agent (LX)

The licensing requirements for a Life Agent license are set forth in Chapter 5 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit I A Life Agent (LX) is defined as a person authorized by and on behalf of a life or disability or life and disability insurer to transact life disability or life and disability insurance1

Generally a life agent advises consumers as to the benefits and disadvantages of life health disability and long term care insurance etc and transact business on behalf of one or more insurance companies offering products to consumers A Life Agent must be compensated

Confidential Page 1 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

by the insurer on the sale of product in the form of commissions and cannot accept fees for service from the consumer There are approximately 154664 resident and non-resident LX agents serving Californians2

Fire amp Casualty Broker-Agent (FX)

A fire and casualty licensee is a person authorized to act as an insurance agent broker or solicitor and a fire and casualty broker-agent license is a license so to act The FX licenseersquos authority to act is determined by which documents are initially submitted

bull A $10000 Bond of Insurance Broker form 417-5 authorizes the licensee to act as an insurance broker An insurance broker is a person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurer

bull An Action Notice of Appointment form 447-54 authorizes the licensee to act as an insurance agent An insurance agent is a person authorized by and on behalf of an insurer to transact all classes of insurance except life insurance

bull An Action Notice of Solicitor form 417-31 authorizes the licensee to act as an insurance solicitor An insurance solicitor is a natural person employed to aid an insurance agent or insurance broker in transacting insurance other than life

There are approximately 88300 resident and non-resident FX agents serving Californians3

Life amp Disability Analyst (LA)

The licensing requirements for a Life and Disability Analyst license are set forth in Chapter 8 Part II Division 1 of the Insurance Code and are attached hereto as Exhibit II A Life and Disability Insurance Analyst is defined as a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto4

Generally a LA is trained to a significantly higher level than a LX and can advise a consumer not only as to the advantages and disadvantages of all forms of insurance but can also provide competent unbiased comparative analysis of various policies for a fee as well as interpret the rights of consumers under any insurance contract The LA must among other things

bull Have been licensed as a Life Agent (LX) for a period of at least 5 years preceding a LA application5 and

bull Must complete a comprehensive course of education covering significantly more topics than the LX and

bull Pass a rigorous examination before obtaining the LA license

Confidential Page 2 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

It should be noted that the LA license currently authorizes a person to provide advice for a fee on all insurance related matters but does not currently require any training or examination in Long-Term Care insurance or require a minimum number of hours of continuing education credit in each licensing period In the past ten years the number of CA Life And Disability Analysts has remained stable at approximately 44 (forty four) for the entire Statersquos population6

ldquoFINANCIAL PLANNERSrdquo OFFERING INSURANCE ADVICE

There are over 34000 (thirty four thousand) Registered Investment Advisors and Investment Advisor Representatives in California7 An Investment Advisor in California is authorized under sect25009(b) California Corporations Code8 to utilize the title of ldquofinancial plannerrdquo (without any statutory requirement to substantiate his her competence to perform the tasks of a financial planner) and perform comprehensive financial planning services on a fee-only basis The examination and qualification requirements for the Series 65 (Uniform Investment Adviser Law Examination) are attached hereto as Exhibit III NO knowledge of insurance products or the business of insurance is required in order to register as an Investment Advisor ldquoFinancial Planningrdquo and ldquoFinancial Plannersrdquo are having an ever increasing and significant impact on the provision of insurance services in California It is important that State Agencies and boards such as the CA Dept of Insurance (CDI) Agent and Broker Advisory Committee (ABAC) provide input to regulators and legislators alike regarding allied ldquoprofessionsrdquo impacting the business of insurance to ensure that consumers are properly protected A copy of this discussion will therefore be forwarded to both the CDI and the ABAC for their consideration

Many fee-only planners offer ldquocomprehensiverdquo financial planning services that by definition include risk management analysis and recommendations as part of the planning process These recommendations include calculations regarding the amounts and types of life insurance recommendations with regard to the benefits and disadvantages of various individual and or group health insurance plans disability and long term care plans etc In some cases advice is provided on a fee basis regarding homeowners auto and other types of property casualty and general liability coverage

To avoid real and ldquoperceivedrdquo conflicts of interest many fee-only financial planners choose not to maintain affiliations or representation agreements with any insurer and therefore are unable to license themselves as LXrsquos or FXrsquos Some let their LX or FX licenses lapse when they transition to fee-only planning In both these cases California law is clear Any person accepting fees for insurance related matters from any third party other than an insurer unless otherwise exempt must be licensed as a LA9 In an attempt to circumvent the law other planners obtain a LX and or FX license to create the appearance of legal compliance but never have any intention of actually ldquotransacting businessrdquo or utilizing the license for the purpose for which it was originally issued or intended This practice is prohibited under CA law10 because it is the fee-only plannerrsquos true intention to charge the consumer for

Confidential Page 3 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance advice rather than to be compensated by an ldquoinsurerrdquo as CA Insurance Code Sections 32 amp 1622 (supra) require

Many fee-only planners quote an often-abused section of Californias Insurance code Section 1831(e) which provides a limited exemption from insurance licensing for Registered Investment Advisers to justify their unlawful behavior The following is an excerpt from a letter originally addressed to Errold Moody CFPtrade (A California Life amp Disability Analyst who has concerned himself with the illegal activities of fee-only financial planners in insurance matters for over 10 years in California) on July 27 1995 by Patricia Staggs the then Assistant General Counsel and Chief Compliance Bureau of the Legal Division Compliance Bureau of the California Department of Insurance who wrote regarding the Investment Adviser exemption

That exemption appears at Insurance Code Section 1831(e) and provides an exemption to the chapter regarding life and disability analysts for an investment adviser as defined in section 25009 of the Corporations Code when acting in that capacity (Emphasis added) Section 25009 of the Corporations Code provides as follows

Investment adviser means any 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 regular business publishes analyzes or reports concerning securities Investment Adviser does not include (a) a bank trust company or savings and loan association (b) an attorney law accountant engineer or teacher whose performance of these services is solely incidental to the practice of his profession (c) a broker-dealer whose performance of the services is solely incidental to the conduct of his business as a broker-dealer and who receives no special compensation for them or (d) a publisher of any bona fide newspaper news magazine or business or financial publication of general regular and paid circulation and the agents and servants thereof but this clause (d) does not exclude any person who engages in any other activity which would constitute him as an investment adviser within meaning of this section

A life and disability insurance analyst is defined in insurance code 325 as follows

Life and disability insurance analyst means a person who for a fee or compensation paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as a beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The Departments view to that exemption set forth in insurance code 1831(e) is that an investment adviser need not submit to regulation by the Department of Insurance so long as the activities engaged in by the investment adviser fall within the defined activities of an investment advisor as set forth in Corporations Code section 25009 It is noteworthy that the definition of an investment adviser contains no reference to insurance related activities

Confidential Page 4 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Emphasis Added) Therefore any activities included within the definition of life and disability analyst such as advising as the life insurance products are clearly outside the capacity of an investment adviser and would subject the person to the provisions of law relating to life and disability insurance analysts

Very Truly Yours Patricia Staggs

Since as early as 1995 the CDI has taken the documented position that the Investment Advisor exemption applies ONLY when a Registered Investment Advisor acts ldquoin that capacityrdquo and as defined in section 25009 of the Corporations code It is the authorrsquos conclusion based on conversations with CDI staff counsel Jody Miller therefore that the only time a Registered Investment Advisor in the State of California may lawfully provide ldquoinsurancerdquo related advice to a consumer for a fee would be for example if he were advising a client as to the allocation of sub accounts containing regulated securities within an already existing variable life insurance or variable annuity policy

This exemption does NOT however permit a Registered Investment Advisor to discuss the merits or disadvantages of any type of insurance including Life Health Disability Long Term Care Property Casualty Homeowners General Liability Auto insurance etc that do not contain any elements related to the provision of investment advisory services Under current law then any Registered Investment Advisor who provides such advice and is compensated directly by the consumer without having first obtained a LA license is guilty of a misdemeanor11

The position of the CDI was illuminated in a letter addressed to representatives of the financial services sector who attended a series of meetings held with the Dept of Insurance in late 1997 In as letter dated February 3 1998 Assistant Ombudsman and Legislative Liaison Jeffrey Kenny wrote

February 3 1998

On July 30 1997 a discussion concerning the life and disability insurance analyst license was held between the California Department of Insurance (CDI) and members of the financial planning industry As you participated in this dialog I am writing to communicate CDIs policy on this matter

The focal point for this issue is consumer protection not the interests of the individual factions With all parties based in customer service it is sad that this detail has been lost in much of the discussion As defined by insurance code Section 325 a life and disability insurance analyst is

a person who for a fee or compensation of any kind paid by or derived from any person or source other than the insurer advises purports to advise or offers to advise any person

Confidential Page 5 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insured under named as beneficiary of or have any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

The fact that there are only 46 life and disability analyst in California is not a valid argument for repealing this code In fact the limited number of licensees and population in noncompliance begs for increased education and enforcement While the easy solution for those in noncompliance may be to repeal this law consumers who pay for fee advise on insurance matters deserve an analyst educated in insurance per CDI standards The current licensing requirements ensure that relationship Any legislative effort to repeal this law will likely be opposed on the basis that such action is harmful to consumers by consumer groups insurers agents and brokers and the California Department of Insurance

At the July 30 1997 meeting representatives from the financial planning industry raised two additional suggestions concerning CDIs examination requirement The first seeks to allow issuance of a Life and Disability Analyst license to Certified Financial Planners and Certified Public Accountants following the successful completion of their own professional examinations Again this is an idea that requires legislation and will certainly face opposition CDIs position remains at only those individuals who pass CDIs exam are to be issued a life and disability analyst license CDI is the agency charged with enforcing this license and will remain via its examination and related or regulatory functions the authorizing agency for this license

The final suggestion request a waiver of the requirement than an examinee must have five (5) years experience as a life licensee or employment experience under said licensee to sit for CDIs examination Again this is an idea that requires legislation CDI will reserve judgment until the full breadth of this proposal has been introduced to the state legislature

Despite some groups interest in changing current law there is an existing law which is and has always been quite clear While a financial planner may be illegally engaging in insurance analyst activities and may not be aware of their violation it is my hope that this the explanation of policy will provide them with the impetus to come into compliance or cease the illegal activity immediately Per insurance code Section 1844 any person who acts offers to acts assumes to act as a life and disability insurance analyst when not licensed by the commissioner per this article is guilty of a misdemeanor Consistent with current practice information obtained on individuals in noncompliance will be aggressively pursued

Sincerely

Jeffrey Kenny Assistant Ombudsman and Legislative Liaison

However successful criminal prosecutions for a violation of CIC sect1844 are apparently rare because the CDI must turn these matters over to local district attorneyrsquos offices Statewide Their failure to enforce the law is probably attributable to a lack of funding to prosecute

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

non-violent misdemeanor counts of this nature where no victim can be produced Unfortunately and to the detriment of Californiarsquos consumers this lack of enforcement has had the effect of creating a Cavalier attitude towards compliance with State law that essentially seems to tolerate this unlawful activity permitting fee-only planners to operate almost with impunity

There are a number of fee-only financial planners who claim in their firms disclosure form that they have no affiliations or representation agreements with any insurance carriers and that they do not represent or offer for sale any kind of insurance products However in reality they maintain LX or FX licenses and have contracts with life insurance carriers who do not require a minimum annual production level without any intention of ldquotransactingrdquo on behalf of an insurer (a violation of CA Insurance code section 1668 sub (c) amp (g) supra) while making no disclosures anywhere on their disclosure statements or advertising materials as to their active insurance licenses which is in and of itself a violation of Section 17255 of the Insurance Code12

Other fee-only financial planners claim that any insurance advice given by them to their clients as part of a comprehensive financial plan is given ldquofree of chargerdquo They claim that a fee is charged for all the other elements (investment tax retirement amp estate planning) but not for the risk management portion of the plan They point to the fact that they never ldquoact in any of the capacities defined in Article 1 (commencing with Section 1621)rdquo because they do not appoint themselves with or represent an insurance company or any particular insurance product and do not actually ldquotransactrdquo insurance business (Thereby avoiding in their minds a licensing requirement under CIC Sections 32 amp 1622) Furthermore they claim they do not charge the consumer a fee for the advice they provide regardless of the complexity of that advice (Charging a fee would trigger a licensing requirement under section 325 Insurance Code) The result if the courts upheld this logic would be that the Dept of Insurance would lose all control and authority for the provision of insurance advice to consumers by fee-only financial planners in California to the California Dept of Corporations Worse still the only recourse damaged consumers would then have against fee-only financial planners in the business of insurance would be the California Dept of Corporations a state agency woefully equipped to enforce state insurance laws

One problem that requires statutory revision is the lack of a suitable definition for ldquotransactingrdquo in the business of insurance While the Dept of Insurance has considerable leeway in determining what constitutes ldquotransactingrdquo the code itself provides little or no useful information or guidance for fee-only planners who often feel based on the wording of the current definition that they acting inside the law when performing certain services Transaction is defined under sect35 of the Insurance code as

35 Transact as applied to insurance includes any of the following a) Solicitation b) Negotiations preliminary to execution c) Execution of a contract of insurance d) Transaction of matters subsequent to execution of the contract and arising out of it

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

While the requirements under sub(s) b c amp d is self-explanatory ldquoSolicitationrdquo (sub A) Is not defined and the legislature has to date been loathe to define it leaving the interpretation to the CDI and creating a ldquofact at issuerdquo that requires administrative or judicial interpretation and determination in cases where fee-only planners dispute their activities as ldquotransactingrdquo This is not the first time the issue of defining ldquosolicitationrdquo has been brought to the attention of the Department of Insurance In a discussion paper dated September 25 1998 the Producer Licensing Working Group recommended defining ldquosolicitationrdquo in the following manner

Solicitation Any oral or written statement or image (1) made by any person either directly or by another person acting pursuant to the first persons authorization direction or control (2) which statement is made with the intention or likely effect of provoking directly or indirectly a recipients interest in potentially purchasing an insurance product

This author believes a clarification of what constitutes Solicitation under the Insurance Code will assist Registered Investment Advisors fee-only financial planners and others in assessing which license if any would be appropriate given their particular facts and circumstances If the legislature decides not to act the Dept of Insurance should issue authoritative guidelines or advisory opinions similar to those of other regulatory agencies such the SEC NASD and IRS in an effort to bolster compliance This is extremely important given recent trends and developments in the delivery methods and current practices of individuals providing insurance services in California

The issue of ldquotransactingrdquo and what constitutes ldquosolicitationrdquo aside and with regard to the practice of giving advice in insurance for free CIC Section 1631 does not mention compensation as a criteria for triggering a licensing requirement13 Even setting aside the current CDI determination of what constitutes ldquotransactingrdquo which is ambiguous Californiarsquos Insurance code for purposes of interpretation is also governed by Section 1858 of the California code of Civil Procedure (CCCP)14 There is voluminous precedent under CCCP section 1858 supporting the authorrsquos opinion that the interpretation of a statute that produces an absurd or anomalous result will not prevail when used as a defense In interpreting a statute Supreme Court avoids any construction that would produce absurd consequences15 In construing statute state Supreme Court will not parse each literal phrase of statute if doing so contravenes obvious underlying intent or leads to absurd or anomalous result16

Since it is already well settled in law that ldquoThe business of Insurance is a business affected with a public interestrdquo17 this author believes the circumvention of State Insurance licensing laws by fee-only financial planners in any manner irrespective of compensation or level of competence presents a clear and present danger to Californiarsquos consumers and is contrary to the public interest The intent and desire of the Legislature to require State licensure for insurance professionals is clearly set forth in CA Insurance Code Sections 1631 1633 amp 1633518 and is unambiguous in the authorrsquos opinion

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

UNLICENSED INSURANCE ADVICE CURRENT REMEDIES

CA Insurance Code Section 1668 applies in the case of fee only planners who maintain a license but do not intend to actively transact business as LXrsquos The sole remedy for such conduct is that under this section ldquo the commissioner may deny an application for any license issued pursuant to this chapter if

helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this staterdquo

CA Insurance Code Section 1668 is problematic in that it is difficult if not impossible to enforce unless insurers are ldquorequiredrdquo to terminate all LXrsquos amp FXrsquos not actively ldquotransactingrdquo insurance business and unless the Dept of Insurance requires proof be provided to the department by the insurer that a LX or FX is in fact actively transacting business The code could require insurers to review commissions paid to appointed agents on an annual basis and terminate the appointments of all agents who do not ldquotransactrdquo over a period of 12 months unless valid cause can be shown Exceptions could be made for salaried employee of insurers and persons engaged in the regulation of insurance business in whatever form

CA Insurance Code Section 1844 is applicable to fee only planners who provide insurance advice for a fee or ldquofor freerdquo and provides that any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

Again this is difficult if not impossible to enforce because the Dept of Insurance must rely on local district attorneyrsquos offices most of which have no funds to prosecute non-violent misdemeanor counts particularly when most DArsquos offices consider this a matter for the Insurance Commissioner in the first place Therefore rather than seek prosecution under this section the Dept of Insurance should actively enforce State law against violators under the recently introduced CIC section 129218 (discussed below) It makes no sense for the Dept to refer these cases to local district attorneyrsquos offices if their decision to prosecute under the Statersquos criminal statutes is based on ldquofinancial considerationsrdquo rather than the evidence of malfeasance

There are two other remedies available to the Dept of Insurance The first is California Insurance Code (CIC) 790 et Seq The Unfair and Deceptive Trade Practices Act The second is the aforementioned and recently introduced CIC Section 129218

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

Prosecution under CIC 790 et Seq does not require compensation because under section 79001 the Insurance Code applies to all persons engaged in the ldquobusinessrdquo of insurance19

Under section 79004 the Dept of Insurance is authorized to investigate any person engaged in the business of Insurance in California20 Transacting in the business of insurance without a valid license with or without compensation is clearly an unfair and deceptive competitive practice because violators seek to avoid and evade ascertainable standards in training examination licensing and continuing education required by the State for agents and brokers appointed by insurers who are performing essentially the same tasks while at the same time claiming to take the ldquoethical high groundrdquo in terms of the advice given State licensing places the agent at a competitive disadvantage because a licensed agent can only accept compensation from an insurer unless that agent is also a Life and disability Analyst Section 790035 provides substantial administrative penalties including fines and restraining orders for persons violating this Act21 The provision of unlicensed insurance advice whether for a fee or ldquofree of chargerdquo by fee-only planners is detrimental to the consumers of California because there is no ascertainable standard of education or requirement to keep current present unless such planners are subjected to the licensing requirements of the CA Dept of Insurance

The second remedy available is authorized under CIC Section 12921822 which provides for greater administrative remedies against those individuals who transact the business of insurance without proper licensure A CA Life amp Disability analyst whose business has been severely impacted filed complaints in early 2002 against prominent California fee-only planners who are flagrantly violating the law To date the CDI has taken no action against these planners and it remains unclear whether these new powers will be utilized on a proactive basis to seek out fee-only financial planners offering insurance advice or whether the Dept of Insurance will remain reactive to ldquoconsumerrdquo complaint only in the enforcement of Californiarsquos insurance laws

On a final note the CDI is considering proposed regulations pursuant to the authority granted to the Insurance Commissioner under the provisions of in SEC 8 of Assembly Bill 393 Chapter 321 Statutes of 2000 that among other things address the necessity for licensing These new regulations include a proposed section 21923

Draft

Section 21923 - Necessity of License

The following activities are not exempt from licensure under CIC Insurance Code Section 1631 because they are directly related to solicitation negotiation or effecting the sale of insurance

(a) Explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

limits premiums rates deductibles payment plans or any other insurance contract or potential insurance contract terms

(b) Recommending andor advising or urging applicantspotential applicantspolicyholders applicants for insurance coverage potential applicants for insurance coverage or policyholders to buy particular insurance policies or to insure with particular companies or insurers

(c) Binding of insurance coverages

Note Authority cited Section 8 of AB 393 Chapter 321 States of 2000 Reference Insurance Code Section 1631 of the Insurance Code

Should section 21923 be enacted any perceived ambiguities associated with the giving of ldquounlawfulrdquo advice by fee-only planners would be eliminated While the author applauds all these efforts to increase compliance through enforcement and regulation the consumerrsquos total ignorance of California Insurance law and the reactive nature of insurance enforcement will bring few if any real-world changes for consumers There have to date been few complaints regarding the illegal practices of fee-only financial planners by consumers because a) a licensed life insurance agent is always eventually involved in the ldquosalerdquo of a specific product to the consumer and b) the client has already received a written affirmation from the fee-only planner that he is acting in a fiduciary capacity as their trusted advisor The client therefore places greater value on the fee advice given by a fee-only planner than the advice of a licensed life agent ldquosellingrdquo the same product the fee-only planner recommends simply because the licensed individual is an agent of the insurer

Of course the consumer is paying twice for the same advice once in the form of fees and a second time in the form of commissions to a licensed ldquoagentrdquo Providing there is no relationship between the fee-only planner and the insurance agent and no referral fee is payable by the agent to the planner this fact is never disclosed to the client It is the authorrsquos personal experience that many fee-only financial planners refer these clients to out-of-state insurance agencies who have declared themselves willing to provide substantial discounts from their commissions While the author views these discounts are ldquoonly fair in light of the circumstancesrdquo it does not excuse the illegal conduct and the fact that the client is not receiving any favorable contractual benefits on their insurance policy such as shorter exclusion periods shorter surrender penalties lower mortality and expense fees or lower percentage monetary penalties for early termination of the product

The already established fiduciary relationship between a fee-only financial planner and his her client creates a bond of trust that implies by its very nature that the planner is fully complying with all federal and state laws In fact many fee-only planners subscribe to written codes of ethics established by credentialing bodies and professional membership organizations such as the CFP Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) which demand their members comply with all federal and state licensing laws However the aforementioned

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

professional membership and regulatory bodies are conflicted in their response to the problem of illegal activity because both organizations as mentioned previously on page 5 amp 6 of this report are lobbying for a change in the law that will allow such fee-only planners particularly those holding the CFPreg Certificate to qualify for a waiver from licensing These professional membership and regulatory bodies refuse to investigate or discipline such planners unless the State first prosecutes them The State of California for reasons stated elsewhere in this report have been loathe to take action against these fee-only planners despite repeated complaint filings by life and disability analysts over the most recent ten year period whose income is being severely impacted by such illegal activities

From a consumerrsquos perspective there would be absolutely no reason to question the integrity of their fee-only financial planner In fact organizations such as the National Association of Personal Financial Advisors (NAPFA) have marketed their fee-only planner members as the ldquoonlyrdquo planners capable of providing clear untainted unbiased advice on all financial matters including insurance and have disseminated brochures since the 1980rsquos claiming that commissioned based advice is somehow tainted and a totally flawed delivery method that could harm consumers NAPFArsquos position has been supported and publicized to a great extent by the media including magazines such as Bloomberg and Money to newspapers such as the Los Angeles Times which requires ldquofee-onlyrdquo as a pre-requisite ldquomethod of compensationrdquo for any planner participating in itrsquos popular ldquoMoney Makeoverrdquo series of consumer assistance feature articles It has also been supported by non-profit organizations such as the Consumer Federation of America Negative consumer perceptions of insurance licensed individuals has to a great extent been unfairly tainted by such media hype and marketing tactics

The recent introduction of section 12921822 coupled with an acceptance of proposed section 21923 would absolutely provide the CDI with additional needed powers to regulate the business of insurance It will not in the authorrsquos opinion however increase compliance in any meaningful manner Continued consumer ignorance of State insurance laws and reactive rather than pro-active enforcement by the CDI will almost certainly maintain the current status quo

This author applauds the sentiment of the recently introduced statute but believes it has no real-world practical value This license requirement will continue to be ignored by most fee-only planners because of the incredible burden it places on them in terms of initial compliance and qualification In addition the statute to date remains un-enforced because the CDI lacks the manpower and funding within the civil enforcement division to even begin to attack this widespread problem Simply stated this recently introduced legislation demands aggressive investigation large fines and numerous prosecutions to achieve even partial compliance The CA Department of Insurance has instigated a consumer-complaint driven ldquoreactiverdquo role rather than a consumer-protective ldquoproactiverdquo enforcement campaign even after the introduction of CIC section 129218

One major reason for continued non-compliance is the requirement that applicants be registered as LX agents for five years preceding their examination and licensure as LArsquos

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

(Fee-only planners view this as being forced to move back into a house they have already sold) Secondary reasons include fee-only planners view the LA license as an over-qualification to perform the tasks they desire to perform there are no schools or colleges currently teaching the course work required to become LArsquos because a total lack of enforcement by the CDI of this statute has created a total lack of interest on the part of fee-only planners Also there are no teaching materials or publications available for purchase to prepare for the examination These problems and potential solutions are discussed in more detail in the section below

Finally it is fascinating and significant to note that while many fee-only planners firmly believe State and SEC investment adviser regulations are outdated irrelevant and sorely in need of a complete revision and overhaul if they permit planners to ldquoperform comprehensive financial planningrdquo few if any fee-only financial planners actually violate the Investment advisory statutes One major reason for this almost total compliance is because of the rigorous enforcement efforts of the Dept of Corporations the NASD and the SEC in regards to the Investment Adviser Act of 1940 and the severe penalties including imprisonment it imposes for offenders

In light of the foregoing this author has concluded that the only way consumers will be substantially protected from unlicensed insurance activities is if (a) meaningful reforms are enacted that make statutory compliance desirable and (b) cooperation is sought with other State agencies such as the Dept of Corporations and private professional regulatory organizations such as the CFP Board of Standards (discussed later) who regulate activities in related financial service categories to facilitate the sharing of information crucial in establishing which activities fee-only financial planners are engaging in

RECOGNIZING NEW DELIVERY METHODS IN THE BUSINESS OF INSURANCE

It is the authorrsquos belief that licensing compliance in the business of insurance will only become a reality when States recognize the recent rapid developments in the ldquomethods of deliveryrdquo of insurance advice nationwide particularly those associated with the emerging profession of financial planning More and more consumers have recognized the advantages of employing one trusted advisor for all their financial affairs and view insurance advice as part of an overall financial plan Californiarsquos consumers are cognizant that conflicts of interest exist in insurance planning because LX amp FX agents are only compensated by insurers and represent the insurerrsquos interests to the client not the clientrsquos interests to the insurer Such agency relationships impact the fee-only plannerrsquos ability to honor hisher fiduciary obligation to act in the clientrsquos best interests at all times

Fee-only planners desire to perform the tasks and functions of an LX amp FX licensee Few if any desire to perform the more complex tasks and analysis normally expected of a Life and Disability Analyst Fee-only planners are committed to eliminating the conflicts of interests associated with representing an insurer and many consumers in California desire to employ one fee-only planner to handle all their affairs including the insurance planning portion of their financial plan rather than multiple professionals The net effect of this is that many

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

consumers seek out fee-only planners to reduce conflicts while ostensibly obtaining objective and untainted advice Unfortunately they are instead often given incompetent advice by unlicensed individuals In order then to benefit and protect consumers substantial but beneficial reform is necessary

Fee-only planners with established financial planning credentials equate obtaining the LA license with ldquomoving back into a house they are trying to sellrdquo They feel competent and qualified to assist consumers in insurance planning and may have held insurance licenses for years prior to allowing them to lapse State law however demands they be licensed for five years preceding their application for licensing as Analysts and during that time they would need to ldquotransactrdquo insurance as a licensed LX agent something they do not feel they can do

As the author sees it the State has two choices in this matter It can either crack down on fee-only planners and others offering unlicensed insurance advice for a fee (hardly feasible based on lack of funding staffing or voluminous consumer complaints) or seek ways to legalize regulate and supervise these plannerrsquos activities Currently financial planners are regulated at the state level under Section 25009(b) of Californiarsquos Corporations Code Which states

Section 25009 (b) (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part of another 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 publishes analyses or reports concerning securitieshelliphelliphelliphelliphelliphelliphelliprdquo

While consumers nationwide have embraced the concept of comprehensive financial planning California along with most other States has been slow to recognize that financial planning has developed far beyond the simple giving of ldquoinvestmentrdquo advice Financial planners in California are still regulated supervised and audited by the Dept of Corporations which while skilled in terms of overseeing regulated securities transactions is woefully under equipped to supervise the activities of a planner engaging in insurance investment tax retirement estate and asset protection planning The Series 65 Investment Advisor Examination is the only legal requirement for those who desire to use the term ldquofinancial plannerrdquo in California However as the Series 65 training and education requirements23 illustrate the current State educational requirements for ldquofinancial plannersrdquo are far removed from the level of competency actually required to practice ldquofinancial planningrdquo

RECOGNITION OF ldquoFINANCIAL PLANNINGrdquo AS A PROFESSION

The State of California is well known for its innovative and forward thinking and has a unique opportunity as the bell-weather State of this nation to lead the way for other States to follow It is time for Californiarsquos regulatory and licensing bodies such as the Dept of Insurance and Dept of Corporations to recognize ldquofinancial planningrdquo as an ldquoemerging

Confidential Page 14 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

allied professionrdquo that is having a significant impact on the provision of services traditionally regulated by their agencies Recognizing the emerging profession of financial planning and recommending to the legislature the necessity of developing regulations that will govern professionals who desire to practice the profession of financial planning is the only viable sensible and logical long-term solution for protecting Californiarsquos consumers from harm

As with any other emerging profession the State in developing any such regulations should recognize and seek the counsel of long established national and international organizations that have developed rules guidelines ethics and ascertainable standards of education examination criteria credentialing and continuing education requirements Consideration should also be given as to whether a new or existing State agency should regulate the activities of financial planners or whether these activities should be regulated independent of agencies in allied professions such as those agencies governing insurance and securities As an example lawyers accountants and bank employees etc are provided limited exemptions from registration under insurance and securities laws because the State has concluded that their existing professional State licensing requirements contained in the Business and Professions Code established standards of practice and a written codes of ethics and professional responsibility provide sufficient protection to consumers without requiring multiple State licensure

Regulations governing investment advisers are inadequate to address the multitude of tasks performed by comprehensive financial planners The question therefore arises as to whether a separate state license and new regulations should be developed within the Business amp Professions Code to govern comprehensive financial planners that is separate and distinct from investment advisory services in order to adequately protect Californiarsquos consumers Should the use of the commonly touted investment industry term ldquofinancial plannerrdquo be reserved for individuals who have been State certified as competent to perform comprehensive financial planning The greatest obstacle to the recognition of financial planning as an emerging profession requiring some form of licensure is by what standards should such a profession be measured Many fee-only financial planners have no professional accreditation whatsoever other than the investment adviser registration overseen by the CA Dept of Corporations Have ascertainable and acceptable standards been developed

FINANCIAL PLANNING AND THE CERTIFIED FINANCIAL PLANNERreg

CERTIFICANT

The most widely recognized professional financial planning designation worldwide is the CFPreg Certificate The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS INC24 (Hereafter CFP Board) has licensed its CFPreg and CERTIFIED FINANCIAL PLANNERreg trademarks to over 67000 individuals in 19 countries There are currently 4578 CERTIFIED FINANCIAL PLANNERreg Certificants licensed in California25 Most CFPreg Certificants hold multiple State or federal licenses (insurance securities Registered Investment Advisor etc) and are already supervised in their professional activities by

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copy2002 Nigel Brian Taylor CFPreg all rights reserved

multiple federal and or state agencies Sadly not one auditor of any supervising federal or state agency possesses the knowledge base or skill sets to supervise the overall activities of a comprehensive fee-only financial planner It should be stated that while the CFP Board has established a code of ethics and uniform standards of practice for CFPreg Certificants that could be used as a yardstick by legislators the CFP Board does not currently supervise investigate or audit any CFPreg Certificantrsquos activities unless a formal complaint is filed against a Certificant with the Board

The CFP Board defines a ldquofinancial plannerrdquo as a person ldquowho is capable and qualified to offer objective integrated comprehensive financial advice to or for the benefit of individuals to help them achieve their financial objectivesrdquo A financial planning professional must have the ability to provide competent financial planning services to the client utilizing the ldquofinancial planning processrdquo26 which covers basic ldquofinancial planning subject areasrdquo 27

With specific regard to the business of insurance it is important to understand the benefits provided by the CFPreg Certificate course of education as well as its shortcomings The CFP Board has developed a course curriculum (Attached as Exhibit IV) in insurance planning as an integral part of the CFPreg Certificate examination requirement This educational requirement exceeds the training currently required by the California Department of Insurance on all levels There are however shortcomings to the CFP Boardrsquos program that cannot be overlooked There is no training in State insurance regulations or any Statersquos insurance code provisions governing the business of insurance Furthermore while there is a mandatory requirement that each CFPreg Certificant complete 30 hours of continuing education for each two year certification period there is currently no requirement that all of these hours be approved by the CDI for insurance continuing education credits

The CFP Board of Standards is willing to cooperate with the CDI to address and correct the shortcomings in its program Once these problems have been corrected there are two potential solutions that if implemented could encourage full compliance with State licensing laws certainly on the part of CFPreg Certificant fee-only planners not currently licensed

SOLUTION 1 PROVIDE A FULL EXEMPTION FROM INSURANCE EXAMINATION AND LICENSING TO CFPreg CERTIFICANTS WHO ARE LICENSED AS REGISTERED INVESTMENT ADVISORS

Currently section 1831(e) provides a limited exemption from insurance licensing for Registered Investment Advisors (RIArsquos) but only ldquowhen acting in that capacityrdquo (Discussed in detail earlier) This suggestion would expand the relevant code section and remove any limitation from RIArsquos performing the tasks of a LX or FX agent providing the following conditions are met

1 The person is and remains a licensed Registered Investment Advisor either with the State or by the SEC AND

Confidential Page 16 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

2 The person remains a CFPreg Certificant in good standing AND

3 The person in addition to any continuing education requirements of the CFP Board of Standards in other areas of financial planning completes no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

4 The person provide to the CA Dept of Insurance proof of his current licensing status as a Registered Investment Advisor and CFPreg Certificant together with a list of all approved continuing education courses completed for each two year period or whenever required to do so by the Dept of Insurance AND

5 Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

6 Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS EXEMPTION

As previously illustrated the Registered Investment Advisor license alone does not qualify a person to offer insurance advice for a fee The CFPreg Certificate alone even once enhanced to provide training in statutory law and the regulation of the business of insurance in California would be insufficient because the CFPreg Certificate is not an official State regulated license However a combination of the CFPtrade Certificate and the Registered Investment Advisor license coupled with the other suggestions made above will provide a sound educational basis for any person desiring to offer insurance advice for a fee while protecting the public from harm to a far greater degree than they are protected under current law In addition this proposed exemption would alleviate the need for fee-only CFPreg Certificants to become licensed LArsquos in order to be compensated by the consumer thereby eliminating the requirement that they license themselves as LXrsquos for 5 years before meeting licensing qualification requirements By NOT forcing fee-only planners to move into a house theyrsquove already moved out of BUT RATHER demanding competence in return for a waiver from LA licensing requirements the CA Dept of Insurance would protect the consumer while facilitating an opportunity for immediate compliance without expensive investigation of illegal activities prosecution and supervision of future activities Compliance would go up the cost of supervision investigation and prosecution would go down

It is important to note that any advice given would be limited under this proposed change to the typical advice offered by LX or FX licensees who generally provide explanations discussions or interpretations of and offering of opinions or recommendations on insurance coverages exposures limits premiums rates deductibles payment plans and

Confidential Page 17 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

insurance contract or potential insurance contract terms as well as recommending andor advising potential applicantspolicyholders on insurance coverage to buy particular insurance policies or to insure with particular companies or insurers The advice given should not be allowed to encroach on the more complex tasks a Life amp Disability Analyst provides

This exemption will

bull Permit Registered Investment Advisors with a CFPreg Certificate to offer insurance advice without the need for appointment by an insurer and allow them to be compensated by a third party other than the insurer for that advice (A Variant of this model already exists in Connecticut and New Hampshire A very POORLY structured derivative (that this author does NOT support) has just been signed into law in Idaho The Idaho statute gives a Registered Investment Advisor carte blanche to offer insurance advice for a fee without any training examination or continuing education requirement in insurance planning a clear violation of the public trust In addition CFPreg Certificants will shortly be given an exemption from registration as Insurance Counselors (LA equivalent license for Texas) in Texas The author finds this unacceptable because again no instruction will be mandatory in insurance regulation and insurance law)

bull Require the candidate to complete a comprehensive course of education in among other things all aspects of insurance planning and demand state licensing (as an investment adviser) before qualifying for the exemption

bull Require continuing education of 30 hours in insurance planning a significant improvement over the LA license which requires NO continuing education currently

bull Leaves intact the State Insurance Commissionerrsquos authority (under CICsect790 et Seq And CICsect129218 (supra)) to supervise audit fine punish and bar from the business of insurance in CA any person who violates the publicrsquos trust

COMPARISON OF THE ldquoCFPreg PLUS REGISTERED INVESTMENT ADVISORrdquo EXEMPTION TO THE LIFE AND DISABILITY ANALYST LICENSE REQUIREMENT

There will still be a need for the Life amp Disability Analyst license in California LArsquos provide a valuable service to the public by

bull Offering expert testimony in court regarding all insurance related matters

bull Providing complex expert comparative analysis and interpretation of the terms and conditions of various insurance contracts to consumers accountants and lawyers

Confidential Page 18 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

bull Explanation of the rights of the parties under an insurance contract a service otherwise reserved exclusively to members of the Bar

The proposed exemption would not obviate the need for LA licensees It will provide a means for fee-only Registered Investment Advisor financial planners who have earned the CFPreg Certificate a professional financial planning credential that has course work superior to the current minimum standard requirement by the CA Dept of Insurance (with the noted exceptions listed above which must be addressed before an exemption would be granted) to serve their clients basic insurance needs without appointment by an insurer and the inherent conflicts of interest this may represent

EFFECT OF THIS PROPOSED EXEMPTION ON CONSUMERS

This proposed exemption would have a substantially positive effect on consumers with no negative impact whatsoever They will be able to seek out a professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education It will further provide greatly enhanced protections for the public against wrongdoing by requiring a bond in the amount of $100000 (one hundred thousand dollars) and mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CA Department of Insurance (It should however be noted that most if not all CFPreg Certificants meet all the above criteria already in terms of EampO insurance etc and obtaining a $100000 bond would not place an undue burden on any fee-only CFPreg Certificant planner) Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their insurance matters

POTENTIAL PROBLEMS ASSOCIATED WITH THE GRANTING OF AN EXEMPTION FOR CFPreg CERTIFICANTS MEETING THE ABOVE CRITERIA

One possible problem would of course be that other financial service professionals with professional insurance or financial planning credentials would seek to block any such legislation unless their credential were to be included Some other designations worthy of exemption would be

The Chartered Life Underwriter (CLU) The Chartered Financial Consultant (ChFC)

The author based on the knowledge and skill sets required to hold such designations has no objections to the inclusion of these designations for purposes of the aforementioned suggested exemption providing these professionals meet ALL the other criteria

SOLUTION 2 PERMIT STATE LICENSING AS A LX OR FX WITHOUT INSURANCE COMPANY APPOINTMENT AND AUTHORIZE PLANNERS TO BILL CLIENTS DIRECTLY

Confidential Page 19 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Under California law a person who ldquofor a fee or compensation of any kind paid by or derived from any person or source other than an insurerrdquo(emphasis added) must register a Life and Disability Insurance Analyst under CIC Section 325 As previously illustrated in this discussion however Life and Disability Insurance Analysts are required to

bull Pass an antiquated examination that has not been substantially revised since 1983 bull Self-Study in some cases already repealed statutes because no examination

revisions have been undertaken since 1983 Furthermore no educational courses are available from any college school or professional educational institution because there is simply no demand for the license due to a complete lack of enforcement of LA laws by the CDI

bull Self Study to familiarize themselves with many topics including Long Term Care and other more recently introduced exotic and hybrid insurance products because candidates are not tested on these products due to lack of LA examination revision

Oddly once licensed Life and Disability Insurance Analysts are NOT required to complete any continuing education requirements of any kind There is no requirement other than one imposed by ldquopotential liabilityrdquo through civil action for a LA to ldquoremain currentrdquo as a LA licensee

In light of the foregoing a far more sensible alternative and second potential solution would be to allow all LX amp FX agents to be licensed with the CDI without the requirement for appointment to transact on behalf of an insurer LX or FX agents desiring to be compensated directly from the consumer (for purposes of this discussion the author will refer to such agents as FLX amp FFX agents) would subject themselves to the same CDI licensing and examination requirements as traditional LX amp FX agents FLX amp FFX agents would also be subject to the same continuing education requirements as traditional LX amp FX agents The function of FLX amp FFX licensed individuals would be to act ldquoquasirdquo in the capacity of a personal representative of the client with the authority to negotiate and effect all insurance coverages on their behalf at the best possible terms with any company they choose (As fiduciaries such FLX ampFFX licensees would be subject to regulations similar to the NASDrsquos ldquobest executionrdquo rules They would be required to perform extensive due diligence and seek the best coverages at the most reasonable prices on behalf of their clients)

Currently such activities allowed under CIC sect33 are restricted to ldquoa person who for compensation and on behalf of another person transacts insurance other than life with but not on behalf of an insurerrdquo (Emphasis added) In essence then a similar but new and distinct section would be created expanding the role of an ldquoinsurance brokerrdquo as defined under CIC sect33 to that of a FLX amp FFX who would be authorized to solicit and negotiate all forms of insurance including property casualty life health disability long-term-care and other forms of insurance

Confidential Page 20 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

This new Code section would make additional demands on any person seeking to license himherself as a FLX amp FFX licensee to protect consumers from harm Among other things such licensees would be required to

bull Complete BOTH LX and FX courses of education and the appropriate licensing examinations (Based on the CFP Boardrsquos program of education in insurance planning fee-only comprehensive financial planners provide information regarding all aspects of a consumerrsquos risk management needs

bull Be a licensed Registered Investment Advisor with the State AND

bull Complete no less than 30 hours of continuing education in each two-year period that is approved by the CA Dept of Insurance 8 hours of which must be a qualified and state approved long-term-care planning course AND

bull Provide to the CA Dept of Insurance proof of current licensing status as a Registered Investment Advisor together with a list of all approved continuing education courses completed each two year period or whenever required to do so by the Dept of Insurance AND

bull Obtain a surety bond to protect consumers in the amount of $100000 (one hundred thousand dollars) AND

bull Carry at least $2000000 (two million dollars) of errors and omissions insurance proof of which must be submitted annually or whenever required to do so by the CA Dept of Insurance

EFFECT OF THIS NEW LICENSE

This proposed license would have a substantially positive effect on consumers with no negative impact whatsoever Consumers will be able to seek out a ldquolicensedrdquo professional on a fee basis that has complied with an ascertainable standard in terms of education licensing examination competency and continuing education The examination requirement supports the CDIrsquos position as stated in the February 8 1998 letter written by Jeffrey Kenny (Supra) that only those individuals who pass CDIrsquos exams are to be issued licenses and that the CDI will remain ldquovia its examination and related or regulatory functions the authorizing agencyhelliphelliprdquo in the business of insurance It will further provide greatly enhanced protections for consumers against wrongdoing by requiring a California surety bond in the amount of $100000 (one hundred thousand dollars) in addition to mandatory Errors and Omissions insurance in the amount of $2000000 (two million dollars) neither of which is currently required under law for LX FX or LA licensees licensed by the CDI Finally it recognizes the fact that most consumers do not require the sophisticated level of assistance offered by an LA in planning their basic insurance needs on a fee-only basis

Confidential Page 21 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

SUMMARY AND CONCLUSIONS

The California Dept of Insurance has essentially four choices

1 Maintain a Status Quo approach do nothing to address the illegal activities of fee-only financial planners remaining a reactive rather than proactive regulator of the business of insurance

2 Implement a program of rigorous investigation and enforcement of illegal activities in the business of insurance utilizing current and newly introduced sections of the California Insurance Code to stamp out the widespread and growing problem of illegal activities on the part of fee-only financial planners offering advice in insurance matters for a fee in California

3 Consider implementation of one or more of the solutions suggested in this discussion

4 Develop meaningful initiatives such as those suggested herein to combat andor provide solutions to illegal activities in the business of insurance

Maintaining the status quo and doing nothing to address the illegal activities of fee-only planners will eventually cause the CDI to lose control and regulatory authority over the business of providing insurance advice to consumers to other state agencies such as the Dept of Corporations an agency ill equipped and hardly qualified to supervise and monitor such activities More and more broker-dealer registered financial planners and life agents are transitioning to the more profitable fee-only model Without aggressive enforcement of the law many of these planners may eventually surrender their insurance licenses to avoid multiple state licensure layering of regulation supervision and audit The current lack of any enforcement by the CDI against prominent planners who have already been reported to CDIrsquos investigations division by Errold Moody CFPreg and others over the past ten years is an encouragement to other transitioning planners to ignore and violate State law Inaction equates to state condoned tolerance and silent approval in the eyes and minds of many fee-only financial planners

Rigorous investigation and enforcement while preferable is also the most difficult policy to enforce The CDI has neither the manpower nor the consumer driven complaints necessary to actively enforce insurance laws against fee-only planners violating state law Simply put these planners are ldquooff the radarrdquo and rarely generate complaints Since they are not licensed they do not fall under the authority of the CDI and unless they are brought to the attention of the CDI by virtue of consumer complaints these planners will continue to remain extremely difficult to find Additionally the CDI lacks proper funding and manpower to effectively enforce Insurance laws in California at this time Therefore any consideration for rigorous investigation and enforcement must be viewed as impractical given the current budget deficit and the apparent lack of will on the part of the CDI and local district attorneyrsquos offices to prosecute violators when they are reported

Confidential Page 22 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

By implementing one or more of the suggestions contained in this discussion the CDI will facilitate voluntary and willing compliance with state law while ensuring that their mandate to protect consumers from harm by insisting that CDI established examination licensing and continuing education requirements would be met Fee-only planners would be able to offer the advice they desire to offer on a fee basis with direct client billing the CDI would be in a far better position to supervise control audit and discipline these planners if and when the need arises More importantly consumers would be able to turn to the CDI for assistance without hearing the phrase ldquoIrsquom sorry that individual is not licensed and does not fall under our jurisdictionrdquo

In conclusion the CDI has the opportunity to solicit opinions and suggestions from state sponsored agencies and boards such as the CA Agent and Broker Advisory Commission to the Dept of Insurance Some members of the CDI Agent and Broker Advisory committee are fee-only CFPreg Certificants and have an understanding of the issues involved These professionals and other insurance professionals whose livelihoods also depend in part on ethical conduct in the business of insurance are in a position to provide valuable input to the CDI regarding these suggestions

It is hoped that this discussion will generate concern and renewed scrutiny of the illegal activities of fee-only planners in California and that this in turn will lead to a necessary beneficial and long overdue overhaul of Californiarsquos insurance licensing laws for the benefit of not only Californiarsquos consumers but eventually Consumers nationwide who reside in States with similar insurance advisory statutes

Respectfully submitted

Nigel B Taylor is a Certified Financial Plannerreg Certificant General Securities Principal and CA Life Agent associated with Royal Alliance Securities Inc He is a former President of the Award Winning Institute of Certified Financial Planners Los Angeles Society (1999) and Former Chairman of the Financial Planners Association ndash Los Angeles Chapter (2000) Mr Taylor has published numerous articles regarding proposed regulation compliance ethics and professionalism for financial planners and CFPreg Certificants He is based in Santa Monica California

1 CA Insurance Code Sections 32 amp 1622 2 Source Dept of Insurance Annual Report 2000 3 Source Dept of Insurance Annual Report 2000 4 CA Insurance Code Section 325 5 CA Insurance Code Sections 1849 6 Source CA Dept of Insurance March 2002 7 Source CA Dept of Corporations March 2002 8 25009 (b) Investment adviser also includes any person who uses the title financial planner and who for compensation engages in the business whether principally or as part

Confidential Page 23 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

of another business of advising others either directly or through publications or writings as to the value of securitieshelliphellip(Excerpt) 9 CA Insurance Code Section 325 10 CA Insurance Code Section 1668 The commissioner may deny an application for any license issued pursuant to this chapter if helliphellip (c) The applicant does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for helliphellip (g) The applicant seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this state 11 CA Insurance Code Section 1844 Any person who acts offers to act or assumes to act as a life and disability insurance analyst when not licensed by the commissioner as provided by this article or after the license granted to him or her has been suspended or revoked unless proceedings are pending in the courts to review the act of the commissioner is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1000) or by imprisonment for not more than one year or by both such fine and imprisonment

12 CA Insurance Code 17255 (a) For purposes of Sections 325 1625 1626 17245 17581 1765 1800 14020 14021 and 15006 every licensee shall prominently affix type or cause to be printed on business cards written price quotations for insurance products and print advertisements distributed exclusively in this state for insurance products its license number in type the same size as any indicated telephone number address or fax number

CIC 17255 (c) Any person in violation of this section shall be subject to a fine levied by the commissioner in the amount of two hundred dollars ($200) for the first offense five hundred dollars ($500) for the second offense and one thousand dollars ($1000) for the third and subsequent offenses The penalty shall not exceed one thousand dollars ($1000) for any one offense These fines shall be deposited into the Insurance Fund

13 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the commissioner authorizing the person to act in that capacity 14 1858 In the construction of a statute or instrument the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein not to insert what has been omitted or to omit what has been inserted and where there are several provisions or particulars such a construction is if possible to be adopted as will give effect to all 15 Flannery v Prentice (2001) 110CalRptr2d 809 26Cal 4th 572 28P3d 860 16 People v Martinez (1995) 45CalRptr2d 905 11Cal4th 434 903P2d 1037 17 Caminetti v State Mut Life Ins Co (1942) 126P2d80926Cal 4th 572 28P3d 860 18 1631 Unless exempt by the provisions of this article a person shall not solicit negotiate or effect contracts of insurance or act in any of the capacities defined in Article 1 (commencing with Section 1621) unless the person holds a valid license from the

Confidential Page 24 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

commissioner authorizing the person to act in that capacity The issuance of a certificate of authority to an insurer does not exempt an insurer from complying with this article

1633 Any person who acts offers to act or assumes to act in a capacity for which a license is required without a valid license so to act is guilty of a misdemeanor

16335 It is hereby declared to be the intent of the Legislature in enacting this chapter that the regulations prescribed herein be the exclusive regulations relating to the conduct of insurance business by persons licensed to act in any of the capacities defined hereunder any local regulations or ordinances notwithstanding 19 79001 This article applies to reciprocal and interinsurance exchanges Lloyds insurers fraternal benefit societies fraternal fire insurers grants and annuities societies insurers holding certificates of exemptions motor clubs nonprofit hospital associations life agents broker-agents surplus line brokers and special lines surplus line brokers as well as all other persons engaged in the business of insurance (color amp emphasis added)

20 79004 The commissioner shall have power to examine and investigate into the affairs of every person engaged in the business of insurance in the State in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 79003 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance Such investigation may be conducted pursuant to Article 2 (commencing at Section 11180) of Chapter 2 Part 1 Division 3 Title 2 of the Government Code

21 790035 (a) Any person who engages in any unfair method of competition or any unfair or deceptive act or practice defined in Section 79003 is liable to the state for a civil penalty to be fixed by the commissioner not to exceed five thousand dollars ($5000) for each act or if the act or practice was willful a civil penalty not to exceed ten thousand dollars ($10000) for each act The commissioner shall have the discretion to establish what constitutes an act However when the issuance amendment or servicing of a policy or endorsement is inadvertent all of those acts shall be a single act for the purpose of this section

22 129218 (a) The commissioner shall have the authority to issue a cease and desist order against any person acting as or holding himself herself or itself out as an insurance agent or broker without being so licensed and against any person holding out that person as transacting or transacting the business of insurance without having been issued a certificate of authority The commissioner may issue a cease and desist order without holding a hearing prior to issuance of the order The commissioner may impose a fine of up to five thousand dollars ($5000) for each day the order is violated

22 Supra 23 See Exhibit III of this memorandum

Confidential Page 25 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

24 CFP Board a 501(c)(3) certifying organization fosters professional standards in

personal financial planning so that the public values has access to and benefits from competent financial planning CFP Board owns the certification marks CFPtrade CERTIFIED FINANCIAL PLANNERtrade and federally registered CFP (with flame) logo which it awards to individuals who successfully complete initial and ongoing certification requirements CFP Board has currently authorized more than 39214 individuals to use these marks in the United States and 27343 individuals outside the United States For more about CFP Board visit wwwCFPnet 25 Source CFP Board of Standards Inc Colorado 26 Financial Planning Process denotes the process which typically includes but is not limited to the six elements of establishing and defining the client-planner relationship gathering client data including goals analyzing and evaluating the clientrsquos financial status developing and presenting financial planning recommendations and monitoring the financial planning recommendations (CFPtrade Board Code of Ethics ndash Definitions) 27 Financial planning subject areas denotes the basic subject fields covered in the financial planning process which typically include but are not limited to financial statement preparation and analysis (including cash flow analysis planning and budgeting) investment planning (Including portfolio design ie asset allocation and portfolio management) income tax planning education planning Risk Management (emphasis added) retirement planning and estate planning (CFPtrade Board Code of Ethics ndash Definitions)

Confidential Page 26 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

EXHIBIT I

Confidential Page 27 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life Agent License Information

LIFE AGENT (LX) Licensing Information

TABLE OF CONTENTS

Authorizing acts and with definitions Qualifications Filing Requirements

Individual -- Residents Organization -- Residents Individual -- Non-Residents Organization -- Non-Residents

License Term Renewal of License Additional Information

APPLICABLE FORMS

Individual Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Action Notice of Appointment (Form 447-54) Organization Endorsement (Form 411-8A) Non-Resident Insurance License Stipulation and Agreement (Form 447-68)

These forms are also included in the Individual and Business Entity applications

AUTHORIZING ACT

California State Insurance Code Chapter 5 Part 2 Division 1

A life agent (LX) is a person authorized by and on behalf of a life disability or life and disability insurer to transact life disability or life and disability insurance

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

Prelicensing ExperienceEducation

1) Require a minimum of 40 hours of approved prelicensing classroom study A new California resident applicant who had a current life license in another state and completed 40 hours of prelicensing education for life insurance in order to obtain that license or an applicant holding either a Life Underwriter Training Council Fellowship (LUTCF) or Chartered Life Underwriter (CLU) designation is exempt from the 40 hours of prelicensing education

2) Require 12 hours of approved prelicensing classroom study on ethics and the California Insurance Code Where an applicant seeks both the Fire and Casualty broker-agent license and the Life agent license the applicant shall only be required to complete one 12-hour course on ethics and the California Insurance Code

Continuing Education

1) During each of the first four 12-month periods following the date of original issue of license satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to a minimum of 25 hours

2) Any licensee who has complied with the above or was licensed as of 123191 shall satisfactorily complete approved courses or programs of instruction or attend seminars equivalent to 30 hours of instruction during each two-year license period

3) Any agent that markets long-term care insurance must complete an 8-hour California specific long-term care continuing education course Check with your insurer regarding long-term care insurance requirements

4) Effective January 01 1998 any person who is 70 years of age or older and who has been licensed for 30 continuous years as a licensee in good standing in this state may be exempt from continuing education requirement Any licensee that markets individual long-term care contracts is still required to meet the specific education requirements for marketing such contracts

The agent who is limited by the terms of a written agreement with the insurer to transact only specific life insurance policies or annuities having an initial face amount of $10000 or less that are designated by the purchaser for the payment of funeral or burial expenses will be exempted from the prelicensing and continuing education requirements The commissioner may require the insurer appointing those life agents to certify as to the limitation of the agents representations

FILING REQUIREMENTS INDIVIDUAL - RESIDENTS

Application Application for Insurance License form 441-9

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to CaliforniaThis form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants If an examination is required fingerprint impressions will be taken at the California examination sites

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Prelicensing Certificate Of Completion Original certificate(s) of completion signed by both classroom instructorprovider director and applicant for life agent course andor Ethics and Code course

Examination Applicants who do not hold an active Life (LX) California resident license and whose eligibility for that license without examination has expired must pass the written examination prepared and administered by the Department

Fees - Individual Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice or an Organization Endorsement $21 per notice Examination $35 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 all applicants must appear at the designated exam site with a check in the amount of $74 made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal Fee $124 (2-year term)

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 1

Life Agent License Information

FILING REQUIREMENTS ORGANIZATION - RESIDENTS

Organization Application

Corporation partnership unincorporated association limited liability company or nonprofit corporation applicants must submit the Application for Organization License form 441-11

NOTE The organization must have at least one California resident LX endorsee to establish and maintain the license

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each endorsee who holds an active California non-resident LX license Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Fees - Organization Resident

License filing $124 (2-year term) Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS INDIVIDUAL - NON-RESIDENTS

Application Application for Insurance License form 441-9 must be completed by applicants who do not hold an active California LX license

NOTE Licensed non-resident agents whose state of residence does not have continuing education must meet the same requirements as a California resident in order to renew their license Licensed non-resident agents who comply with the continuing education requirements of their state of residence are exempt from California continuing education requirements If licensees transact long term care products they must meet California specific long term care education requirements

Action Notice Action Notice of Appointment form 447-54 completed by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

ANDOR

Organization Endorsement form 411-8A completed by the sponsoring organization licensed in California This form is also included in the Individual and Business Entity applications

Stipulation and Agreement Non-resident Insurance Licensee Stipulation and Agreement form 447-68

Certification Of License Status From Resident State

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

Examination Not required except if the applicants state commonwealth or Canadian province of residence has no reciprocal agreement for waiving of examination

Fees - Individual Non-Resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

FILING REQUIREMENTS ORGANIZATION - NON-RESIDENTS

Organization Application

Corporation partnership unincorporated association or nonprofit corporation applicants must submit the Application for Business Entity License form 441-11

Note A California resident cannot be endorsed on a non-resident organization

Action Notice Action Notice of Appointment form 447-54 must be completed in the organization name by the sponsoring insurance company admitted to California This form is also included in the Individual and Business Entity applications

Natural Person Named On Organization

Organization Endorsement form 411-8A must be completed for each natural person who holds an active California non-resident LX license This form is also included in the Individual and Business Entity applications Application for insurance license form 441-9 and Organization Endorsement form 411-8A (this form is also included in the Individual and Business Entity applications) must be completed by each natural person who does not hold an active California non-resident LX license (individual filing requirements must be met)

Stipulation and Agreement Non-resident Insurance License Stipulation and Agreement as required by law form 447-68 signed by an officer or partner of the organization

Certification Of License Status From Resident State Must be in the organization name

Fees - Organization Non-resident

License filing $124 (2-year term) subject to retaliatory provisions Action Notice fee $21 per action notice Organization Endorsement $21 per notice Renewal Fee $124 (2-year term) Must have 1 natural person currently named on organization

Note Natural persons filing form 441-9 refer to individual filing fees

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 2

Life Agent License Information

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed to the mailing address of record approximately 90 days prior to the expiration date of the license Individuals will receive a renewal application showing total fees due for all license types held and the total number of continuing education hours completed at the time the renewal form is printed If the continuing education requirement has not been met the renewal will indicate how many hours are needed If renewal application is not received refer to the back of the permanent license for renewal instructions

All licensees that renew their licenses late will be required to file new company appointments organization endorsements or solicitor appointments Late is defined as any renewal for which the requirements to renew (this includes completing the continuing education hours) are not met until after the expiration date of the previous license term

ADDITIONAL INFORMATION

The Commissioner may grant authority to transact variable contracts to a person or an organization licensed as a Life Agent which is appointed by an admitted insurer which is required to register itself or to register a separate account or fund with the United States Securities and Exchange Commission or to register its variable policies or contracts with the Securities and Exchange Commission The person must submit acceptable proof of registration with NASD or SECO before authority to transact variable contracts can be granted

If currently licensed as a resident of another state upon becoming a California resident a clearance letter from the former state of residence is required

Limited liability company applicants are required to submit the following information to demonstrate compliance with Section 16475 of the California Insurance Code

1 A statement as to the number of licensees rendering professional services on behalf of the Limited Liability Company

2 The aggregate dollar amount of E amp O Liability Insurance Cash Bonds Bank Certificates of Deposit US Treasury obligations etc held to provide security for claims against the Limited Liability Company (The amount required over the minimum of $500000 is at least $100000 multiplied by the number of licensees rendering professional services on behalf of the company however the maximum amount is not required to exceed $5000000)

3 For purposes of satisfying the security requirements of California Insurance Code Section 16475 we will require one or more of the following

(A) A copy of the declaration page for each liability insurance policy used to satisfy the minimum security requirement

(B) Verification by the bank or escrow holder listing the type and current dollar value of the assets used to satisfy the minimum security requirements

Limited liability company licensees must file at least once each year an annual confirmation with the commissioner in the above format to demonstrate continuing compliance with the financial security requirements of Section 16475 of the California Insurance Code

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 644A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - January 16 2002 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC644-ahtm Page 3

EXHIBIT II

Confidential Page 31 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Life and Disability Insurance Analyst License Information

LIFE AND DISABILITY INSURANCE ANALYST (LA) License Information

APPLICABLE FORMS

Application for Insurance License (Form 441-9) Application for Business Entity License (Form 441-11) Organization Endorsement (Form 441-8A) Request For Live Scan Service (form 442-39A)

This form is also included in the Individual and Business Entity applications

AUTHORIZING ACT California State Insurance Code Chapter 8 Part 2 Division 1

A Life and Disability Insurance Analyst is a person who for a fee or compensation of any kind paid by or derived from any person or source other than an insurer advises purports to advise or offers to advise any person insured under named as beneficiary of or having any interest in a life or disability insurance contract in any manner concerning that contract or his or her rights in respect thereto

QUALIFICATIONS

Minimum Age 18 years

Residency California residency is required

Prelicensing ExperienceEducation Must have worked as a life licensee as defined under Chapter 5 Part 2 Division 1 of the Insurance Code for five years preceding the date of the examination or as an employee of such a licensee

Continuing Education

Not required

Entity Types Individual corporation partnership nonprofit corporation unincorporated association limited liability company

FILING REQUIREMENTS - INDIVIDUAL

Application Application for Insurance License form 441-9

Fingerprint Impressions Fingerprint impressions are required for unlicensed applicants You must call SYLVANIDENTIX at 1-(800) 315-4507 to schedule an appointment to have your fingerprint impressions taken prior to submitting your application Fingerprint impressions will not be accepted from any other source A copy of your Request For Live Scan Service (form 442-39A) must be submitted with your application verifying your prints were taken by SYLVANIDENTIX

Additional Documents The Insurance Commissioner may require such other documents as will aid in determining whether the applicant meets the qualifications for a license

FEES - Individual

License Filing $418 (2-year term) Examination $103 per scheduled examination date Fingerprint Processing $74 Effective October 2 2000 this fee must be paid at the designated site when the fingerprint impressions are taken You may pay by check made payable to SIFC VISAMASTERCARD WILL ALSO BE ACCEPTED CASH WILL NOT BE ACCEPTED Renewal $418 (2-year term )

EXAMINATION

The applicant must pass the written examination prepared and administered by the Department

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 1

Life and Disability Insurance Analyst License Information

STUDY MATERIAL

Although the Department does not recommend any particular text method or course of study listed below is a study guide to assist in the preparation for the examination 1) The life and disability laws of this state are contained in the California Insurance Code Those sections on which an applicant might be tested are

General Provisions Sections 1 - 46 Division 1 Part 1 Chapter 1 Sections 100 - 123 Division 1 Part 1 Chapter 2 Article 1 Sections 150 - 151 Division 1 Part 1 Chapter 2 Article 3 Sections 250 - 252 Division 1 Part 1 Chapter 2 Article 4 Sections 280 - 287 Division 1 Part 1 Chapter 2 Article 5 Sections 300 - 305 Division 1 Part 1 Chapter 3 Article 1 Sections 330 - 339 Division 1 Part 1 Chapter 3 Article 2 Sections 350 - 361 Division 1 Part 1 Chapter 4 Article 1 Sections 380 - 393 Division 1 Part 1 Chapter 4 Article 3 Section 430 Division 1 Part 1 Chapter 4 Article 4 Sections 440 - 449 Division 1 Part 1 Chapter 4 Article 5 Section 460 Division 1 Part 1 Chapter 5 Sections 480 - 489 Division 1 Part 1 Chapter 6 Article 3 Sections 550 - 5575 Division 1 Part 2 Chapter 1 Article 1 Section 680 Division 1 Part 2 Chapter 1 Article 3 Sections 669 - 726 Division 1 Part 2 Chapter 1 Article 5 Sections 750 - 767 Division 1 Part 2 Chapter 1 Article 55 Sections 770 - 776 Division 1 Part 2 Chapter 1 Article 57 Sections 7771 - 7773 Division 1 Part 2 Chapter 1 Article 6 Sections 780 - 784 Division 1 Part 2 Chapter 1 Article 65 Sections 790 - 79010 Division 1 Part 2 Chapter 1 Article 75 Sections 815 - 816 Division 1 Part 2 Chapter 2 Article 5 Sections 1220 - 1221 Division 1 Part 2 Chapter 4 Article 2 Sections 1580 - 1599 Division 1 Part 2 Chapter 5 Sections 1621 - 17585 Division 1 Part 2 Chapter 5A Sections 1759 - 175910 Division 1 Part 2 Chapter 8 Sections 1831 - 1849 Division 2 Part 2 Chapters 1-13 Sections 10110 - 11533 Division 2 Part 61 Sections 12670 - 12691 Division 3 Chapters 1 and 2 Sections 12900 - 12977

2) The provisions terms and conditions of a life and disability insurance contract that might be tested are but not limited to the following Life Insurance Disability Insurance

Insuring Agreement Insurance Clause Reinstatement Schedule Incontestability Renewal Provisions Settlement Options Benefit Provisions Dividend Options Co-Insurance Ownership Provisions Waiting Periods Nonforfeiture Provisions Elimination Periods Grace Periods Deductibles Loan Provisions Waivers Suicide Exclusions Assignments of Transfers Restrictions Aviation Clause Pre-existing Conditions Beneficiaries Provisions Other Insurance

Additionally the applicants are expected to be thoroughly familiar with the types of contracts being issued in this state including but not necessarily limited to Life Disability

Individual Contracts Individual ContractsGroup Contracts Group ContractsIndustrial Contracts Blanket ContractsOrdinary Life Basic Hospital ExpenseLimited Payment Life Basic Medical-Surgical ExpenseModified and Graded Premium Basic Hospital and Medical-Surgical ExpenseEndowment Insurance Hospital Confinement IndemnityImmediate Annuities Major Medical ExpenseDeferred Annuities Comprehensive Major Medical ExpenseVariable Annuities Disability Income ProtectionLevel Term Life Accident OnlyIncreasing Term Life Specified DiseaseDecreasing Term Life Specified AccidentRe-entry Term Life Medicare SupplementUniversal Life 3) A thorough and complete knowledge of life and disability insurance may include

a Application and consequences of various policies b Applications and consequences of federal and estate taxes c Interrelationship with other investment vehicles d Interrelationship with other regulatory agencies including but not limited to SEC RIA etc e Interrelationship with contract business probate and investment laws in California f Insurance companys financial and organization analysis g Rate calculations and risk transfer

FILING REQUIREMENTS - ORGANIZATION

Organization Application

Corporation partnership nonprofit corporation or unincorporated association applicants must submit the Application for Business Entity License form 441-11

Natural Person Named On Organization

Application for insurance license form 441-9 and Organization Endorsement form 411-8A must be completed by each natural person who does not hold an active California LX license (individual filing requirements must be met)

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 2

Life and Disability Insurance Analyst License Information

Organization Endorsement form 441-8A (this form is also included in the Business Entity application) must be completed for each natural person who holds an active California LX license

FEES - ORGANIZATION

Fees are not required for the organization license Each natural person named on the organization must pay individual fees

License filing $418 (2-year term) Renewal Fee $418 (2-year term)

Note Natural persons filing form 441-9 refer to individual filing fees

LICENSE TERM

The term of the first license begins the date the license is issued and ends the last day of that same calendar month two years later All additional licenses are issued for the balance of the established term

RENEWAL OF LICENSE

Renewal notification is mailed approximately 60 days prior to the expiration date of the license and will show total fees due for all license types held If this application is not received refer to the back of the permanent license for renewal instructions

ADDITIONAL INFORMATION

The following persons are exempt from the requirements of this license

a Active members of the State Bar of California

b Any person who has passed all of the qualifying examinations necessary to become an Associate of the Society of Actuaries

c An officer or employee of any bank or trust company who receives no compensation from sources other than the bank or trust company for activities connected with his employment which would otherwise subject him to licensing requirements

d Any person employed by an employer who on behalf of his or her employer or any employee of his or her employer transacts life or disability insurance with but not on behalf of an insurer or advises his or her employer or any employee of his or her employer in any manner concerning life or disability insurance if

1 the employer receives no compensation by reason of such transactions or advice and 2 such person receives no compensation from any source other than his or her employer for such transactions or advice

e An investment advisor as defined in Section 25009 of the Corporations Code when acting in that capacity

NOTE An employee or officer of any insurer is not eligible for a license as a Life and Disability Insurance Analyst

To obtain insurance licensing forms by mail send request to Department of Insurance 320 Capitol Mall Sacramento CA 95814 or you may phone Sacramento at (800) 967-9331 or (916) 322-3555 press 4

To obtain insurance licensing information you may phone our Sacramento office at (800) 967-9331 or (916) 322-3555

ALL FEES MAILED TO THE DEPARTMENT MUST BE ADDRESSED TO

DEPARTMENT OF INSURANCE PO BOX 1139 SACRAMENTO CA 95812-1139

ALL FILING FEES SUBMITTED ARE NOT REFUNDABLE OR TRANSFERABLE WHETHER OR NOT THE APPLICATION IS ACTED UPON OR THE EXAMINATION TAKEN

Form 765A (Rev 112000)

~ Return to Producer Licensing Bureau Forms Main Page ~

Last Revised - December 18 2000 Copyright copy California Department of Insurance

Disclaimer

Monday March 11 2002 httpwwwinsurancecagovLIC765ahtm Page 3

EXHIBIT III

Confidential Page 35 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

Series 65 Exam

The Uniform Investment Adviser Law Examination and the available study outline were developed by the North American Securities Administrators Association Inc (NASAA) The examination called the Series 65 exam is designed to qualify candidates as investment adviser representatives The exam covers topics that have been determined to be necessary to understand in order to provide investment advice to clients The study outline is designed to provide an overview of the exams general content and format

The study outline is divided into corresponding sections to aid in preparing for the examination

The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline Applicants are allowed 180 minutes to complete the examination At least 89 (685) of the questions must be answered correctly for an individual to pass the Series 65 exam

The examination is conducted as a closed book test Upon completion of the examination the score for each section and the overall test score will immediately be made available to the candidate

The examination is administered by the National Association of Securities Dealers Inc (NASD) To schedule a candidate for the examination an individuals firm should file a Form U-4 or the individual should file a Form U-10 and pay the $11000 examination fee to the NASD at the following address

NASD Regulation Inc Attention Exams Dept 9509 Key West Avenue Rockville MD 20850 301590-6500

Once registered NASD will open a 120-day window within which an individual may schedule the exam A link to the NASD Forms can be found at httpwwwnasdrcom3400asp More information on exam sites can be found at httpwwwnasdrcom2630asp

The questions in the examination the examination study outline and the method by which the examination is administered have been designed by Chauncey Group International for NASAA and approved by NASAA and the Competency Exam Project Group In addition each examination question is statistically analyzed to insure reliability

Any attempt to compromise the examination may serve to destroy its validity and usefulness Therefore NASAA intends to bring appropriate action against persons who attempt to compromise the examination in whole or in part In addition such conduct may subject a candidate to further action by state administrators

Successful completion of the Uniform Investment Adviser Law Examination does not relieve a candidate of the personal responsibility to know and to abide by the specific requirements of the securities laws and regulations of the states in which the candidate transacts business Furthermore although successful completion of the examination may satisfy a portion of the requirements of a particular state it does not convey the right to transact business prior to being granted a license or registration by that state

NASAA believes that the Uniform Investment Adviser Law Examination will significantly benefit the industry and state regulators alike by such uniformity The investing public will be afforded a greater degree of protection through enhanced uniform qualification standards

NASAA Uniform Investment Adviser Law Exam (Series 65)

Exam Specifications

CONTENT AREA

OF ITEMS

I Economics and Analysis

20

A B Understand basic economic concepts

1 Inflationdeflation a Definitions b Causes of inflationdeflation

2 Interest rates and yield curves a Graphs b Definitions c Interest rate = cost of money

3 Basic economic indicators a GDP b Employment indicators c Trade deficit d Balance of payments e CPI

A

determine investment merits A Income statement

a Revenues b Cost of goods sold c Pre-tax margins d Cash flow

B Balance sheet a Assets b Liabilities c Working capital d Owners equity e Footnotes

A

C Demonstrate understanding of quantitative methods to evaluate investments

A Time value of money B Expected return C Net present value D Internal rate of return E Inflation-adjusted return (real return) F After-tax returnyield G Risk-adjusted return H Total return I Holding period return J Yield-to-maturity K Yield-to-call L Current yield M Risk measurements (eg Beta standard deviation duration) N Valuation ratios (eg PE price-to-book) O Benchmark portfolios P Annualized return

D E Identify risks (ie definitions impact on the market companies

and personal investments) D Business E Market F Interest rate G Inflation H Regulatory (eg tax law changes) I Liquidity

J Opportunity cost

II Investment Vehicles

26

A B Evaluate cash and cash equivalents

A Types and characteristics of cash and cash equivalents a Certificates of deposit b Money market funds c Treasury bills

B Benefitsrisks of owning cash and cash equivalents

B C Evaluate fixed income securities

B Types and characteristics of fixed income securities a US government and agency securities b Mortgage-backed securities c Corporate bonds (ie investment grade and high yield) d Convertible bonds e Municipal bonds f Zero-coupon bonds

C Benefitsrisks of owning fixed income securities

C D Evaluate equity securities

C Types and characteristics of equity securities a Common stock (eg voting rights etc) b Preferred stock c Convertible preferred stock

D Methods used to determine the value of equity securities (eg technical and fundamental analyses dividend discount)

E Benefitsrisks of owning equity securities

D E Evaluate investment company securities

D Types and characteristics of investment companies a Open-end investment companies

(mutual funds)

b Closed-end investment companies c Classes of shareholders expense ratios sales load

breakpoints 12b-1 fees E Benefitsrisks of owning investment company securities

E Recognize derivative securities and their benefitsrisks

F G Understand unique aspects of international investing

F Emerging vs developed markets G American Depository Receipts (ADRs) H Currency influences (concept of risk)

G H Understand real estate partnerships and investment trusts

(REITs) and variable annuities G Definitions H Benefitsrisks

III Investment Recommendations and Strategies

39

A B Determine and analyze the financial profile of the client to

develop a suitable investment policy and strategy A Type of client

a Individual b Sole proprietorship c General partnership d Limited partnership (including family limited

partnership) e Limited liability company f C corporation g S corporation h Trust i Estate

B Financial goals C Current financial status (eg cash flow balance sheet) D Capital needs (eg current retirement death disability)

E Current investments and strategies F Time horizon G Non-financial investment considerations (eg values

attitudes experience demographic characteristics) H Risk tolerance I Tax situation

B C Understand portfolio management strategies styles and

techniques (fixed income and equities) B Portfolio management styles and strategies

a Strategic and tactical asset allocation (eg style asset class rebalancing)

b Active vs passive c Growth vs value d Market capitalization (micro small mid large) e Buyhold f Indexing g Diversification

C Funding techniques a Dollar-cost averaging b Income reinvestment (eg dividend interest cap gain)

C D Recognize fundamental taxation issues

C Individual income tax (eg capital gains tax basis retirement distribution alternative minimum tax)

D Corporate trust and estate income tax E Estate and gift tax

D E Recognize types of retirement plans and related issues

D Retirement plans a Individual Retirement Arrangements (IRA) b 403(b) plans c Qualified retirement plans (eg pension and profit

sharing 401(k)) d Nonqualified retirement plans

E Important ERISA issues a Fiduciary responsibility (eg 404(c)) b Investment policy statement

c Prohibited transactions

E F Define the fundamental terms and concepts of trading securities

E Terminology (eg bids offers quotes) F Role of broker-dealers specialists market-makers G Types of orders (eg market limit stop short sale) H Types of accounts (eg cash margin option) I Commissions markups spread

F G Calculate performance

F Calculate performance a Total return (ie yield plus growth) b Inflation-adjusted return c After-tax returnyield d Current yield

IV Ethics and Legal Guidelines

45

A B Understand relevant aspects of securities acts and other rules and

regulations in order to comply as an investment adviser representative

A Investment Company Act of 1940 B Investment Advisers Act of 1940 C Securities Act of 1933 and Securities Exchange Act of 1934

(as applicable to investment adviser issues) D SEC Release No IA-1092 (applicability of the Investment

Advisers Act to financial planners and others) E State securities laws (ie Blue Sky) F NASAA rules prohibiting dishonest and unethical business

practices G Limitations on permissible practice (ie technical licensing

requirements)

B C Demonstrate ability to apply ethical practices

B Fiduciary responsibility C Conflict of interest D Prudent Investor standards E Limitations on advice and activities (ie when to consult other

professionals)

EXHIBIT IV

Confidential Page 44 of 48 82202 Illegal Activities of Fee Only Planners in the Business of Insurance (Problems amp Solutions)

copy2002 Nigel Brian Taylor CFPreg all rights reserved

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

CFP Required subject matter for ldquoInsurance Planning and Risk Managementrdquo

CFPreg Candidates must complete comprehensive training in the following subject areas at a college or university whose program has been inspected and approved by the CFP Board This course represents approximately 20 of the educational requirement for CFP Candidates Other courses include ldquoFinancial Planning Fundamentalsrdquo ldquoInvestment Planningrdquo ldquoTax Planningrdquo ldquoRetirement Planning amp Qualified Plansrdquo and ldquoEstate Planningrdquo

Principles of insurance

A Definit ions and application of

principles

1) Risk

2) Peril

3) Hazard

4) Law of large numbers

5) Adverse selection

B Response to risk

1) Retain

2) Transfer

3) Control

4) Reduce

5) Avoid

C Mortality vs morbidity

Analysis and evaluation of risk

exposures

A Personal Insurance l ines

1) Death

2) Disability

3) Poor health

4) Unemployment

5) Outliving onersquos capital

B Property Insurance l ines

1) Real

2) Personal

3) Auto

C Liability Issues

1) Negligence

2) Libel

3) Slander

4) Malpractice

D Business-related risks

E Calculation of benefits

23 Legal aspects of insurance

A Indemnity

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Insurable interest

C Contract requirements

D Contract characterist ics

Property and casualty insurance

(individual and business)

A Real property

B Automobile and recreational

vehicles

C Business

D Business activity

E Personal property

F Umbrella liability

General business liability

A Professional l iabili ty

B Errors and omissions

D Product liability

Health insurance (individual)

A Hospital-surgical

B Major medical

C Traditional indemnity

D Preferred Provider Organization

(PPO)

E Health Maintenance Organization

(HMO)

F Medicare supplemental insurance

G Other

Disability income insurance

(individual)

A Occupational definit ions and

application

1) Total

2) Partial

3) Residual

C Directors and officers

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

B Benefit period

C Elimination period

D Benefit amount

E Riders

F Taxation of benefits

Long-term care insurance (individual

and joint)

A Basic provisions

B Eligibility

C Benefit amount and period

D Elimination period

E Inflation protection

F Nursing home and in-home care

G Comparing and selecting policies

H Tax implications and qualification

I Appropriateness of coverage

Life insurance

A Fundamentals

B Types

C Contractual provisions

D Dividend options

E Non-forfeiture and other options

F Settlement options

G Policy replacement

H Tax issues and strategies

I Policy ownership issues and

strategies including split-dollar

Viatical settlements

A Legal principles

B Requirements

C Tax implications

D Planning

E Ethical concepts and planning

Insurance needs analysis and

rationale

A Life insurance amount required

1) Liquidity and survivor income needs

2) Human life value

3) Capital retention

B Disabili ty insurance

C Long-term care insurance

D Health insurance

Source CFP Board of Standards Inc Denver CO

CFP Board Curriculum Requirements for the ldquoInsurance Planning And Risk Managementrdquo Module of the CFP Certification Course of Education

E Property insurance E Reinsurance

F Liabili ty insurance F Investments

Taxation of l ife disability and long- G Underwriting

term care insurance H Federal and state law

A Income

B Gift

C Estate

D Generation-Skipping Transfer

Tax (GSTT)

E Ownership issues

F Beneficiary issues

G Withdrawals

Insurance policy selection

A Purpose of coverage

B Length of t ime required

C Risk tolerance

D Cash flow constraints

Insurance company selection and due

diligence

A Financials

B Ratios

C Ratings

D Mutual vs stock

Source CFP Board of Standards Inc Denver CO

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

CURRENT ISSUE

PAST ISSUES

RIA Survey 2011 Click Here

ADVISOR SERVICES Broker-Dealers

CustodianFee-Only

Technology

ADVICE 401(k) plans

Annuities

Business Transitions

ComplianceFraud

Economy

Education529

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Insurance

Practice Management

Retirement Planning

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Social Media

Tax Planning

Women in Planning

INVESTING Alternative Investments

Analysis

Commodities

ETFs

Fixed Income

International

Mutual Funds

Free Site RegistrationgtgtLogin Logout

SEARCH GO December 10 2011

HOME CE CENTER WEBCASTS CONFERENCES EVENTS SUBSCRIBE

November 23 2011

SEC OFFICIAL SCRUTINIZED FOR lsquoCRASH-PROOF RETIREMENTrsquo INTERVIEW WITH ADVISOR

(Bloomberg News) The US Securities and Exchange Commissionrsquos internal watchdog has come under scrutiny for comments he made in a 75-minute videotaped interview about the agency and the stock market to a man who markets a ldquocrash-proof retirementrdquo plan through the Internet and a paid radio program

SEC Inspector General H David Kotz has been contacted about the matter by the agencyrsquos general counselrsquos office which also has briefed the SECrsquos commissioners over concerns the interview could be construed as investment advice or an endorsement of financial services

Phillip Cannella III chief executive officer of First Senior Financial Group in King of Prussia Pennsylvania edited the interview he conducted at SEC headquarters in late July into more than a dozen video segments He posted them on YouTube and his website wwwcrashproofretirementcom and plays them on the radio as well as during his seminars about insurance products for retirees

The SEC doesnrsquot ban its employees from interviews with people connected to commercial ventures Kotz said he cleared the matter in advance with the SECrsquos internal ethics counsel He told SEC officials he would ask an outside group the Council of Inspectors General on Integrity and Efficiency to look into whether he said or did anything improper in the interview according to two people briefed on the situation

The Federal Bureau of Investigation which oversees the panel within the inspector generalrsquos group that deals with integrity matters doesnrsquot comment on its inquiries said William Carter an FBI spokesman

lsquoAppropriate Caveatsrsquo

Kotz said in an e-mailed statement to Bloomberg News that he provided ldquoall the appropriate caveats and disclaimersrdquo to Cannella and ldquospecifically stated in the radio interview that I was not in a position to nor was I providing investment advicerdquo

SEC Chairman Mary Schapiro said in a statement that she appreciated that Kotz requested an independent review

ldquoDavid Kotz is an experienced professional with expertise in the ethics rules who I

believe would not intentionally create an appearance issuerdquo Schapiro said

The SEC didnrsquot say if it was taking further action on the matter The agencyrsquos ethics counsel Shira Pavis Minton didnrsquot respond to a request for comment

In the interview segments posted on the website Kotz discusses issues ranging from the Bernard Madoff fraud to the difficulties the SEC faces policing Wall Street A press release issued by Cannellarsquos company headlined Kotzrsquos suggestion that retirees consider cutting their investments in stocks

lsquoTurbulent Timesrsquo

ldquoSo much money is in the stock market where peoplersquos lives are so affected by it that sometimes it may make sense to take things out in turbulent times to ensure that yoursquore not living and dying so to speak by the Dow Jones going up and downrdquo Kotz told Cannella as the two sat in the agencyrsquos Washington offices in front of the SEC seal ldquoParticularly with whatrsquos occurred over the last several yearsrdquo

Kotz also discusses the SECrsquos past shortcomings and says the agency has improved being a ldquofundamentally different place now than when I first started at the SEC and before we issued our Madoff reportrdquo

FINANCIAL ADVISOR BLOGS

Evan Simonoffs Blog

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ONLINE EXTRAS

10 Ways To Stronger Client Connections

Tips on how to create stronger bonds with clients capped off IMCAs Winter Specialty Conference in Vail Colowith speaker Jamie Ziegler founder of AUMPartners telling attendees ldquoTrust is the single most important factor in building lasting relationshipsrdquo Read more

Business Growth Through Referrals

BOOKSTORE

httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 1 of 2

SEC Official Scrutinized For lsquoCrash-Proof Retirementrsquo Interview With Advisor 121011 818 AM

Real EstateREITs

US Equity

RESEARCH BD Ranking

RIA Ranking

SMA Ranking

MORE SERVICES BD Profiles 2011

BD Recruitment Center

RIA Services

White Papers

Cannella said in a phone interview that he was contacted by an SEC attorney several weeks ago asking that he put a disclaimer on the videos to make clear that neither the agency nor Kotz endorse sponsor or promote his firm Cannella said he quickly complied Kotz said he supported efforts by the SECrsquos general counselrsquos office ldquoto ensure that my interview is not being used to endorse any productrdquo

lsquoNot a Journalistrsquo

Cannella said he was pleased to be able to interview a high-level government official like Kotz -- a man he said he greatly respects While it costs him $12000 a week to air the radio show on two Philadelphia area stations Cannella said he treats it like a consumer advocacy program not an infomercial

ldquoI canrsquot believe myselfrdquo Cannella said ldquoIrsquom not a journalist and I got over a 75-minute interview with Kotz inside the SEC buildingrdquo

Besides the radio program Cannella said he holds ldquoeducational eventsrdquo in restaurants where he teaches people in their 50s and older about ldquosafe investment alternatives in the insurance industryrdquo His website has clips of prospective clients being asked about their reaction to watching the Kotz interview

One woman who wasnrsquot identified in the video said that Cannellarsquos interview with the inspector general shows that the host is ldquostanding up for the little people and very admirable and thatrsquos one of the reasons that Irsquom very anxious to proceed with Philrdquo

Probes

In another clip an unidentified man said ldquoIt was incredible to find out that the SEC feels like it canrsquot police the securities industry because it doesnrsquot have the funding or the manpowerrdquo

The fracas adds a new chapter to Kotzrsquos contentious four-year tenure at the SEC In recent months current and former officials have spoken out about what they say are his overly aggressive probes and their negative impact on the agencyrsquos ability to police the markets Earlier this month the Justice Department declined to open an investigation into Kotzrsquos allegations that former SEC General Counsel David Becker violated ethics laws

Kotz and his supporters have dismissed the complaints saying his oversight has done much to help the SEC burnish its image after it was widely attacked for missing massive frauds like Madoffrsquos and the alleged Ponzi scheme run by R Allen Stanford

Commissions

In his interview with Cannella Kotz said victims of investment schemes ldquodeserve a strong vibrant effective aggressive SEC that goes after those people gets their money back as possible and puts them in jailrdquo

Because he doesnrsquot sell securities Cannella isnrsquot regulated by the SEC He said he is licensed to sell insurance in over 40 states His company puts together individual plans for clients and then earns commission on products they buy from an insurance company He described the investments as ldquoguaranteed tax-deferred contractual agreements with income options from a statutory corporationrdquo

The investments are ldquooutside of the securities industryrdquo and ldquomany of them have outperformed the markets since their inception with no market risk no market fees no upfront commissions or sales costsrdquo he added

The trade magazine Senior Market Advisor in January 2008 reported that Cannella said he wrote about $25 million in premiums in 2007 for fixed index annuities Cannella said he didnrsquot want to put a specific name on the investments he sells because he thinks the media has misreported on the products

ldquoIrsquom not well-liked among securities guys because I am speaking truth and logic to a deceptive industryrdquo Cannella said ldquoYou canrsquot beat the sword of truthrdquo

Comments

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Techniques for gaining more business through client referrals were among the topics broached at the IMCA 2011 Winter Specialty Conference in Vail Colo Read more

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MARKETECONOMIC COMMENTARY

Raise Taxes On Rich To Reward True Job Creators In this opinion piece a venture capitalist makes a case for raising taxes on the rich to benefit the true job creators the middle class Read more

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ON THE MOVE

Atlanta Capital Group Continues Expansion

Birmingham Ala office will be third for Atlanta Capital Group Read more

NAIBD Welcomes Two Broker-Dealers To Its Board of Directors Small business experts Tina Maloney and Carolyn May join NAIBD board of directors Read more

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httpwwwfa-magcomcomponentcontentarticle7-news9226htmlItemid=171 Page 2 of 2

United States Government Accountability Office

Report to Congressional AddresseesGAO

January 2011 CONSUMER FINANCE

Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

GAO-11-235

January 2011

CONSUMER FINANCE Regulatory Coverage Generally Exists for Financial Planners but Consumer Protection Issues Remain

Accountability bull Integrity bull Reliability

Highlights of GAO-11-235 a report to congressional addressees

Why GAO Did This Study

Consumers are increasingly turning for help to financial plannersmdash individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products and managing tax and estate planning The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners This report examines (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of this regulation and (3) the advantages and disadvantages of alternative regulatory approaches To address these objectives GAO reviewed federal and state statutes and regulations analyzed complaint and enforcement activity and interviewed federal and state government entities and organizations representing financial planners various other arms of the financial services industry and consumers

What GAO Recommends

GAO recommends that (1) NAIC assess consumersrsquo understanding of the standards of care associated with the sale of insurance products (2) SEC assess investorsrsquo understanding of financial plannersrsquo titles and designations and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers NAIC said it would consider GAOrsquos recommendation and SEC provided no comments

View GAO-11-235 or key components For more information contact Alicia Puente Cackley at (202) 512-8678 or cackleyagaogov

What GAO Found

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level but various laws and regulations apply to most of the services they provide Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners

The regulatory structure applicable to financial planners covers the great majority of their services but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain First consumers may be unclear about when a financial planner is required to serve the clientrsquos best interest particularly when the same financial planner provides multiple services associated with different standards of care SEC is studying these issues with regard to securities transactions but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products Second financial planners can adopt numerous titles and designations which vary greatly in the expertise or training that they signify but consumers may not understand or be able to distinguish among them SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed Finally the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole A regulatory system should have data to identify risks and problem areas and given that financial planning is a growing industry that has raised certain consumer protection issues regulators could benefit from better information on the extent of problems specifically involving financial planning services

A number of stakeholders have proposed different approaches to the regulation of financial planners including (1) creation of a federally chartered board overseeing financial planners as a distinct profession (2) augmenting oversight of investment advisers with a self-regulatory organization (3) extending the fiduciary standard of care to more financial services professionals and (4) specifying standards for financial planners and the designations that they use While the views of stakeholder interests vary a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities Given available information an additional layer of regulation specific to financial planners does not appear to be warranted at this time

United States Government Accountability Office

Contents

Letter 1

Background 2 Various Federal and State Laws and Regulations Apply to Financial

Planners and Their Activities 3 Regulatory Structure for Financial Planners Covers Most Activities

but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited 11

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed 28

Conclusions 33 Recommendations 34 Agency Comments 35

Appendix I Scope and Methodology

Appendix II Comments from the National Association of

Insurance Commissioners

Appendix III Comments from the North American Securities

Administrators Association

Appendix IV GAO Contact and Staff Acknowledgments

Figures

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act 5

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners 12

Figure 3 Differences in the Standards of Care Required of Financial Planners 17

Page i GAO-11-235 Consumer Finance

37

41

42

46

Abbreviations

Advisers Act Investment Advisers Act of 1940 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer

Protection Act FINRA Financial Industry Regulatory Authority Form ADV Uniform Application for Investment Adviser

Registration FTC Federal Trade Commission NAIC National Association of Insurance Commissioners NASAA North American Securities Administrators Association SEC Securities and Exchange Commission

This is a work of the US government and is not subject to copyright protection in the United States The published product may be reproduced and distributed in its entirety without further permission from GAO However because this work may contain copyrighted images or other material permission from the copyright holder may be necessary if you wish to reproduce this material separately

Page ii GAO-11-235 Consumer Finance

United States Government Accountability Office

Washington DC 20548

January 18 2011

Congressional Addressees

Consumers are increasingly turning for help to professionals who describe themselves as financial planners for assistance with a broad range of services such as selecting the right balance of stocks and bonds for an investment portfolio choosing among insurance products and tax and estate planning Although there is no statutory or single definition of financial planning it can be broadly defined as a systematic process that individuals use to achieve their financial goals Between 2000 and 2008 the number of financial planners more than doubled and may continue to climb as more individuals are asked to take responsibility for their retirement savings and must choose among a growing array of investment options

Some financial planning organizations have raised concerns that no single law governs providers of financial planning services broadly describing this situation as a regulatory gap Concerns also exist that financial planners may have an inherent conflict of interest in recommending products they may stand to benefit from selling In addition some consumer advocates believe consumers may be confused by the numerous titles and designations that financial planners can use This report responds to a mandate included in Section 919C of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that directed GAO to conduct a study on the oversight and regulation of financial planners Our objectives are to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

To address these objectives we reviewed federal and selected state statutes and regulations applicable to financial planners We also reviewed regulations issued by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) and model laws developed by the National Association of Insurance Commissioners (NAIC) and by the North American Securities Administrators Association (NASAA) In addition we reviewed applicable securities and insurance laws and regulations of five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texas We also interviewed representatives of and

Page 1 GAO-11-235 Consumer Finance

gathered documentation from SEC FINRA the Federal Trade Commission (FTC) NAIC and organizations representing the interests of consumers financial planners and various arms of the financial services industry In addition we gathered information on complaints and enforcement activity as available from SEC FINRA FTC and selected state regulators and organizations A more extensive discussion of our scope and methodology appears in appendix I

We conducted this performance audit from June 2010 to January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Background Financial planning typically involves a variety of services including preparing financial plans for clients based on their financial circumstances and objectives and making recommendations for specific actions clients may take In many cases financial planners also help implement these recommendations by for example providing insurance products securities or other investments Individuals who provide financial planning services may call themselves a variety of different titles such as financial planner financial consultant financial adviser trust advisor or wealth manager In addition many financial planners have privately conferred professional designations or certifications such as Certified Financial Plannerreg Chartered Financial Consultantreg or Personal Financial Specialist

The number of financial planners in the United States rose from approximately 94000 in 2000 to 208400 in 2008 according to the Bureau of Labor Statistics The bureau projects the number will rise to 271200 by 2018 because of the need for advisers to assist the millions of workers expected to retire in the next 10 years1 According to the bureau 29 percent of financial planners are self-employed and the remaining 71

1While the Bureau of Labor Statistics reports these statistics using the term ldquofinancial adviserrdquo bureau officials said that this term could be used interchangeably with financial planner The bureau broadly defined a ldquopersonal financial adviserrdquo as an individual who provides financial planning services and that private bankers or wealth managers would also be categorized as financial advisers

Page 2 GAO-11-235 Consumer Finance

percent are employees of firms some of them large entities with offices nationwide that provide a variety of financial services The median annual wage for financial planners was $68200 in May 2009

According to an analysis of the 2007 Survey of Consumer Finances the most recent year for which survey results are available in 2007 about 22 percent of US households used a financial planner for investment and saving decisions and about 12 percent of US households used a financial planner for making credit and borrowing decisions Those households most likely to use a financial planner were those with higher incomes For example 37 percent of households in the top income quartile used a financial planner to make investment and saving decisions compared to 10 percent of households in the bottom quartile2

Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities

Financial planners are primarily regulated by federal and state investment adviser laws because planners typically provide advice about securities as part of their business In addition financial planners that sell securities or insurance products are subject to applicable laws governing broker-dealers and insurance agents Certain laws and regulations can also apply to the use of the titles designations and marketing materials that financial planners use

Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws

There is no specific direct regulation of ldquofinancial plannersrdquo per se at the federal or state level However the activities of financial planners are primarily regulated under federal and state laws and regulations governing investment advisersmdashthat is individuals or firms that provide investment advice about securities for compensation According to SEC staff financial planning normally includes making general or specific recommendations about securities insurance savings and anticipated retirement3 SEC has issued guidance that broadly interprets the Investment Advisers Act of 1940 (Advisers Act) to apply to most financial planners because the advisory services they offer clients typically include

2Our percentage estimates based on the 2007 Survey of Consumer Finances have 95 percent confidence intervals of +- 25 percentage points or less For example we are 95 percent confident that between 82 and 118 percent of households in the bottom quartile used financial planners for investment decisions See appendix I for additional information

3Investment Adviser Act Release No 1092 52 Fed Reg 38400 38401 (Oct 16 1987) (IA Rel No 1092)

Page 3 GAO-11-235 Consumer Finance

providing advice about securities for compensation4 Similarly NASAA representatives told us that states take a similar approach on the application of investment adviser laws to financial planners and as a result generally register and oversee financial planners as investment advisers As investment advisers financial planners are subject to a fiduciary standard of care when they provide advisory services so that the planner ldquo[is] held to the highest standards of conduct and must act in the best interest of [the adviserrsquos] clientsrdquo5

SEC and state securities departments share responsibility for the oversight of investment advisers in accordance with the Advisers Act6 Under that act SEC generally oversees investment adviser firms that manage $25 million or more in client assets and the states that require registration oversee those firms that manage less7 However as a result of section 410 of the Dodd-Frank Act as of July 2011 the states generally will have registration and oversight responsibilities for investment adviser firms that manage less than $100 million in client assets instead of firms that manage less than $25 million in assets as under current law8 This will result in the states gaining responsibility for firms with assets under management between $25 million and $100 million As shown in figure 1 as of October 2010 of the approximately 16000 investment adviser firms providing

4The Advisers Act defines an investment adviser as any person (ie individual or firm) who is in the business of providing advice or issuing reports or analyses regarding securities for compensation 15 USC sect 80b-2(a)(11) IA Rel No 1092 In addition to applicable securities law investment advice related to a retirement savings plan such as a 401(k) plan may also be subject to the Employee Retirement Income Security Act The requirements under that act are outside the scope of this study A forthcoming GAO report GAO-11-119 will provide more information on investment advice in 401(k) plans

5In SEC v Capital Gains Research Bureau Inc 375 US 180 189-192 (1963) the US Supreme Court recognized that the Advisers Act imposes a fiduciary duty on investment advisers This standard imposes an affirmative duty to act solely in the best interests of the client The investment adviser also must eliminate or disclose all conflicts of interest

615 USC sect 80b-3a The term investment adviser can refer to a person or firm Investment adviser firms generally register with SEC or state securities departments as registered investment advisers According to NASAA certain natural persons that are employed by firms generally register with the state securities departments as investment adviser representatives

7Id Under 17 CFR sect 275203A-1 SEC registration has been optional for certain

investment advisers having assets under management between $25 and $30 million Firms also may have a different basis for registering with SEC (other than the amount of client assets the firm has under management) such as whether the principal office and place of business are within a state that has no registration requirement

8Pub L No 111-203 sect 410 124 Stat 1376 1576-77 (2010)

Page 4 GAO-11-235 Consumer Finance

financial planning services the states were overseeing about 11100 firms and SEC was overseeing about 4900 such firms9 However in July 2011 about 2400 of investment adviser firms that provided financial planning services (15 percent of the 16000 firms) may shift from SEC to state oversight10

Figure 1 Change in Regulatory Oversight of Investment Adviser Firms Providing Financial Planning Services as a Result of the Dodd-Frank Act

SECrsquos supervision of investment adviser firms includes evaluating their compliance with federal securities laws by conducting examinations of firmsmdashincluding reviewing disclosures made to customersmdashand investigating and imposing sanctions for violations of securities laws According to SEC staff in its examinations the agency takes specific steps to review the financial planning services of investment advisers For example SEC may review a sample of financial plans that the firm prepared for its customers to check whether the firmrsquos advice and investment recommendations are consistent with customersrsquo goals the contract with the firm and the firmrsquos disclosures

9In registering with SEC or a state investment adviser firms are required to report whether they provide financial planning services in Part 1A of the Uniform Application for Investment Adviser Registration Item 5 G(1) SEC does not provide a definition of financial planning services for firms to use when completing the registration form The total number of investment adviser firms overseenmdashincluding both those that do and do not provide financial planning servicesmdashis 15016 for the states and 11873 for SEC For data on investment adviser firms firms that were registered with both SEC and the states were counted with SEC-registered investment adviser firms

10See 75 Fed Reg 77052 (Dec 10 2010) (SEC proposed rule which if finalized would give advisers until August 20 2011 to report the market value of their assets under management to the SEC as the first step in the process)

Page 5 GAO-11-235 Consumer Finance

However the frequency with which SEC conducts these examinations varies largely because of resource constraints faced by the agency11 SEC staff told us that the agency examined only about 10 percent of the investment advisers it supervises in 2009 In addition they noted that generally an investment adviser is examined on average every 12 to 15 years although firms considered to be of higher risk are examined more frequently In 2007 we noted that harmful practices could go undetected because investment adviser firms rated lower-risk are unlikely to undergo routine examinations within a reasonable period of time if at all12

According to NASAA state oversight of investment adviser firms generally includes activities similar to those undertaken by SEC including taking specific steps to review a firmrsquos financial planning services According to NASAA states generally register not just investment adviser firms but also investment adviser representativesmdashthat is individuals who provide investment advice and work for a state- or federally registered investment adviser firm13

Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities

In addition to providing advisory services such as developing a financial plan financial planners generally help clients implement the plan by making specific recommendations and by selling securities insurance products and other investments SEC data show that as of October 2010 19 percent of investment adviser firms that provided financial planning

11GAO Securities and Exchange Commission Steps Being Taken to Make Examination

Program More Risk-Based and Transparent GAO-07-1053 (Washington DC Aug 14 2007) As we noted since the detection of mutual fund trading abuses in late 2003 in light of limited resources SEC has shifted its approach to examinations of investment advisers from one that focused on routinely examining all registered firms regardless of risk to one that focuses on more frequently examining those firms and industry practices at higher risk for compliance issues

12GAO-07-1053 SEC reported in February 2010 that it is now placing a greater emphasis on fraud detection in addition to identifying potential violations of securities laws and rules strengthening procedures and internal controls to maximize limited resources recruiting examiners with specialized skills and increasing expertise through enhanced training

13According to NASAA New York Minnesota and Wyoming do not register investment adviser representatives although New York and Minnesota do have certain examination and other requirements that must be met

Page 6 GAO-11-235 Consumer Finance

services also provided brokerage services and 27 percent provided insurance14

Financial planners that provide brokerage services such as buying or selling stocks bonds or mutual fund shares are subject to broker-dealer regulation at the federal and state levels At the federal level SEC oversees US broker-dealers and SECrsquos oversight is supplemented by self-regulatory organizations (SRO)15 The primary SRO for broker-dealers is FINRA State securities offices work in conjunction with SEC and FINRA to regulate securities firms Salespersons working for broker-dealers are subject to state registration requirements including examinations About half of broker-dealers were examined in 2009 by SEC and SROs Under broker-dealer regulation financial planners are held to a suitability standard of care when making a recommendation to a client to buy or sell a security meaning that they must recommend those securities that they reasonably believe are suitable for the customer16

Financial planners that sell insurance products such as life insurance or annuities must be licensed by the states to sell these products and are subject to state insurance regulation In contrast to securities entities (other than national banks) that are subject to dual federal and state oversight the states are generally responsible for regulating the business of insurance When acting as insurance agents financial planners are

14The brokerage and insurance services provided by these investment adviser firms are not necessarily a part of their financial planning services In addition many financial planners may sell securities- or insurance-related products through affiliated brokers or agents

15The primary law for regulating broker-dealers is the Securities Exchange Act of 1934 codified at 15 USC sectsect 78a-78oo Brokers effect transactions for the account of others while dealers buy and sell securities for their own accounts 15 USC sect 78c The term registered representative is generally used to refer to certain employees of a broker-dealer firm who are engaged in providing securities recommendations Broker-dealers must be members of a qualifying self-regulatory organization (either a national exchange or a registered securities association) 15 USC sect 78o(b)(8)

16Under NASD Conduct Rule 2310 a FINRA member making an investment recommendation to a customer must have grounds for believing that the recommendation is suitable for that customerrsquos financial situation and needs In November 2010 SEC approved FINRArsquos proposed new consolidated rules governing the suitability obligations of its members 75 Fed Reg 71479 (Nov 23 2010) This rule proposed FINRA Rule 2111 requires salespersons to have a reasonable basis for believing based on adequate due diligence that a recommendation of a transaction or strategy is suitable for at least some investors that the recommendation is suitable for a specific customer based on that customerrsquos profile and that a series of recommended transactions is not excessive and unsuitable for the customer

Page 7 GAO-11-235 Consumer Finance

subject to state standard of care requirements which can vary by product and by state As of October 2010 32 states had adopted a previous version of the NAIC Suitability in Annuities Transactions Model Regulation according to NAIC17 In general this regulation requires insurance agents to appropriately address consumersrsquo insurance needs and financial objectives at the time of an annuity transaction18 Thirty-four states had also adopted the Life Insurance Disclosure Model Regulation in a uniform and substantially similar manner as of July 2010 according to NAIC This regulation does not include a suitability requirement although it does require insurers to provide customers with information that will improve their ability to select the most appropriate life insurance plan for their needs and improve their understanding of the policyrsquos basic features

Financial planners that sell variable insurance products such as variable life insurance or variable annuities are subject to both state insurance regulation and broker-dealer regulation because these products are regulated as both securities and insurance products When selling variable insurance financial planners are subject to FINRA sales practice standards requiring that such sales be subject to suitability standards19 In addition other FINRA rules and guidance such as those governing standards for communication with the public apply to the sale of variable insurance products20 In addition as previously discussed 32 states also generally require insurance agents and companies to appropriately address a consumerrsquos insurance needs and financial objectives at the time of an annuity transaction However in the past we have reported that the effectiveness of market conduct regulationmdashthat is examination of the sales practices and behavior of insurersmdashmay be limited by a lack of

17NAIC amended this model regulation in March 2010 according to NAIC one state has adopted the updated model and additional states are expected to do so

18According to NAIC in 4 of these 32 states the regulation applies only when the consumers are senior citizens

19NASD Notice to Members 96-86 outlines that variable contracts for insurance products are subject to suitability requirements

20NASD Interpretive Material 2210-2 outlines guidance concerning communications with the public about variable life insurance and variable annuities FINRA has proposed that this guidance be replaced by a separate new FINRA Rule 2211 See FINRA Rule Filing No SR-FINRA-2009-070

Page 8 GAO-11-235 Consumer Finance

reciprocity and uniformity which may lead to uneven consumer protection across states21

Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations

At the federal level SEC and FINRA have regulations on advertising and standards of communication that apply to the strategies investment adviser firms and broker-dealers use to market their financial planning services For example SEC-registered investment advisers must follow SEC regulations on advertising and other communications which prohibit false or misleading advertisements and these regulations apply to investment advisersrsquo marketing of financial planning services22 FINRA regulations on standards for communication with the public similarly prohibit false exaggerated unwarranted or misleading statements or claims by broker-dealers and broker-dealer advertisements are subject to additional approval filing and recordkeeping requirements and review procedures23 According to many company officials we spoke with their companies responded to these requirements by putting procedures in place to determine which designations and titles their registered representatives may use in their marketing materials such as business cards

SEC and state securities regulators also regulate information that investment advisers are required to disclose to their clients In the Uniform Application for Investment Adviser Registration (Form ADV) regulators have typically required investment adviser firms to provide new and prospective clients with background information such as the basis of the advisory fees types of services provided (such as financial planning services) and strategies for addressing conflicts of interest that may arise

21GAO Insurance Reciprocity and Uniformity NAIC and State Regulators Have Made

Progress in Producer Licensing Product Approval and Market Conduct Regulation but

Challenges Remain GAO-09-372 (Washington DC Apr 6 2009) Reciprocity refers to the extent to which state regulators accept other statesrsquo regulatory actions Uniformity refers to the extent to which states have implemented either the same or substantially similar regulatory standards and procedures

2217 CFR sect 275206(4)-1

23NASD Rule 2210

Page 9 GAO-11-235 Consumer Finance

from their business activities24 Recent changes to Form ADV are designed to improve the disclosures that firms provide to clients For example firms must now provide clients with information about the advisory personnel on whom they rely for investment advice including the requirements and applicability of any professional designations or certifications advisers may choose to include in their background information

Most states regulate the use of the title ldquofinancial plannerrdquo and state securities and insurance laws can apply to the misuse of this title and other titles For example according to NASAA at least 29 states specifically include financial planners in their definition of investment adviser25 According to NAIC in many states regulators can use unfair trade practice laws to prohibit insurance agents from holding themselves out as financial planners when in fact they are only engaged in the sale of life or annuity insurance products However as noted earlier the effectiveness of the regulation of insurersrsquo market conduct varies across states In particular in 2010 we noted inconsistencies in the state regulation of life settlements a potentially high-risk transaction in which financial planners may participate26

In addition we were told some states had adopted regulations limiting the use of ldquosenior-specific designationsrdquomdashthat is designations that imply expertise or special training in advising senior citizen or elderly investors According to NAIC as of December 2010 25 states had adopted in a uniform and substantially similar manner the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities which limits the use of senior-specific designations by insurance agents According to NASAA as of December 2010 31 states had adoptedmdashand at least 9 other states were

24SEC and the states use Form ADV to register investment adviser firms and collect information from them Part 2 of Form ADV provides information about the investment adviser and its business for use of the clients and is publicly available on the Investment Adviser Public Depository Web site The SEC adopted amendments to Form ADV that were effective October 12 2010 requiring Part 2 of Form ADV be written in a plain English narrative format See Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (to be codified at 17 CFR pt 275 and 279)

25The District of Columbia and Puerto Rico also include financial planners in their definitions of investment adviser according to NASAA

26GAO Life Insurance Settlements Regulatory Inconsistencies May Pose a Number of

Challenges GAO-10-775 (Washington DC July 9 2010)

Page 10 GAO-11-235 Consumer Finance

planning to adoptmdashthe NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations which prohibits the misleading use of senior-specific designations by investment adviser representatives and other financial professionals

Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited

The regulatory system for financial planners covers most activities in which they engage However enforcement of regulation may be inconsistent and some questions exist about consumersrsquo understanding of the roles standards of care and titles and designations that a financial planner may have The ability of regulators to identify potential problems is limited because they do not specifically track complaints inspections and enforcement actions specific to financial planning services

Existing Regulation Covers Most Financial Planning Services

Although there is no single stand-alone regulatory body with oversight of financial planners the regulatory structure for financial planners covers most activities in which they engage As discussed earlier and summarized in figure 2 the primary activities a financial planner performs are subject to existing regulation at the federal or state level primarily through regulation pertaining to investment advisers broker-dealers and insurance agents As such SEC FINRA and NASAA staff a majority of state securities regulators financial industry representatives consumer groups and academic and subject matter experts with whom we spoke said that in general they believe the regulatory structure for financial planners is comprehensive although as discussed below the attention paid to enforcing existing regulation has varied

Page 11 GAO-11-235 Consumer Finance

Figure 2 Summary of Key Statutes and Regulations That Can Apply to Financial Planners

Financial planner

Capacity Investment adviser Broker-dealer Insurance agent

Applicable federal and state laws

Federal bull Investment Advisers Act of 1940 and rules from SEC

State bull State securities laws

Federal bull Securities and Exchange Act of 1934 and rules of SEC and FINRA

State bull State securities laws

State bull State insurance laws

Financial planning service covered by regulation

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for specific securities products bull Purchase or sale of securities products

bull Recommendations for insurance products

bull Sale of insurance products

bull Sale of variable insurance (variable annuities variable life insurance) bull

Federal and state regulators enforcing laws

Federal bull SEC

State bull State securities agencies

Federal bull SEC and FINRA

State bull State securities agencies

State bull State insurance agencies

Customer

Source GAO

Note This figure highlights three major areas of regulatory oversight but is not comprehensive and does not include other regulatory regimes or practice standards that may be applicable to financial planners In addition not all investment advisers broker-dealers or insurance agents are financial planners

As noted earlier the activities a financial planner normally engages in generally include advice related to securitiesmdashand such activities make financial planners subject to regulation under the Advisers Act One industry association and an academic expert noted that it would be very difficult to provide financial planning services without offering investment

Page 12 GAO-11-235 Consumer Finance

advice or considering securities SEC staff told us that financial planners holding even broad discussions of securitiesmdashfor example what proportion of a portfolio should be invested in stocksmdashwould be required to register as investment advisers or investment adviser representatives In theory a financial planner could offer only services that do not fall under existing regulatory regimesmdashfor example advice on household budgetingmdashbut such an example is likely hypothetical and such a business model may be hard to sustain SEC and NASAA staff a majority of the state securities regulators we spoke with and many representatives of the financial services industry told us that they were not aware of any individuals serving as financial planners who were not regulated as investment advisers or regulated under another regulatory regime Some regulators and industry representatives also said that to the extent that financial planners offered services that did not fall under such regulation the new Bureau of Consumer Financial Protection potentially could have jurisdiction over such services27

However not everyone agreed that regulation of financial planners was comprehensive One group the Financial Planning Coalition has argued that a regulatory gap exists because no single law governs the delivery of the broad array of financial advice to the public28 According to the coalition the provision of integrated financial advicemdashwhich would cover topics such as selecting and managing investments income taxes saving for college home ownership retirement insurance and estate planningmdash is unregulated Instead the coalition says that there is patchwork regulation of financial planning advice and it views having two sets of lawsmdashone regulating the provision of investment advice and another regulating the sale of productsmdashas problematic

27Section 1011 of the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate ldquothe offering and provision of consumer financial products or services under the Federal consumer financial lawsrdquo A financial product or service is defined in section 1002(15)(A)(viii) of the act to include financial advisory services to consumers on individual financial matters with the exception of advisory services related to securities provided by a person regulated by SEC or a state securities commission to the extent that such person acts in a regulated capacity Accordingly it appears that the bureau may have jurisdiction over financial planners to the extent that they may offer services that would not be under the jurisdiction of SEC or a state securities commission

28The members of this coalition include the Certified Financial Planner Board of Standards Inc the Financial Planning Association and the National Association of Personal Financial Advisors

Page 13 GAO-11-235 Consumer Finance

In addition although the regulatory structure itself for financial planners may generally be comprehensive attention paid to enforcing existing statute and regulation has varied For example as noted earlier due to resource constraints the examination of SEC-supervised investment advisers is infrequent Further as also noted earlier market conduct regulation of insurersmdashwhich would include the examination of the sales practices and behavior of financial planners selling insurance productsmdash has been inconsistent Some representatives of industry associations told us that they believed that a better alternative to additional regulation of financial planners would be increased enforcement of existing law and regulation particularly related to fraud and unfair trade practices

Certain professionalsmdashincluding attorneys certified public accountants broker-dealers and teachersmdashwho provide financial planning advice are exempt from regulation under the Advisers Act if such advice is ldquosolely incidentalrdquo to their other business activities29 According to an SEC staff interpretation this exemption would not apply to individuals who held themselves out to the public as providing financial planning services and would apply only to individuals who provided specific investment advice on anything other than ldquorare isolated and non-periodic instancesrdquo30 Banks and bank employees are also excluded from the Advisers Act and are subject to separate banking regulation31 The American Bankers Association told us that the financial planning activities of bank employees such as trust advisors or wealth managers were typically utilized by clients with more than $5 million in investable assets The association noted that these activities were subject to a fiduciary standard and the applicable supervision of federal and state banking regulators

Most regulators and academic experts and many financial services industry representatives we spoke with told us that there is some overlap in the regulation of individuals who serve as financial planners because

2915 USC sect 80b-2(a)(11) IA Rel No 1092(II)(B) at 38403 Under 15 USC sect 80bshy2(a)(11)(C) brokers and dealers also cannot receive any special compensation for their services in order to be exempt from registration as an investment adviser

30Id

31Id The Advisers Act excludes bank and bank holding companies from the definition of

investment adviser Further a bank and a bank holding company is an investment adviser under the act to the extent that the bank or bank holding company serves or acts as an adviser to a registered investment company If such services are performed in a separate department or division of a bank the department or division and not the bank itself is the investment adviser

Page 14 GAO-11-235 Consumer Finance

such individuals might be subject to oversight by different regulatory bodies for the different services they provide For example a financial planner who recommends and sells variable annuities as part of a financial plan is regulated as a registered representative of a broker-dealer as well as an insurance agent under applicable federal and state laws However some state regulators we spoke with told us that such overlap may be appropriate since the regulatory regimes cover different functional areas

Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products

As seen in figure 3 financial planners are subject to different standards of care in their capacities as investment advisers broker-dealers and insurance agents

bull Fiduciary Standard of Care As noted earlier investment advisers are subject to a fiduciary standard of caremdashthat is they must act in their clientrsquos best interest ensure that recommended investments are suitable for the client and disclose to the client any material conflicts of interest32

According to SEC and NASAA representatives the fiduciary standard applies even when investment advisers provide advice or recommendations about products other than securities such as insurance in conjunction with advice about securities

bull Suitability Standard of Care When Recommending Security Products FINRA regulation requires broker-dealers to adhere to a suitability standard when rendering investment recommendationsmdashthat is they must recommend only those securities that they reasonably believe are suitable for the customer33 Unlike the fiduciary standard suitability rules do not necessarily require that the clientrsquos best interest be served According to FINRA staff up-front general disclosure of a broker-dealerrsquos business activities and relationships that may cause conflicts of interest is not

32The SEC has in effect established rules of conduct for investment advisers including requirements for disclosing conflicts of interest obtaining the best execution on behalf of clients allocating investments among clients fairly ensuring that investments are suitable for clients and ensuring that there is a reasonable basis for recommendations SEC also requires investment advisers to maintain records pertaining to client accounts and business operations

33A broker-dealer must have an adequate and reasonable basis for any recommendation and must make recommendations based on a customerrsquos financial situation needs and other securities holdings

Page 15 GAO-11-235 Consumer Finance

required34 However according to SEC broker-dealers are subject to many FINRA rules that require disclosure of conflicts in certain situations although SEC staff also note that those rules may not cover every possible conflict of interest and disclosure may occur after conflicted advice has already been given35

bull Suitability Standard of Care When Recommending Insurance Products Standards of care for the recommendation and sale of insurance products vary by product and by state For example as seen earlier NAICrsquos model regulations on the suitability standard for annuity transactions adopted by some states but not others require consideration of the insurance needs and financial objectives of the customer while NAICrsquos model regulation for life insurance does not include a suitability requirement per se

34Letter from Marc Menchel Executive Vice President and General Counsel FINRA to Elizabeth M Murphy Secretary SEC 4 (Aug 25 2010) available at httpwwwfinraorgwebgroupsindustryipregguidedocumentsindustryp121983p df

35The standards of conduct for broker-dealers may also be based on antifraud provisions of the securities law and agency principles Broker-dealers also have a duty of fairness in their contracts with a customer which requires them to disclose material information that the customer would consider important as an investor In addition broker-dealers that handle discretionary accounts are generally thought to owe fiduciary obligations to their customers

Page 16 GAO-11-235 Consumer Finance

Figure 3 Differences in the Standards of Care Required of Financial Planners

Financial planner

Capacity

Investment adviser Broker-dealer Insurance agent

Fiduciary Suitability Varies by product and by state insurance law

Standard of care

bull Person has an affirmative duty to render services solely in the best interests of clients

bull Requires advisers to disclose material conflicts of interest to clients

bull Rules require standard of care that includes among other things rendering

investment recommendations that are suitable for customers

bull Requires insurance agents to follow suitability standards when state has adopted such standards for products

Financial planning service covered by standard of care

bull Advice about securities including advice given in conjunction with product recommendations and advice about non-securities

bull Recommendations for the purchase or sale of specific securities products

bull Recommendations for the purchase of insurance products

bull Recommendations for the purchase of variable insurance (variable annuities variable life insurance)

Customer

Source GAO

Note This figure is illustrative and is not comprehensive financial planners may serve in capacities other than those shown here and not all investment advisers broker-dealers and insurance agents serve as financial planners

Conflicts of interest can exist when for example a financial services professional earns a commission on a product sold to a client Under the fiduciary standard applicable to investment advisers financial planners must mitigate any potential conflicts of interest and disclose any that remain But under a suitability standard applicable to broker-dealers conflicts of interest may exist and generally may not need to be disclosed

Page 17 GAO-11-235 Consumer Finance

up-front36 For example as confirmed by FINRA financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission as long as the product is suitable and the broker-dealer complies with other requirements Because the same individual or firm can offer a variety of services to a clientmdasha practice sometimes referred to as ldquohat switchingrdquomdashthese services could be subject to different standards of care As such representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care if any applies to a financial professional As shown above the standards of caremdashand the extent to which conflicts of interest must be disclosedmdashcan vary depending on the capacity in which the individual serves37 A 2007 report by the Financial Planning Association stated that ldquoit would be difficult if not impossible for an individual investor to discern when the adviser was acting in a fiduciary capacity or in a non-fiduciary capacityrdquo38 A 2008 SEC study conducted by the RAND Corporation consisting of a national household survey and six focus group discussions with investors found that consumers generally did not understand not only the distinction between a suitability and fiduciary standard of care but also the differences between broker-dealers and investment advisers39 Similarly a 2010 national study of investors found that most were confused about which financial professionals are required to operate under a fiduciary standard that requires professionals to put their clientrsquos interest ahead of their own40

36FINRA officials have stated that they believe that the regulation of broker-dealersmdashwhile lacking an express fiduciary dutymdashprescribes in great detail the conduct and supervision of broker-dealers who provide investment advice to retail customers

37Blackrsquos Law Dictionary (9th ed 2009) defines the term ldquoconflict of interestrdquo as a ldquoreal or seeming incompatibility between onersquos private interests and onersquos public or fiduciary dutiesrdquo

38Final Report on Financial Planner Standards of Conduct FPA Fiduciary Task Force

June 2007

39Angela A Hung et al RAND Institute for Civil Justice Investor and Industry

Perspectives on Investment Advisers and Broker-Dealers (2008)

40Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010 The survey was conducted among a sample of 2012 adults living in the continental United States including 1319 who identified themselves as investors The survey was sponsored by AARP the Consumer Federation of America NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors

Page 18 GAO-11-235 Consumer Finance

Representatives of financial services firms that provide financial planning told us they believe that clients are sufficiently informed about the differing roles and accompanying standards of care that a firm representative may have They noted that when they provide both advisory and transactional services to the same customer each servicemdashsuch as planning brokerage or insurance salesmdashis accompanied by a separate contract or agreement with the customer These agreements disclose that the firmrsquos representatives have different obligations to the customer depending on their role In addition once a financial plan has been provided some companies told us that they have customers sign an additional agreement stating that the financial planning relationship with the firm has ended

Recent revisions by SEC to Form ADV disclosure requirements were designed to address among other things consumer understanding of potential conflicts of interest by investment advisers and their representatives Effective October 12 2010 SEC revised Form ADV Part 2 which financial service firms must provide to new and prospective clients41 The new form which must be written in plain English is intended to help consumers better understand the activities and affiliations of their investment adviser It requires additional disclosu res about a firmrsquos conflicts of interest compensation business activities and disciplinary information that is material to an evaluation of the adviser rsquos integrity Similarly in October 2010 FINRA issued a regulatory notice requesting comments on a concept proposal regarding possible new disclosure requirements that would among other things detail for consumers in plain English the conflicts of interest that broker-dealers may have associated with their services42

Section 913 of the Dodd-Frank Act requires SEC to study the substantive differences between the applicable standards of care for broker-dealers and investment advisers the effectiveness of the existing legal or regulatory standards of care for brokers dealers and investment advisers and consumersrsquo ability to understand the different standards of care SEC

41Amendments to Form ADV 75 Fed Reg 49234 (Aug 12 2010) (requires investment advisers registered with SEC to provide new and prospective clients with a brochure and brochure supplements clearly setting forth a meaningful current disclosure of the business practices conflicts of interest and background of the investment adviser and its advisory personnel and requires the brochures to be filed with SEC electronically which will make them available to the public through its Web site)

42FINRA Regulatory Notice 10-54

Page 19 GAO-11-235 Consumer Finance

will also consider the potential impact on retail customers of imposing the same fiduciary standard that now applies to investment advisers on broker-dealers when they provide personalized investment advice Under the act SEC may promulgate rules to address these issues and is specifically authorized to establish a uniform fiduciary duty for broker-dealers and investment advisers that provide personalized investment advice about securities to customers As a result further clarification of these standards may be forthcoming FINRA officials told us that they support a fiduciary standard of care for broker-dealers when they provide personalized investment advice to retail customers

Consumer confusion on standards of care may also be a source of concern with regard to the sale of some insurance products A 2010 national survey of investors found that 60 percent mistakenly believed that insurance agents had a fiduciary duty to their clients43 Some insurance products such as annuities are complex and can be difficult to understand and annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators as well as SEC and FINRA for many years44 According to NAIC many states have requirements that insurance salespersons sell annuities only if the product is suitable for the customer However NAIC notes that some states do not have a suitability requirement for annuities Consumer groups and others have stated that high sales commissions on certain insurance products including annuities may provide salespersons with a substantial financial incentive to sell these products which may or may not be in the consumerrsquos best interest As a result of section 989J of the Dodd-Frank Act one type of annuitymdashthe indexed annuitymdashis to be regulated by states as an insurance product rather than regulated by SEC as a security under certain conditions45

SECrsquos pending study related to the applicable standards of care for broker-dealers and investment advisers will not look at issues of insurance that

43Infogroup Opinion Research Corporation US Investors amp The Fiduciary Standard A

National Opinion Survey September 15 2010

44See for example Securities and Exchange Commission Rule 151A and Annuities Issues and Legislation CRS Report for Congress 7-7500 (July 29 2010)

45State regulation applies so long as a state has adopted NAICrsquos Suitability in Annuity Transactions model regulation or if an insurance company adopts and implements practices on a nationwide basis that meet or exceed the minimum requirements established by NAICrsquos model regulation Indexed annuities are products that guarantee a purchaserrsquos principal and a certain rate of return and offer a chance for additional returns linked to a securities index or indices

Page 20 GAO-11-235 Consumer Finance

fall outside of SECrsquos jurisdiction NAIC has not undertaken a similar study regarding consumer understanding of the standard of care for insurance agents As we reported in the past financial markets function best when consumers understand how financial service providers and products work and know how to choose among them46 Given the evidence of consumer confusion about differing standards of care and given the increased risks that certain insurance products can pose there could be benefits to an NAIC review of consumersrsquo understanding of standards of care for high-risk insurance products

Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public

Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public including financial planner financial consultant and financial adviser among many others However evidence suggests that the different titles financial professionals use can be confusing to consumers The 2008 RAND study found that even experienced investors were confused about the titles used by broker-dealers and investment advisers including financial planner and financial adviser Similarly in consumer focus groups of investors conducted by SEC in 2005 as part of a rulemaking process participants were generally unclear about the distinctions among titles including broker investment adviser and financial planner47 In addition a representative of one consumer advocacy group has expressed concern that some financial professionals may use as a marketing tool titles suggesting that they provide financial planning services when in fact they are only selling products One industry group the Financial Planning Coalition also has noted that some individuals may hold themselves out as financial planners without meeting minimum training or ethical requirements Federal and state regulators told us they generally focused their oversight and enforcement actions on financial plannersrsquo activities rather than the titles they use Moreover NASAA has said that no matter what title financial planners use most are required to register as investment adviser representatives and must satisfy certain competency requirements

46GAO Financial Regulation A Framework for Crafting and Assessing Proposals to

Modernize the Outdated US Financial Regulatory System GAO-09-216 (Washington DC Jan 8 2009)

47Results of Investor Focus Group Interviews About Proposed Brokerage Account

Disclosures Report to the Securities and Exchange Commission by Siegel amp Gale LLC and Gelb Consulting Group Inc Mar 10 2005

Page 21 GAO-11-235 Consumer Finance

including passing an examination or obtaining a recognized professional designation48

Financial plannersrsquo professional designations are typically conferred by a professional or trade organization These designations may indicate that a planner has passed an examination met certain educational requirements or had related professional experience Some of these designations require extensive classroom training and examination requirements and include codes of ethics with the ability to remove the designation in the event of violations State securities regulators view five specific designations as meeting or exceeding the registration requirements for investment adviser representatives according to NASAA and allow these professional designations to satisfy necessary competency requirements for prospective investment adviser representatives49 For example one of these five designations requires a bachelorrsquos degree from an accredited college or university 3 years of full-time personal financial planning experience a certification examination and 30 hours of continuing education every 2 years

The criteria used by organizations that grant professional designations for financial professionals vary greatly FINRA has stated that while some designations require formal certification procedures including examinations and continuing professional education credits others may merely signify that membership dues have been paid The Financial Planning Coalition and The American College a nonprofit educational institution that confers several financial designations similarly told us that privately conferred designations range from those with rigorous competency practice and ethical standards and enforcement to those that can be obtained with minimal effort and no ongoing evaluation

48According to NASAA all but three statesmdashNew York Minnesota and Wyomingmdashregister investment adviser representatives and require that they pass either the Series 65 (Uniform Investment Adviser Law Examination) or the Series 66 (Uniform Combined State Law Examination) or obtain a recognized professional designation While New York and Minnesota do not register individual investment adviser representatives their state laws require that the representatives meet other requirements such as passing certain examinations or obtaining a professional designation accepted by the state

49The five designations recognized as such are Certified Financial Plannerreg Chartered Financial Consultantreg Personal Financial Specialist Chartered Financial Analyst and Chartered Investment Counselor

Page 22 GAO-11-235 Consumer Finance

As noted earlier designations that imply expertise or special training in advising senior citizen or elderly investors have received particular attention from regulators A joint report of SEC FINRA and NASAA described cases in which financial professionals targeted seniors by using senior-specific designations that implied that they had a particular expertise for senior investors when in fact they did not as noted earlier NASAA and NAIC have developed a model rule to address the issue50 The report also noted these professionals targeted seniors through the use of so-called free-lunch seminars where free meals are offered in exchange for attendance of a financial education seminar However the focus of the seminars was actually on the sale of products rather than the provision of financial advice

Given the large number of designations financial planners may use concerns exist that consumers may have difficulty distinguishing among them To alleviate customer confusion FINRA has developed a Web site for consumers that provides the required qualifications and other information about the designations used by securities professionals The site lists more than 100 professional designations 5 of which include the term ldquofinancial plannerrdquo and 24 of which contain comparable terms such as financial consultant or counselor51 The American College told us that it had identified 270 financial services designations Officials from NASAA NAIC and a consumer advocacy organization told us that consumers might have difficulty distinguishing among the various designations Officials from The American College told us that the number of designations itself was not necessarily a cause for concern but rather consumersrsquo broadly held misperception that all designations or credentials are equal

To help address these concerns FINRA plans to expand its Web site on professional designations to include several dozen additional designations related to insurance However FINRA officials noted that consumersrsquo use of this tool has been limited For example in 2009 the site received only 55765 visits A recent national study of the financial capability of American adults sponsored by FINRA found that only 15 percent of adults

50Protecting Senior Investors Report of Examinations of Securities Firms Providing

ldquoFree Lunchrdquo Sales Seminars by the Office of Compliance Inspections and Examination Securities and Exchange Commission North American Securities Administrators Association and the Financial Industry Regulatory Authority September 2007

51See httpappsfinraorgDataDirectory1prodesignationsaspx

Page 23 GAO-11-235 Consumer Finance

who had used a financial professional in the last 5 years claimed to have checked the background registration or license of a financial professional52 In addition SEC staff acknowledged that there have been concerns about confusing designations and SECrsquos October 2010 changes to investment adviser disclosure requirements mandate that investment adviser representatives who list professional designations and certifications in their background information also provide the qualifications needed for these designations so that the consumer can understand the value of the designation for the services being provided

Section 917 of the Dodd-Frank Act includes a requirement that SEC conduct a study identifying the existing level of financial literacy among retail investors including the most useful and understandable relevant information that they need to make informed financial decisions before engaging a financial intermediary While the section does not specifically mention the issue of financial plannersrsquo titles and designations the confusion we found to exist could potentially be addressed or mitigated if SEC incorporated this issue into its overall review of financial literacy among investors SEC staff told us that at this time its review would not likely address this issue although it would address such things as the need for conducting background checks on financial professionals Financial markets function best when consumers have information sufficient to understand and assess financial service providers and products53

Including financial plannersrsquo use of titles and designations in SECrsquos financial literacy review could provide useful information on the implications of consumersrsquo confusion on this issue

Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners

Available data do not show a large number of consumer complaints and enforcement actions involving financial planners but the exact extent to which financial planners may be a source of problems is unknown We were able to find limited information on consumer complaints from various agencies For example representatives of FTC and the Better Business Bureau said that they had received relatively few complaints related to financial planners FTC staff told us that a search in its Consumer Sentinel Network database for the phrase ldquofinancial plannerrdquo

52Applied Research amp Consulting LLC Financial Capability in the United States Initial

Report of the Research Findings from the 2009 National Survey prepared for the FINRA Investor Education Foundation (New York December 2009)

53GAO-09-216

Page 24 GAO-11-235 Consumer Finance

found 141 complaints in the 5-year period from 2005 through 2010 but that only a handful of these appeared to actually involve activity connected to the financial planning profession54 The staff added that additional searches on other titles possibly used by financial planners such as financial consultant and personal financial adviser did not yield significant additional complaints In addition a representative of the Better Business Bureau told us that it had received relatively few complaints related to financial planners although the representative noted that additional complaints might exist in broader categories such as ldquofinancial servicesrdquo

Consumer complaint data may not be an accurate gauge of the extent of problems Complaints may represent only a small portion of potential problems and complaints related to ldquofinancial plannersrdquo may not always be recorded as such As we have previously reported consumers also may not always know where they can report complaints55 At the same time some complaints that are made may not always be valid

SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm The agency does record and track whether federally and state-registered investment adviser firms provide financial planning services but its data tracking systems for complaints examination results and enforcement actions are not programmed to readily determine and track whether the complaint result or action was specifically related to a financial planner or financial planning service For example SEC staff told us the number of complaints about financial planners would be undercounted in their data system that receives and tracks public inquiries known as the Investor Response Information System because this code would likely be used only if it could not be identified whether the person (or firm) was an investment adviser or broker-dealer In addition the data system that SEC uses to record examination results known as the Super Tracking and Reporting System

54The Consumer Sentinel Network database is a secure online database of millions of consumer complaints available only to law enforcement In addition to storing complaints received by FTC the Consumer Sentinel Network also includes complaints filed with the Internet Crime Complaint Center Better Business Bureaus Canadarsquos PhoneBusters the US Postal Inspection Service the Identity Theft Assistance Center and the National Fraud Information Center among others

55GAO Telecommunications FCC Needs to Improve Oversight of Wireless Phone Service GAO-10-34 (Washington DC November 2009) p 18

Page 25 GAO-11-235 Consumer Finance

does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers

However SEC staff told us that a review of its Investor Response Information System identified 51 complaints or inquiries that had been recorded using their code for issues related to ldquofinancial plannersrdquo between November 2009 and October 2010 SEC staff told us that the complaints most often involved allegations of unsuitable investments or fraud such as misappropriation of funds56 A review of a separate SEC database called Tips Complaints and Referralsmdashan interim system that was implemented in March 2010mdashfound 124 allegations of problems possibly related to financial planners from March 2010 to October 201057

SEC staff told us that they did not have comprehensive data on the extent of enforcement activities related to financial planners per se In addition NASAA said that states generally do not track enforcement data specific to financial planners At our request SEC and NASAA provided us with examples of enforcement actions related to individuals who held themselves out as financial planners Using a keyword search SEC identified 10 such formal enforcement actions between August 2009 and August 2010 According to SEC documents these cases involved allegations of such activities as defrauding clients through marketing schemes receiving kickbacks without making proper disclosures and misappropriation of client funds Although NASAA also did not have comprehensive data on enforcement activities involving financial planners representatives provided us with examples of 36 actions brought by 30 states from 1986 to 2010 These cases involved allegations of such things as the sale of unsuitable products fraudulent misrepresentation of qualifications failure to register as an investment adviser and misuse of client funds for personal expenses

56Of these 51 complaints or inquiries 29 involved allegations of fraud 9 involved allegations of unsuitable investments and the remaining 13 represented questions on a variety of topics

57Of these 124 allegations 13 were coded as ldquofraudulent or unregistered offer or sale of securities including Ponzi schemes high yield investment programs or other investment programsrdquo 12 as ldquomanipulation of a securityrsquos price or volumerdquo 6 as ldquotheft or misappropriation of funds or securitiesrdquo 5 as ldquofalse or misleading statements about a companyrdquo 3 as ldquoproblems with my brokerage or advisory accountrdquo and 2 as ldquoinsider tradingrdquo An additional 14 were coded as ldquoother fraudulent conductrdquo and 69 were coded simply as ldquootherrdquo

Page 26 GAO-11-235 Consumer Finance

Because of limitations in how data are gathered and tracked SEC and state securities regulators are not currently able to readily determine the extent to which financial planning services may be causing consumers harm NASAA officials told us that as with SEC state securities regulators did not typically or routinely track potential problems specific to financial planners SEC and NASAA representatives told us that they had been meeting periodically in recent months to prepare for the transition from federal to state oversight of certain additional investment adviser firms as mandated under the Dodd-Frank Act but they said that oversight of financial planners in particular had not been part of these discussions SEC staff have noted that additional tracking could consume staff time and other resources They also said that because there are no laws that directly require registration recordkeeping and other responsibilities of ldquofinancial plannersrdquo per se tracking such findings relating to those entities would require expenditure of resources on something that SEC does not have direct responsibility to oversee Yet as we have reported in the past while we recognize the need to balance the cost of data collection efforts against the usefulness of the data a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking58 Given the significant growth in the financial planning industry ongoing concerns about potential conflicts of interest and consumer confusion about standards of care regulators may benefit from identifying ways to get better information on the extent of problems specifically involving financial planners and financial planning services

58GAO Managing for Results Using GPRA to Help Congressional Decisionmaking and

Strengthen Oversight GAOT-00-95 (Washington DC March 2000) p 13 GAO Executive

Guide Effectively Implementing the Government Performance and Results Act GAOGGD-96-118 (Washington DC June 1996) p 27

Page 27 GAO-11-235 Consumer Finance

Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed

Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners

Creation of a Board to Oversee Financial Planners

Over the past few years a number of stakeholdersmdashincluding consumer groups FINRA and trade associations representing financial planners securities firms and insurance firmsmdashhave proposed different approaches to the regulation of financial planners Following are four of the most prominent approaches each of which has both advantages and disadvantages

In 2009 the Financial Planning Coalitionmdashcomprised of the Certified Financial Planner Board of Standards Financial Planning Association and the National Association of Personal Financial Advisorsmdashproposed that Congress establish a professional standards-setting oversight board for financial planners According to the coalition its proposed legislation would establish federal regulation of financial planners by allowing SEC to recognize a financial planner oversight board that would set professional standards for and oversee the activities of individual financial planners although not financial planning firms For example the board would have the authority to establish baseline competency standards in the areas of education examination and continuing education and would be required to establish ethical standards designed to prevent fraudulent and manipulative acts and practices It would also have the authority to require registration or licensing of financial planners and to perform investigative and disciplinary actions Under the proposal states would retain antifraud authority over financial planners as well as full oversight for financial plannersrsquo investment advisory activity However states would not be allowed to impose additional licensing or registration requirements for financial planners or set separate standards of conduct Supporters of a new oversight board have noted that its structure and governance would be analogous to the Public Company Accounting Oversight Board a private nonprofit organization subject to SEC oversight that in turn oversees the audits of public companies that are subject to securities laws

Page 28 GAO-11-235 Consumer Finance

Augmenting Oversight of Investment Advisers with an SRO

According to the Financial Planning Coalition a potential advantage of this approach is that it would treat financial planning as a distinct profession and would regulate across the full spectrum of activities in which financial planners may engage including activities related to investments taxes education retirement planning estate planning insurance and household budgeting Proponents argue that a financial planning oversight board would also help ensure high standards and consistent regulation for all financial planners by establishing common standards for competency professional practices and ethics

However many securities regulators and financial services trade associations with whom we spoke said that they believe such a board would overlap with and in many ways duplicate existing state and federal regulations which already cover virtually all of the products and services that a financial planner provides Some added that the board would entail unnecessary additional financial costs and administrative burdens for the government and regulated entities In addition some opponents of this approach question whether ldquofinancial planningrdquo should be thought of as a distinct profession that requires its own regulatory structure noting that financial planning is not easily defined and can span multiple professions including accounting insurance investment advice and law One consumer group also noted that the regulation of individuals and professions is typically a state rather than a federal responsibility Finally we note that the analogy to the Public Company Accounting Oversight Board may not be apt That board was created in response to a crisis involving high-profile bankruptcies and investor losses caused in part by inadequacies among public accounting firms In the case of financial planners there is limited evidence of an analogous crisis or as noted earlier of severe harm to consumers

A number of proposals over the years have considered having FINRA or a newly created SRO supplement SEC oversight of investment advisers These proposals date back to at least 1963 when an SEC study recommended that all registered investment advisers be required to be a

Page 29 GAO-11-235 Consumer Finance

member of an SRO59 In 1986 the National Association of Securities Dealers a predecessor to FINRA explored the feasibility of examining the investment advisory activities of members who were also registered as investment advisers The House of Representatives passed a bill in 1993 that would have amended the Advisers Act to authorize the creation of an ldquoinspection onlyrdquo SRO for investment advisers although the bill did not become law60 In 2003 SEC requested comments on whether one or more SROs should be established for investment advisers citing among other reasons concerns that the agencyrsquos own resources were inadequate to address the growing numbers of advisers61 However SEC did not take further action Section 914 of the Dodd-Frank Act required SEC to issue a study in January 2011 on the extent to which one or more SROs for investment advisers would improve the frequency of examinations of investment advisers62

According to FINRA the primary advantage of augmenting investment adviser oversight with an SRO is that doing so would allow for more frequent examinations given the limited resources of states and SEC The Financial Services Institute an advocacy organization for independent broker-dealers and financial advisers has stated that an industry-funded SRO with the resources necessary to appropriately supervise and examine all investment advisers would close the gap that exists between the regulation of broker-dealers and investment advisers FINRA said that it finds this gap troubling given the overlap between the two groups (approximately 88 percent of all registered advisory representatives are also broker-dealer representatives) FINRA adds that any SRO should operate subject to strong SEC oversight and that releasing SEC of some of its responsibilities for investment advisers would free up SEC resources for other regulatory activities

59See Securities and Exchange Commission News Digest Issue No 63-4-3 8 (1963) which describes SECrsquos report to Congress regarding the adequacy of the rules of national securities exchanges and national securities associations pursuant to Pub L No 87-196 75 Stat 465 (1961) wherein SEC points out that the framework of industry self-regulation permitted many broker-dealer firms and registered investment advisers to remain outside of any official self-regulatory group According to the SEC News Digest the report suggested that membership in an SRO should be a prerequisite to registration with SEC as a broker-dealer or investment adviser

60HR 578 103rd Cong (1993)

61Investment Advisers Act Release No 2107 68 Fed Reg 7038 (Feb 11 2003)

62SEC is required to report the results of its study within 180 days of enactment of the Dodd-Frank Act

Page 30 GAO-11-235 Consumer Finance

Extending Coverage of the Fiduciary Standard

However NASAA some state securities regulators and one academic with whom we spoke opposed adding an SRO component to the regulatory authority of investment advisers NASAA said it believed that investment adviser regulation is a governmental function that should not be outsourced to a private third-party organization that lacks the objectivity independence expertise and experience of a government regulator Further NASAA said it is concerned with the lack of transparency associated with regulation by SROs because unlike government regulators they are not subject to open records laws through which the investing public can obtain information Two public interest groups including the Consumer Federation of America have asserted that one SROmdashFINRAmdash has an ldquoindustry mindsetrdquo that has not always put consumer protection at the forefront In addition the Investment Adviser Association and two other organizations we interviewed have noted that funding an SRO and complying with its rules can impose additional costs on a firm63

Proposals have been made to extend coverage of the fiduciary standard of care to all those who provide financial planning services Some consumer groups and others have stated that a fiduciary standard should apply to anyone who provides personalized investment advice about securities to retail customers including insurance agents who recommend securities The Financial Planning Coalition has proposed that the fiduciary standard apply to all those who hold themselves out as financial planners Proponents of extending the fiduciary standard of care which also include consumer groups and NASAA generally maintain that consumers should be able to expect that financial professionals they work with will act in their best interests They say that a fiduciary standard is more protective of consumersrsquo interests than a suitability standard which requires only that a product be suitable for a consumer rather than in the consumerrsquos best interest In addition the Financial Planning Coalition notes that extending a fiduciary standard would somewhat reduce consumer confusion about financial planners that are covered by the fiduciary standard in some capacities (such as providing investment advice) but not in others (such as selling a product)

However some participants in the insurance and broker-dealer industries have argued that a fiduciary standard of care is vague and undefined They say that replacing a suitability standard with a fiduciary standard could

63The Investment Adviser Association is a not-for-profit association that represents the interests of SEC-registered investment adviser firms

Page 31 GAO-11-235 Consumer Finance

Clarifying Financial Plannersrsquo Credentials and Standards

actually weaken consumer protections since the suitability of a product is easier to define and enforce Opponents also have argued that complying with a fiduciary standard would increase compliance costs that in turn would be passed along to consumers or otherwise lead to fewer consumer choices

The American College has proposed clarifying the credentials and standards of financial professionals including financial planners In particular it has proposed creating a working group of existing academic and practice experts to establish voluntary credentialing standards for financial professionals As noted previously consumers may be unable to distinguish among the various financial planning designations that exist and may not understand the requirements that underpin them Clarifying the credentials and standards of financial professionals could conceivably take the form of prohibiting the use of certain designations as has been done for senior-specific designations in some states or establishing minimum education testing or work experience requirements needed to obtain a designation The American College has stated that greater oversight of such credentials and standards could provide a ldquoseal of approvalrdquo that would generally raise the quality and competence of financial professionals including financial planners help consumers distinguish among the various credentials and help screen out less qualified or reputable players

However the ultimate effectiveness of such an approach is not clear since the extent to which consumers take designations into account when selecting or working with financial planners is unknown as is the extent of the harm caused by misleading designations In addition implementation and ongoing monitoring of financial plannersrsquo credentials and standards could be challenging Further the issue of unclear designations has already been addressed to some extentmdashfor example as noted earlier some states regulate the use of certain senior-specific designations and allow five professional designations to satisfy necessary competency requirements for prospective investment adviser representatives State securities regulators also have the authority to pursue the misleading use of credentials through their existing antifraud authority

Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners

In general a majority of the regulatory agencies consumer groups academics trade associations and individual financial services companies with which we spoke did not favor substantial structural change in the regulation of financial planners In particular few supported an additional oversight body which was generally seen as duplicative of existing regulation Some stakeholders in the securities and insurance industries

Page 32 GAO-11-235 Consumer Finance

Conclusions

noted that given the dynamic financial regulatory environment under way as a result of the Dodd-Frank Actmdashsuch as creation of a new Bureau of Consumer Financial Protectionmdashmore time should pass before additional regulatory changes related to financial planning services were considered Several industry associations also noted that opportunities existed for greater enforcement of existing law and regulation as discussed earlier

Existing statutes and regulations appear to cover the great majority of financial planning services and individual financial planners nearly always fall under one or more regulatory regimes depending on their activities While no single law governs the broad array of activities in which financial planners may engage given available information it does not appear that an additional layer of regulation specific to financial planners is warranted at this time At the same time as we have previously reported more robust enforcement of existing laws could strengthen oversight efforts In addition there are some actions that can be taken that may help address consumer protection issues associated with the oversight of financial planners

First as we have reported financial markets function best when consumers understand how financial providers and products work and know how to choose among them Yet consumers may be unclear about standards of care that apply to financial professionals particularly when the same individual or firm offers multiple services that have differing standards of care As such consumers may not always know whether and when a financial planner is required to serve their best interest While SEC is currently addressing the issue of whether the fiduciary standard of care should be extended to broker-dealers when they provide personalized investment advice about securities the agency is not addressing whether this extension should also apply to insurance agents who generally fall outside of SECrsquos jurisdiction Sales practices involving some high-risk insurance products such as annuities have drawn attention from federal and state regulators A review by NAIC of consumersrsquo understanding of the standards of care with regard to the sale of insurance products could provide information on the extent of consumer confusion in the area and actions needed to address the issue

Second we have seen that financial planners can adopt a variety of titles and designations The different designations can imply different types of qualifications but consumers may not understand or distinguish among these designations and thus may be unable to properly assess the qualifications and expertise of financial planners SECrsquos recent changes in this areamdashrequiring investment advisers to disclose additional information

Page 33 GAO-11-235 Consumer Finance

on professional designations and certifications they listmdashshould prove beneficial Another opportunity lies in SECrsquos mandated review of financial literacy among investors Incorporating issues of consumer confusion about financial plannersrsquo titles and designations into that review could assist the agency in assessing whether any further changes are needed in disclosure requirements or other related areas

Finally SEC has limited information about the nature and extent of problems specifically related to financial planners because it does not track complaints examination results and enforcement activities associated with financial planners specifically and distinct from investment advisers as a whole However a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking SEC staff have noted that additional tracking could require additional resources but other opportunities may also exist to gather additional information on financial planners Because financial planning is a growing industry and has raised certain consumer protection issues regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services

Recommendations We recommend that the National Association of Insurance Commissioners in concert with state insurance regulators take steps to assess consumersrsquo understanding of the standards of care with regard to the sale of insurance products such as annuities and take actions as appropriate to address problems revealed in this assessment

We also recommend that the Chairman of the Securities and Exchange Commission direct the Office of Investor Education and Advocacy Office of Compliance Inspections and Examinations Division of Enforcement and other offices as appropriate to

bull Incorporate into SECrsquos ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumersrsquo investment decisions and

bull Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services and take actions to address any problems that are identified

Page 34 GAO-11-235 Consumer Finance

Agency Comments We provided a draft of this report for review and comment to FINRA NAIC NASAA and SEC These organizations provided technical comments which we incorporated as appropriate In addition NAIC provided a written response which is reprinted in appendix II NAIC said it generally agreed with the contents of the draft report and would give consideration to our recommendation regarding consumersrsquo understanding of the standards of care with regard to the sale of insurance products

NASAA also provided a written response which is reprinted in appendix III In its response NASAA said it agreed that a specific layer of regulation for financial planners was unnecessary and provided additional information on some aspects of state oversight of investment advisers NASAA also said that it welcomed the opportunity to continue to collaborate with SEC to identify methods to better understand and address problems specifically involving financial planners as we recommended In addition NASAA expanded upon the reasons for its opposition to proposals that would augment oversight of investment advisers with an SRO

We are sending copies of this report to interested congressional committees the Chief Executive Officer of FINRA Chief Executive Officer of NAIC Executive Director of NASAA and the Chairman of SEC In addition the report will be available at no charge on GAOrsquos Web site at httpwwwgaogov

If you or your staffs have any questions about this report please contact me at (202) 512-8678 or cackleyagaogov Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report GAO staff who made major contributions to this report are listed in appendix IV

Alicia Puente Cackley Director Financial Markets

and Community Investment

Page 35 GAO-11-235 Consumer Finance

List of Congressional Addressees

The Honorable Bob Corker The Honorable Tim Johnson The Honorable Herbert Kohl The Honorable Richard C Shelby United States Senate

The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives

Page 36 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

Appendix I Scope and Methodology

Our reporting objectives were to address (1) how financial planners are regulated and overseen at the federal and state levels (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches

For background information we obtained estimates for 2000 and 2008 and projections for 2018 from the Bureau of Labor Statistics on the number of individuals who reported themselves as ldquopersonal financial advisersrdquo a term that the agency said was interchangeable with ldquofinancial plannerrdquo The bureau derived these estimates from the Occupational Employment Statistics survey and the Current Population Survey1

According to the bureau the Occupational Employment Statisticsrsquo estimates for financial planners have a relative standard error of 19 percent and the median wage estimate for May 2009 has a relative standard error of 15 percent Because the overall employment estimates used are developed from multiple surveys it was not feasible for the bureau to provide the relative standard errors for these financial planner employment statistics To estimate the number of households that used financial planners we analyzed 2007 data from the Board of Governors of the Federal Reserversquos Survey of Consumer Finances This survey is conducted every three years to provide detailed information on the finances of US households2 Because the survey is a probability sample based on random selections the sample is only one of a large number of samples that might have been drawn Since each sample could have provided different estimates we express our confidence in the precision of our particular samplersquos results as a 95 percent confidence interval (eg plus or minus 25 percentage points) This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn In this report for this survey all percentage

1As explained by the Bureau of Labor Statistics the Occupational Employment Statistics program produces employment and wage estimates for over 800 occupations These are estimates of the number of people employed in certain occupations and estimates of the wages paid to them Since self-employed persons are not included in the estimates the bureau also considers information from the Current Population Survey a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics to derive its occupation estimates

2Additional information on the sample design and data collected by the Survey of Consumer Finances is available at httpwwwfederalreservegovpubsossoss2abouthtml

Page 37 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

estimates have 95 percent confidence intervals that are within plus or minus 25 percentage points from the estimate itself

To identify how financial planners are regulated and overseen at the federal and state levels we identified and reviewed on the federal level federal laws regulations and guidance applicable to financial planners the activities in which they engage and their marketing materials titles and designations We also reviewed relevant SEC interpretive releases such as IA Rel No 1092 Applicability of the Investment Advisers Act to

Financial Planners Pension Consultants and Other Persons Who

Provide Investment Advisory Services as a Component of Other

Financial Services We also discussed the laws and regulations relevant to financial planners in meetings with staff of the Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) Department of Labor and Internal Revenue Service We also interviewed two legal experts and reviewed a legal compendium on the regulation of financial planners At the state level we interviewed representatives from the North American Securities Administrators Association (NASAA) and the National Association of Insurance Commissioners (NAIC) and reviewed model regulations developed by these agencies In addition we selected five statesmdashCalifornia Illinois North Carolina Pennsylvania and Texasmdashfor a more detailed review We chose these states because they had a large number of registered investment advisers and varying approaches to the regulation of financial planners and represented geographic diversity For each of these states we reviewed selected laws and regulations related to financial planners which included those related to senior-specific designations and insurance transactions and we interviewed staff at each statersquos securities and insurance agencies

To identify what is known about the effectiveness of the regulation of financial planners and what regulatory gaps or overlap may exist we reviewed relevant federal and state laws regulations and guidance In addition we spoke with representatives of the federal and state agencies cited above as well as FINRA and organizations that represent or train financial planners including the Financial Planning Coalition The American College and the CFA Institute organizations that represent the financial services industry including the Financial Services Institute Financial Services Roundtable Securities Industry and Financial Markets Association Investment Advisers Association American Society of Pension amp Professional Actuaries National Association of Insurance and Financial Advisors American Council of Life Insurers Association for Advanced Life Underwriting American Institute of Certified Public Accountants American Bankers Association and organizations

Page 38 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

representing consumer interests including the Consumer Federation of America and AARP We also spoke with selected academic experts knowledgeable about these issues In addition we reviewed relevant studies and other documentary evidence including a 2008 study of the RAND Corporation that was commissioned by SEC ldquoInvestor and Industry Perspectives on Investment Advisers and Broker-Dealersrdquo ldquoResults of Investor Focus Group Interviews About Proposed Brokerage Account Disclosuresrdquo sponsored by SEC results of the FPA Fiduciary Task Force ldquoFinal Report on Financial Planner Standards of Conductrdquo ldquoUS Investors amp The Fiduciary Standard A National Opinion Surveyrdquo sponsored by AARP the Consumer Federation of America the NASAA the Investment Adviser Association the Certified Financial Planner Board of Standards the Financial Planning Association and the National Association of Personal Financial Advisors and the 2009 National Financial Capability Study commissioned by FINRA We determined that the reliability of these studies was sufficient for our purposes In addition we reviewed relevant information on the titles and designations used by financial planners including FINRArsquos Web site that provides the required qualifications and other information about the designations used by securities professionals

We also obtained and reviewed available data on complaints and selected enforcement actions related to financial planners from the Federal Trade Commission Better Business Bureau and SEC We collected from the Federal Trade Commission complaint data from its Consumer Sentinel Network database using a keyword search of the term ldquofinancial plannerrdquo for complaints filed from 2005 to 2010 From the Better Business Bureau we collected the number of complaints about the financial planning industry received in 2009 From SEC we collected complaints from the agencyrsquos Investor Response Information System that had been coded as relating to ldquofinancial plannersrdquo from November 2009 to October 2010 We also reviewed data from SECrsquos Tips Complaints and Referrals database that resulted from a keyword search for the terms ldquofinancial plannerrdquo ldquofinancial adviserrdquo ldquofinancial advisorrdquo ldquofinancial consultantrdquo and ldquofinancial counselorrdquo from March 2010 to October 2010 In addition at our request SEC and NASAA provided us anecdotally with examples of enforcement actions related to individuals who held themselves out as financial planners SEC identified 10 formal enforcement actions between August 2009 and August 2010 and NASAA provided us selected examples of state enforcement actions involving financial planners from 1986 to 2010 from 30 states We gathered information on SEC- and state-registered investment advisers from SECrsquos Investment Adviser Registration Database FINRA did not provide us with data on complaints examination results or

Page 39 GAO-11-235 Consumer Finance

Appendix I Scope and Methodology

enforcement actions specific to financial planners FINRA officials told us they do not track these data specific to financial planners

To identify alternative approaches for the regulation of financial planners and their advantages and disadvantages we conducted a search for legislative and regulatory proposals related to financial planners which have been made by Members of Congress consumer groups and representatives of the financial planning securities and insurance industries We identified and reviewed position papers studies public comment letters congressional testimonies and other documentary sources that address the advantages and disadvantages of these approaches In addition we solicited views on these approaches from representatives of the wide range of organizations listed above including organizations that represent financial planners financial services companies and consumers as well as state and federal government agencies and associations and selected academic experts

We conducted this performance audit from June 2010 through January 2011 in accordance with generally accepted government auditing standards Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives

Page 40 GAO-11-235 Consumer Finance

Appendix II Comments from the National

Association of Insurance Commissioners

Appendix II Comments from the National Association of Insurance Commissioners

Page 41 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Appendix III Comments from the North American Securities Administrators Association

Page 42 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 43 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 44 GAO-11-235 Consumer Finance

Appendix III Comments from the North

American Securities Administrators

Association

Page 45 GAO-11-235 Consumer Finance

Appendix IV

A

GAO Contact and Staff

cknowledgments

Appendix IV GAO Contact and Staff Acknowledgments

Alicia Puente Cackley (202) 512-8678 or cackleyagaogov GAO Contact

In addition to the contact named above Jason Bromberg (Assistant Staff Director) Sonja J Bensen Jessica Bull Emily Chalmers Patrick Dynes

Acknowledgments Ronald Ito Sarah Kaczmarek Marc Molino Linda Rego and Andrew Stavisky made key contributions to this report

(250550) Page 46 GAO-11-235 Consumer Finance

The Government Accountability Office the audit evaluation and GAOrsquos Mission investigative arm of Congress exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people GAO examines the use of public funds evaluates federal programs and policies and provides analyses recommendations and other assistance to help Congress make informed oversight policy and funding decisions GAOrsquos commitment to good government is reflected in its core values of accountability integrity and reliability

The fastest and easiest way to obtain copies of GAO documents at no cost Obtaining Copies of is through GAOrsquos Web site (wwwgaogov) Each weekday afternoon GAO GAO Reports and posts on its Web site newly released reports testimony and

correspondence To have GAO e-mail you a list of newly posted products Testimony go to wwwgaogov and select ldquoE-mail Updatesrdquo

Order by Phone The price of each GAO publication reflects GAOrsquos actual cost of production and distribution and depends on the number of pages in the publication and whether the publication is printed in color or black and white Pricing and ordering information is posted on GAOrsquos Web site httpwwwgaogovorderinghtm

Place orders by calling (202) 512-6000 toll free (866) 801-7077 or TDD (202) 512-2537

Orders may be paid for using American Express Discover Card MasterCard Visa check or money order Call for additional information

ContactTo Report Fraud Web site wwwgaogovfraudnetfraudnethtm Waste and Abuse in E-mail fraudnetgaogov

Federal Programs Automated answering system (800) 424-5454 or (202) 512-7470

Ralph Dawn Managing Director dawnrgaogov (202) 512-4400 Congressional US Government Accountability Office 441 G Street NW Room 7125 Relations Washington DC 20548

Chuck Young Managing Director youngc1gaogov (202) 512-4800 Public Affairs US Government Accountability Office 441 G Street NW Room 7149 Washington DC 20548

Please Print on Recycled Paper

  • GAO Doc d11235pdf
    • Letter
    • Background
    • Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities
      • Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws
      • Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities
      • Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations
        • Regulatory Structure for Financial Planners Covers Most Activities but Some Consumer Protection Issues Exist and Data Tracking Complaints and Regulatory Actions against Planners Are Limited
          • Existing Regulation Covers Most Financial Planning Services
          • Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products
          • Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public
          • Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited but Regulators Generally Do Not Track Data Specific to Financial Planners
            • Some Changes in the Oversight of Financial Planners Could Be Beneficial but Most Stakeholders Believe Substantial Overhaul Is Not Needed
              • Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners
                • Creation of a Board to Oversee Financial Planners
                • Augmenting Oversight of Investment Advisers with an SRO
                • Extending Coverage of the Fiduciary Standard
                • Clarifying Financial Plannersrsquo Credentials and Standards
                  • Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners
                    • Conclusions
                    • Recommendations
                    • Agency Comments
                      • Appendix I Scope and Methodology
                      • Appendix II Comments from the National Association of Insurance Commissioners
                      • Appendix III Comments from the North American Securities Administrators Association
                      • Appendix IV GAO Contact and Staff Acknowledgments
                        • GAO Contact
                        • Staff Acknowledgments
                        • Obtaining Copies of GAO Reports and Testimony
                          • Order by Phone

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 ETI 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 HEB 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 HRV (Za stvaranje Adobe PDF dokumenata najpogodnijih za visokokvalitetni ispis prije tiskanja koristite ove postavke Stvoreni PDF dokumenti mogu se otvoriti Acrobat i Adobe Reader 50 i kasnijim verzijama) HUN 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 ITA 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 JPN ltFEFF9ad854c18cea306a30d730ea30d730ec30b951fa529b7528002000410064006f0062006500200050004400460020658766f8306e4f5c6210306b4f7f75283057307e305930023053306e8a2d5b9a30674f5c62103055308c305f0020005000440046002030d530a130a430eb306f3001004100630072006f0062006100740020304a30883073002000410064006f00620065002000520065006100640065007200200035002e003000204ee5964d3067958b304f30533068304c3067304d307e305930023053306e8a2d5b9a306b306f30d530a930f330c8306e57cb30818fbc307f304c5fc59808306730593002gt KOR ltFEFFc7740020c124c815c7440020c0acc6a9d558c5ec0020ace0d488c9c80020c2dcd5d80020c778c1c4c5d00020ac00c7a50020c801d569d55c002000410064006f0062006500200050004400460020bb38c11cb97c0020c791c131d569b2c8b2e4002e0020c774b807ac8c0020c791c131b41c00200050004400460020bb38c11cb2940020004100630072006f0062006100740020bc0f002000410064006f00620065002000520065006100640065007200200035002e00300020c774c0c1c5d0c11c0020c5f40020c2180020c788c2b5b2c8b2e4002egt LTH 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 LVI 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 NLD (Gebruik deze instellingen om Adobe PDF-documenten te maken die zijn geoptimaliseerd voor prepress-afdrukken van hoge kwaliteit De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 50 en hoger) NOR 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 POL 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 PTB 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 RUM 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 RUS ltFEFF04180441043f043e043b044c04370443043904420435002004340430043d043d044b04350020043d0430044104420440043e0439043a043800200434043b044f00200441043e043704340430043d0438044f00200434043e043a0443043c0435043d0442043e0432002000410064006f006200650020005000440046002c0020043c0430043a04410438043c0430043b044c043d043e0020043f043e04340445043e0434044f04490438044500200434043b044f00200432044b0441043e043a043e043a0430044704350441044204320435043d043d043e0433043e00200434043e043f0435044704300442043d043e0433043e00200432044b0432043e04340430002e002000200421043e043704340430043d043d044b04350020005000440046002d0434043e043a0443043c0435043d0442044b0020043c043e0436043d043e0020043e0442043a0440044b043204300442044c002004410020043f043e043c043e0449044c044e0020004100630072006f00620061007400200438002000410064006f00620065002000520065006100640065007200200035002e00300020043800200431043e043b043504350020043f043e04370434043d043804450020043204350440044104380439002egt SKY 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 SLV 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 SUO 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 SVE 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 TUR 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 UKR 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 ENU (Use these settings to create Adobe PDF documents best suited for high-quality prepress printing Created PDF documents can be opened with Acrobat and Adobe Reader 50 and later) gtgt Namespace [ (Adobe) (Common) (10) ] OtherNamespaces [ ltlt AsReaderSpreads false CropImagesToFrames true ErrorControl WarnAndContinue FlattenerIgnoreSpreadOverrides false IncludeGuidesGrids false IncludeNonPrinting false IncludeSlug false Namespace [ (Adobe) (InDesign) (40) ] OmitPlacedBitmaps false OmitPlacedEPS false OmitPlacedPDF false SimulateOverprint Legacy gtgt ltlt AddBleedMarks false AddColorBars false AddCropMarks false AddPageInfo false AddRegMarks false ConvertColors ConvertToCMYK DestinationProfileName () DestinationProfileSelector DocumentCMYK Downsample16BitImages true FlattenerPreset ltlt PresetSelector MediumResolution gtgt FormElements false GenerateStructure false IncludeBookmarks false IncludeHyperlinks false IncludeInteractive false IncludeLayers false IncludeProfiles false MultimediaHandling UseObjectSettings Namespace [ (Adobe) (CreativeSuite) (20) ] PDFXOutputIntentProfileSelector DocumentCMYK PreserveEditing true UntaggedCMYKHandling LeaveUntagged UntaggedRGBHandling UseDocumentProfile UseDocumentBleed false gtgt ]gtgt setdistillerparamsltlt HWResolution [2400 2400] PageSize [612000 792000]gtgt setpagedevice

                              1. identify B Identify components of a businesss financial statements to
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