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118 Cards in this Set

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The Investment Advisers Act of 1940

- Applies to persons who give investment advice

- Antifraud provisions covering conflict of interest and full disclosure apply to such persons, regardless of the amount of assets under management and regardless of whether or not one has registered as an investment adviser.

- Amended by the National Securities Markets Improvement Act of 1996
State licensing regulations
Require many individuals to register with their states as investment advisers.

Most will also have to pass a FINRA exam on blue sky laws.

State licensing requirements may also apply to individuals who sell or give advice regarding insurance or real estate.
FINRA
- the Financial Industry Regulatory Authority

- Began operations in July, 2007

- Combines the regulatory functions of the National Association of Securities Dealers (NASD) and the regulation, enforcement, and arbitration operation of the New York Stock Exchange (NYSE)

- Oversees the licensing of individuals who sell securities.
The Insider Trading and Securities Fraud Enforcement Act of 1988
- Modifies Section 204A of the 1940 Act

- Requires anyone who is considered an investment adviser under the 1940 Act to take measures to ensure that he or she does not violate the insider trading provisions of the Securities Exchange Act of 1934

-Advisers may not use any material, nonpublic information about any security.
National Securities Markets Improvement Act of 1996
- Made significant changes in the registration process

- Includes the Investment Advisers Supervision Coordination Act.
The SEC has adopted Rule 204A–1
- Adopted by the SEC under the Advisers Act

- Requires registered investment advisers to adopt codes of ethics (describe on side 3) that also addresses personal trading

- Requires advisers to keep copies of their code of ethics and records relating to the code

- Amended disclosure requirements under Part II of Form ADV to include description of the code of ethics
- Code of Ethics must:
- set forth standards of conduct
- require compliance with federal securities laws
- address personal trading
- require personnel to report their personal sec holdings and transactions, including mutual
- require advisers' personnel to obtain pre-approval for certain investments
FINRA Notices to Members 94-44 and 96-33
- Intended to prevent registered representatives from selling away by engaging in private securities transactions.

- Not Laws
- Selling away is the sale of any security that has not been approved for sale by the broker-dealer of a registered representative
Registered Representative
- A person who is licensed to sell securities.
Investment Advisers Act of 1940
- Created to protect the public and investors against malpractice by persons paid for advising others about securities.…”

- Makes it unlawful for investment advisers to engage in practices that constitute fraud and deceit.
SEC Release IA-770: 8/13/81
- Provides guidance on how the SEC interprets the Invest Advisers Act of 1940.

- SEC interprets the Investment Advisers Act in such a way that practically everyone who gives advice about securities should register as an adviser, and practically any investment can be considered a security.
SEC Release IA-1092: 10/8/87
- The three-pronged test is the measure to determine if a financial planner would be required to register as an investment adviser

- Clearly states that the antifraud provisions of the Investment Advisers Act apply to any adviser, regardless of whether the Act requires them to register with the SEC.

- Referred to a Supreme Court ruling that declared that an investment adviser has a fiduciary responsibility to his or her clients

- Requires financial planners to offer complete disclosures to clients.
- Issued in response to calls from the financial planning community for an updated position.
National Securities Markets Improvement Act of 1996
- States have assumed increased regulatory authority over smaller, non-SEC-registered investment advisers

- States are generally are applying the principles of IA-770 and IA-1092
Who Is an Investment Adviser Under the Investment Advisers Act?
- Any entity or individual who, for compensation, engages in the business of advising others, either directly or through publications or writing, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities; or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

- Registered investment adviser is the advisory firm.

- Investment adviser representatives are those those who work for the firm
The Three-Pronged Test
- Anyone who qualifies under these categories, often called the three-pronged test, will be considered an investment adviser.

- The three categories are:
1. Advice or analyses concerning securities,
2. The “business” standard
3. Compensation
The Three-Pronged Test - Advice or analyses concerning securities

What qualifies as giving advice?
- A financial planner suggests that a client invest in a specific security.

- A financial planner recommends only that a client invest in securities, as opposed to some other form of investment

- Advising employee benefit plan sponsors to fund plan benefits by investing in securities and advising a client as to the selection or retention of an investment manager.
The Three-Pronged Test - The business standard
- Anyone who provides investment advisory services for compensation or holds out that he or she provides investment advice meets what is known in abbreviated form as “the business standard.”
Three questions that must be addressed with respect to the business standard in an effort to determine if someone qualifies:
- Is the advice solely incidental to a non advisory principal business of the person giving the advice?

- How specific is the advice?

- Is the provider receiving, either directly or indirectly, any special compensation for the advice?
The Three-Pronged Test - Compensation for services.
- Not necessary for the individual providing advice to charge a separate fee for investment advisory activities

- If a financial planner charges for a comprehensive financial plan that includes investment advice, they are considered to be compensated for the advice.
Exemption from registering as an investment advisor
Generally, broker-dealers are exempt from the requirement of registering as an investment adviser as long as they don’t charge a fee for providing investment advice and the advice given is solely incidental to the securities business.
Registered Representative
A person who is licensed to sell securities.
Security

(as defined by the Investment Advisers Act)
any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or in general, any instrument or interest commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or guarantee of, or warrant or right to subscribe to or purchase any of the foregoing.
The Three-Pronged Test:

The Business Standard
- Anyone who provides investment advisory services for compensation or holds out that he or she provides investment advice meets what is known in abbreviated form as “the business standard.”
If the advice is solely incidental to a non-advisory investment business of the individual and the individual receives no compensation for the advice, then he or she is not likely to be considered to be in the business of providing advice.
Rule for where to register:

An adviser who manages over $30 million in client funds
- Must register with the SEC

- Need not register within their state.
Rule for where to register:

An adviser who manages at least $25 million in client funds
- May Register with the SEC
Rule for where to register:

An adviser who has direct, continuous management of between $25 million and $30 million of client funds
- May have some discretion as to registering with his or her state or the SEC.
This is to minimize the possibility of having to switch regulators frequently if assets fluctuate above and below $25 million over short periods of time.
Rule for where to register:

An adviser who has less than $25 million under management
- Register with the state, unless the adviser’s state does not have registration requirements.
Rule for where to register:

A state-registered firm that now has $30 million of assets under management
- Must register with the SEC within 90 days of filing their annual updating amendment to Form ADV.
Rule for where to register:

Advisers who do not have a state registration process
- Must register with the SEC.
Six exceptions investment adviser registration requirement.
1. banks that are not also investment companies.

2. lawyers, accountants, engineers, or teachers whose advice is solely incidental to the practice of their profession.

3. Broker-dealers or reistered representativest thereof whose investment advice is solely incidental to the conduct of their business as broker-dealers and who receive no special compensation

4. Publishers of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation

5. Those securities involved as U.S. government securities or with principal or interest guaranteed by the U.S. government

6. Other persons whom the SEC may designate by rule, regulation or order as not within the intent of the law
It is important to remember that the Investment Advisers Act stipulates that those who qualify under one of the six exceptions are not considered advisers, and thus do not have to comply with the antifraud (or any other) provisions of the Act.
SEC Rule 202(a)(11)-1
- Adopted by the SEC on April 12, 2005 under the Investment Advisers Act of 1940.

Stipulates:
1. As long as any investment advice is incidental to their normal business (i.e., selling securities), brokers do not necessarily have to register as investment advisers.

2. there is a difference between doing a financial plan and offering financial planning services. If the financial plan is not being used within the context of giving investment advice, then the broker would not have to register as an investment adviser. If financial planning services are identified to the client, and/or a plan is used simply as a tool to provide guidance for making a transaction (but not applied as a comprehensive financial planning tool), registration should not be required.

3. A firm that is registered as both a broker-dealer and an investment adviser may act as either an investment adviser or a broker-dealer (or both) in providing brokerage services to the same (or different) clients. The key here would be to determine whether investment advisory services are being offered to a particular client.

4. Just having “CFP®” on a business card or letterhead would not necessarily require registration as an investment adviser.

Technically, identifying that you are a CFP Board designee is considered “holding out” for purposes of this rule. However, if you do not give investment advice as part of your services, you should still fall under the broker-dealer exception.
Three groups exempt from registration as investment advisers (by the Act)
1. An adviser whose clients are all residents of the state in which the adviser maintains his, her, or its principal office and place of business and who only gives advice regarding securities that are not listed on any exchange and/or does not have unlisted trading privileges on any national securities exchange.

2. An adviser whose only clients are insurance companies.

3. An adviser who had fewer than 15 clients during the last 12 months and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under the Investment Company Act of 1940. Investment advisers who are under common control and are not operated separately, each having fewer than 15 clients, but having 15 or more clients in the aggregate, cannot claim exemption.

- Also certain charitable organizations
Note that all three are considered investment advisers but are exempt from registration

- Must comply with the antifraud (and all other) provisions of the 1940 Act.
The duties and obligations of an investment adviser fall within seven general categories, as follows:
1. Registration as an investment adviser

2. fee restrictions

3. Assignment of an advisory contract

4. Prohibition against the use of the terms “Investment Counsel” or “RIA”

5. The brochure rule

6. Record-keeping requirements

7. Antifraud provisions
Duties and Obligations of an Investment Adviser

What is required to meet the obligation for Registering as an Investment Adviser
- If he or she qualifies to register with the SEC, that individual will submit a Form ADV.

- Those who must register with their states generally find that they also must pay a fee.

- require advisers who are registered with the SEC to register electronically through the Investment Adviser Registration Depository (IARD).

- pay an Initial Set-Up Fee and annual updating fees
IARD
Investment Adviser Registration Depository


- SEC rules and rule amendments under the Investment Advisers Act of 1940 require advisers who are registered with the SEC to register electronically through the Investment Adviser Registration Depository
The SEC is no longer accepting paper filings of Form ADV unless the adviser has been granted a hardship exemption.
What is provided by the Adviser when registering through IARD
- Part I
- general info
- name, location, form of operation
- background, criminal record

- Part II
- Detailed information
- Fee structure, services offered, business associates, background info and current balance sheet
f you are an SEC-registered adviser, you do not have to file Part II with the SEC (but you can, if you want). You must keep a copy of Part II in your files and provide it to SEC staff upon request, updating it whenever the information becomes materially inaccurate.
Form U–4 (Uniform Application for Securities Industry Registration)
- Must be submitted on behalf of every Investment Adviser Representative (IAR) seeking to be employed by the Investment Adviser (IA).
What must be submitted for registration with the SEC for a sole proprietor
A sole proprietor is both an IA and an IAR, and so must submit both an ADV and a U–4. The Form U–4 must be submitted electronically on the IARD/CRD (as of 2002).
Form ADV-W
Filed by an adviser if:

- The adviser ceases operations\

- The adviser is changing from state to SEC (or vice versa), a partial form ADV-W is filed.
Rule 206 (4)-2
- The custody rule under the Investment Advisers Act

- Amended by the SEC in 2003

- Requires advisers who have custody to maintain client funds and securities with a broker-dealer, bank or other 'qualified custodian'

- If the qualified custodian sends account statements directly to an adviser’s clients, the adviser is relieved from sending its own account statements and from undergoing an annual surprise examination.

-Added a definition of "custody" to the rule

- Removes the form ADV requirement that advisers custody include an audited balance sheet in their disclosure brochure to clients.
Anti-money laundering rule under the USA Patriot Act of 2001
- Implemented by the Dept of Treasury

- Requires registered investment advisers who manage client assets to establish anti-money laundering programs.

- Also covers certain unregistered advisers.
Under the Patriot Act's provisions Advisers are required to have
1. anti-money laundering internal policies, procedures, and controls;

2. a designated compliance officer;

3. an ongoing employee training program; and

4. an independent audit function to test the firm’s programs.
Investment Advisers Act

When are performance based or incentive fees permissible?
- If the client is high net worth
(adviser is manager at at least $750K and the client as $1.5 MM)
Investment Advisers Act

What requirements must be met if the adviser is going to charge a performance-based or incentive fee?
- The Adviser must show the client how the fee will be calculated

- Disclose any incentive for him or her to take undue risks

- The contract must be made at arm’s length (i.e., neither party must feel compelled to concede and no favoritism can be shown),

- The incentive fee must be based on at least one year's performance
Fulcrum Fee
A Fee tied to the investment performance of the funds (as compared to an index) over a specified period of time.
Investment Advisers Act

Advisory Contract Assignment
Anyone who is an investment adviser is considered a fiduciary under the Act, and as such is prohibited from assigning an investment advisory contract without the express consent of the client.
Investment Advisers Act

What are the guidelines for the use of the terms "Investment Council" or "RIA"
- A egistered investment adviser may not use the term investment counsel unless his or her primary business is that of being an investment adviser, and a substantial portion of his or her business involves the rendering of investment supervisory services. a registered investment adviser may not use the term investment counsel unless his or her primary business is that of being an investment adviser, and a substantial portion of his or her business involves the rendering of investment supervisory services.

- RIA must be spelled out as Registered Investment Adviser
Investment Advisers Act

The Brochure Rule
- The Act requires that Advisers create a brochure that discloses specific information about heir business.

- This must be distributed to all existing and prospective clients.
Investment Advisers Act

What information must be in the Advisers brochure
1) Advisory services and fees.

2) Types of clients.

3) Types of investments.

4) Method(s) of analysis, sources of information, and investment strategies.

5) Education and business standards. (expected requirements for those associated with the adviser)

6) Education and business background.

7) Other Business Activities

8) Other financial industry activities or affiliations.

9) Participation or interest in client transactions.

10) Conditions for managing accounts.

11) Review of accounts (who, how often etc)

12) Investment or brokerage discretion

13) Additional compensation

14) Balance sheet (under certain circumstances)

15) Material financial and disciplinary information (under rule 206 (4)-4)

16) Summary of material changes

17) Asset under Management

18) Brokerage and custody fees and expenses

19) Performance fees and side-by-side management


20) Disciplinary history

21) Code of ethics summary and offer of delivery

22) Trade aggregation practices

23) Referrals of clients from broker-dealers

24) Custody

25) Voting client securities
Investment Advisers Act

Under what circumstances must an adviser include a balance sheet in their brochure.
- If the adviser requires a prepayment of fees six months or more in advance and in excess of $1,200 per client,
Investment Advisers Act

Record Keeping Requirements
- Rule 204–2, established specific and strict record-keeping requirements for advisers.

The rule outlines 16 separate record-keeping responsibilities, plus responsibilities regarding any inside trading records. For those who have custody of client funds or who exercise investment supervisory services, there are additional requirements.

They must also retain copies of the client’s acknowledgment of the brochure plus a statement as to the location of any client funds.
Investment Advisers Act

What are the 16 Record Keeping Requirements
Records that must be kept:
- copies of the client acknowledgement of the brochure, and statement from adviser about location of client funds

- records of dates the adviser gave the client or prospective client all required documents

- Journals and ledgers reflecting asset, liability, reserve, capital, income, and expense accounts

- writeen communications to client regarding recommendations, advice, receipt, disbursement, or delivery of funds or securities

- All client instructions regarding purchase etc of securities

- Written agreements with clients.

- Records must be kept in a safe and accessible place for at least 5 years
Investment Advisers Act

Anti-fraud provisions
- An adviser cannot use anything nor do anything, either directly or indirectly, that would defraud a client.

- Whenever there may be a conflict of interest, it must be disclosed to the client.
Investment Advisers Act

Enforcement of registration requirement.
- May be subject to $1,000 fine, 1 year of imprisonment or both.
Investment Advisers Act

Punishment for failing to respond to an inquiry by the regulatory authority
- May be subject to $1,000 fine, 1 year of imprisonment or both.

- In addition registration my be suspended, censured, or have limitations put on their activities
Investment Advisers Act

Punishment for a willful violation of the act
- The SEC may impose fines of up to $10,000 and/or imprisonment of up to five years.
SEC ruling IA-770
- States that generally the Commission’s position is that most people providing financial planning services do indeed fall within the definition of an investment adviser for purposes of the Act. Generally, for those who are providing financial advice, neither the exemptions from nor the exceptions to registration will apply.
SEC ruling IA-1092
- Released to restate the position of IA-770 and to clarify that the antifraud provisions apply to any practitioner who is an investment adviser, regardless of whether or not that person is required to be registered.

- The ruling referred to a U.S. Supreme Court case holding that investment advisers are fiduciaries.

All potential conflicts of
interest—such as recommending only products offered through the planner’s broker-dealer—must be disclosed to clients.
Who must register - the Individual or the Firm?
- Experts generally recommend that an individual avoid personally registering as an investment adviser (as opposed to being a representative under the firm’s registration).
FINRA Notices to Members, 94-44 and 96-33
This basically means that whenever an investment adviser, who is also a registered representative, provides advice regarding investments that are not offered by his or her broker-dealer, the broker-dealer has to grant approval in each and every case. It also means that the broker-dealer and FINRA can audit all registered-investment-adviser-related books, records, procedures, policies, etc.

- Notice 96-33 is, in large measure, a reaffirmation of 94-44. It has been expanded recently to include professional activities involving the sale of group annuities.
FINRA
- Financial Industry Regulatory Authority

- Is a self-regulatory organization.

- Established by the securities industry, but under the purview of the government
Does FINRA registration equate to compliance with the Investment Advisers act?
- No

- It is common for an indivusat to be required to resgister with SEC but no FINRA

Also there are people (due to sales activities) must register with FINRA but do not have to register with their state
Who Must Register With FINRA?
Essentially, anyone who chooses to sell securities must register to do so with FINRA.
Registration with FINRA

What is the first step in registering.
- Choose a broker-dealer with whom to associate.

- The broker-dealer generally provides the initial Form U–4 (Uniform Application for Securities Industry Registration), which is used to gather substantial information about the registrant.
Series 6
Investment company products (mutual funds, unit investment trusts, etc.) and variable contracts (variable life and annuities).
Series 7.
General Securities Registered Representative: stocks, bonds, government and municipal bonds, tax shelters, real estate syndications, REITs, and mutual funds. This is the most common license sought; it allows sales of everything except commodities and certain options. Unlike the other exams, this exam is divided into five modules.
Series 22.
Direct Participation Programs: tax shelters (but not Real Estate Investment Trusts [REITs]).
Series 62.
Corporate Securities Limited Representative: common stock, preferred stock, corporate bonds, stock rights, warrants, American Depository Receipts, shares of closed-ended investment companies, money market funds, privately issued mortgage-backed securities, and other asset-backed securities. Cannot sell options. This exam, in conjunction with the Series 6 and Series 22 exams, is the equivalent of a limited version of the Series 7 exam. It essentially excludes options.
Series 63.
Uniform Securities Agent State Law Exam: required by many states for state registration. This exam tests what are often called the blue sky laws.
Series 65.
Investment Adviser Exam: covers legal and regulatory matters. This exam is usually required in order to be registered as an investment adviser (an exemption may apply in some situations).
Series 66.
Investment Adviser/Uniform Securities Agent State Law Combination Exam: combines Series 63 and Series 65 exams for those who need both.
Investment Advisers Act

Can an adviser receive both a fee and commission
Yes

s long as the contract and any other communication with a client make it clear that this conflict may exist, and the adviser does nothing to hide it, there should be no problem.
Rebating
- Paying back to a client or customer any portion of the compensation received by the professional.

- Unethical
- For insurance it is illegal in almost every state
- - Many state securities departments also label rebating illegal.
Other activities that qualify as rebating
- An flat fee is quoted and it is reduced when he client buys a product

- Adviser quotes one fee structure where there is no purchase and a different fee structure when there is a purchase
When is rebating allowed ?
- In a few states rebating is allowed in the insurance arena however the same rebate must be available to all clients

- May be allowed in the securities arena - when the client clearly benefits.

- When done legally it is most often done at the institution level
ERISA
- The Employee Retirement Income Security Act of 1974

- Requirements:
-Any fiduciary who provided investment advice to an employee benefit plan that was considered an ERISA plan, had to be registered as an investment adviser with the SEC.
When can an Adviser charge a fee for providing advice on an ERISA plan?
To charge a fee, the adviser must strictly adhere to the requirements of Prohibited Transaction Exemptions 77-9 and 79-1, which deal with the sales of insurance and securities, respectively.

Prohibited Transaction Exemptions 77-9 and 79-1 basically restate the requirements of full disclosure and reasonable fees. Further, the fees must be approved by an independent fiduciary.

Finally, if the adviser is providing investment advice to a qualified plan trustee, an ERISA bond is required.
Investment Adviser Act

Rules regarding practicing law and giving insurance advice
It is illegal in every state to practice law without a license, and in most states it is illegal to give advice regarding insurance without a license.

Planners are well advised to limit their activities in these areas and to include a disclaimer in every investment advisory agreement.
7 Principals of the CFP Board’s Code of Ethics and Professional Responsibility
1. Integrity. Provide professional services with integrity

2. Objectivity. Provide professional services objectively.

3. Competence. Maintain the knowledge and skill necessary to provide professional services competently.

4. Fairness. Be fair and reasonable in all professional relationships. Disclose conflicts of interest.

5. Confidentiality. Protect the confidentiality of all client information.

6. Professionalism. Act in a manner that demonstrated exemplary professional conduct.

7. Diligence. Provide professional services diligently.
6 categories of the CFP Board's Rules of Conduct
- Establish the high standards expected of certificants and describe the level of professionalism required of certificants.

1. Defining the Relationship with the Prospective Client or Client
2. Information Disclosed To Prospective Clients and Clients
3. Prospective Client and Client Information and Property
4. Obligations to Prospective Clients and Clients
5. Obligations to Employers
6. Obligations to CFP Board
CFP Board's Rules of Conduct -
Rule 1.4
The Code specifically states that a certificant, when providing financial planning (or material elements of the planning process), owes the client the duty or care of a fiduciary as defined by CFP Board. The definition provided in the terminology section of the Code reads: “Fiduciary: one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.”
Four primary options of the CFP Board when a certificant falls short of the Principles and Rules.
1. Private Censure.
- An unpublished written reproach mailed to the certificant.

2. Public Letter of Admonition.
- A published written reproach of the certificant’s behavior.
- The Letter of Admonition will be published in a press release or other public form.

3. Suspension.
- Used with certificants the Board deems can be rehabilitated.
- For a period not to exceed five years.
-Any suspension period greater than one year requires a petition to be reinstated.
- Usually are made public.

4. Revocation.
- Permanent denial of all rights associated with use of the marks.
- Revocations normally are published.
Release IA-770 (1981) and IA-1092 (1988),
SEC clearly indicated that financial planners fall within the definition of investment advisers.
Duties owed to a client by a planner

(Critical Elements of Fiduciary Relationship)
- the fiduciary duty

- the duty to disclose, the duty to diagnose

- the duty to consult

- the duty to keep current.
The Fiduciary Duty
- The fundamental duty a professional owes a client.

- A financial planner must put the client’s interest first.

- Key aspect is rendering impartial advice.
The Duty to Disclose
- Must disclose any conflicts of interest that cannot be eliminated fully is to disclose all relevant information to the client.

- Inform the client of the risks inherent in investments that are being considered.
- Numerous other antifraud provisions apply to the failure to disclose.
SEC Rule 10b-5, relating to the Securities Exchange Act of 1934
makes unlawful false or misleading statements relating to the purchase or sale of a security.
The Duty to Diagnose
- Must gather all relevant information and be aware of changes

- Must know and consider investor suitability, which refers to matching an investor’s sophistication, financial means, and risk tolerance with the appropriate investment.
New York Stock Exchange Rule 405
- “Know Your Customer” rule
\
- focuses on gathering essential information on all customers, transactions, and accounts, including information about the customer’s investment knowledge and financial goals.
FINRA suitability rule
Requires a broker-dealer to have reasonable grounds for believing that a particular investment recommendation is suitable for the client—suitable in terms of the client’s overall financial situation, investment objectives, and risk tolerance level.
The Duty to Consult
If a planner has any doubts concerning an issue that goes beyond his or her level of personal competence, an expert in that area should be consulted.
The Duty to Keep Current
- For CFP certificants registered with CFP Board, there are continuing education requirements
CFP Board Practice Standards
- Included in the Standards of Professional Conduct

- Financial Planning Practice Standards are developed and promulgated by Certified Financial Planner Board of Standards Inc. (CFP Board) for the ultimate benefit of consumers of financial planning services.

- - Establishes the level of professional practice that is expected of CFP Board designees engaged in personal financial planning

- Do not provide ethical principals
- Concerned with what constitutes good practice.
- Based on the steps of the financial planning process.
What are the stated intentions of the CFP Board's Practice Standards
1. Assure that the practice of financial planning by CERTIFIED FINANCIAL PLANNER™ professionals is based on established norms of practice;

2. Advance professionalism in financial planning; and

3. Enhance the value of the financial planning process.”
CFP Board Practice Standards

- Series 100 - Establishing and Defining the Relationship With the Client
a. 100-1—Defining the Scope of the Engagement
CFP Board Practice Standards

- Series 200 - Gathering Client Data
a. 200-1—Determining a Client’s Personal and Financial Goals, Needs and Priorities

b. 200-2—Obtaining Quantitative Information and Documents
CFP Board Practice Standards

- Series 300 - Analyzing and Evaluating the Client’s Financial Status
a. 300-1—Analyzing and Evaluating the Client’s Goals, Needs and Priorities
CFP Board Practice Standards

400 Series—Developing and Presenting the Financial Planning Recommendation(s)
a. 400-1—Identifying and Evaluating Financial Planning Alternative(s)

b. 400-2—Developing the Financial Planning Recommendation(s)

c. 400-3—Presenting the Financial Planning Recommendation(s)
Guidance for using the term due diligence versus due care.
- Avoid using the term due diligence in any area other than securities.

- In the area of life insurance, the term due care is preferred.
CFP Board Candidate Fitness Standards

- Transgressions that are presumed unacceptable barring certification
This list includes:
- One personal or business bankruptcy filed within the last five years.

- More than one judgment lien.

- Revocation or suspension of a non-financial professional (real estate, attorney) license -->unless the revocation is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees.

-Felony conviction for non-violent crimes (including perjury) within the last five years.

- Felony conviction for a violent crime other than murder or rape that occurred more than five years ago.
- Suspension of a financial professional (registered securities representative, broker-dealer, insurance, accountant, investment adviser, financial planner) license, unless the suspension is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees.
Options for candidates that are rejected by the CFP Board
- May petition the Board for reconsideration.
Fair Credit Reporting Act
- Enacted in 1971

- Intended to limit errors by credit reporting agencies

- Established the right to information free of charge

- If a consumer is denied credit must be notified which credit reporting agency provided information to the potential creditor

- The creditor has the right to include his written explanation of the facts in the file.
How long may adverse information on an individual's credit file be maintained?
- 7 years (non-bankruptcy)

- 10 years in the case of bankruptcy
If incorrect information is included in a credit report -
- It must be investigated an corrected

- The consumer may request the corrected report be sent to:
1. Potential creditors who received an erroneous report in the prior 6 months
2) Potential employer who received an erroneous report in the past 2 years
The Consumer Credit Protection Act
- Truth in Lending law

- Passed in 1968 (updated in 1996)

- Purpose of this act was to have lenders make certain uniform disclosures, enabling the consumer to evaluate credit terms.

- Established a standard method of calculating and reporting interest (APR)

- Required disclosure of all pertinent credit terms (including late fees, when payments begin etc)

- Regulates advertisement of credit terms

- Requires disclosures to be written in easy to understand language

-Limits credit card liability of unauthorized charges to $50 if the card is lost or stolen
Regulation Z Required Disclosures
1) annual percentage rate (APR)
2) when payments begin
3) Charges for late payments
4) prepayment information
5) amount financed
6)right of rescission
The Fair Credit Billing Act
Enables borrowers to recover from creditors who break the rules regarding the correction of billing errors.
The Equal Credit Opportunity Act
Allows a borrower to recover if a creditor discriminates against him or her for any reason that is prohibited by the Act.
The Equal Credit Opportunity Act
-Allows a borrower to recover if a creditor discriminates against him or her for any reason that is prohibited by the Act.
The Electronic Fund Transfer Act
- Provides for recovery by those who suffer losses due to a financial institution failing to follow the provisions of the Act.
Chapter 7 bankruptcy
- The individual is permitted to keep certain assets, but all others are relinquished to satisfy the costs of bankruptcy and the claims of creditors.

- If any of the protected assets have been pledged to secure a specific debt, they may be seized legally by the creditor.

- The debtor is not required to give up certain payments received, including Social Security benefits, pension benefits, unemployment compensation, and alimony.

- Many states provide for retention by the debtor of all or a portion of the cash values of life insurance and annuities.

- Upon completion most debts are discharged completely

- No assurance the creditors will receive anything
What debts cannot be discharged as part of chapter 7 bankruptcy
- alimony
- child support
- loans for education
Chapter 13 bankruptcy
- A repayment plan is created —normally three to five years.

- Frequently, the amount owed is reduced

- Generally more favorable for creditors

- Debtor is generally not required to relinquish assets

- Available for those whose debts total less than certain amounts and who have regular income. (called wage earner plan)
Bankruptcy Abuse Prevention and Consumer Act of 2005.
- Makes filing for bankruptcy a somewhat less desirable alternative

- Biased towards moving individuals to chapter 13
When is Chapter 7 not allowed / not likely
Not allowed if:
- The individual’s income over the last six months is above the state median

Not likely if:
- If the individual can pay at least $100 a month to creditors, and if it seems possible for repayments to reach $10,000 over a five-year perio
Provisions of the Bankruptcy Abuse Prevention and Consumer Act of 2005.
Individuals must
2) Receive a briefing from an approved budget and counseling service (non profit)
3) wait at least 8 years from their last bankruptcy

2) Complete an approved personal financial management instructional course (paid for by the individual)
Rules for retirement assets when filing bankruptcy.
Individuals are typically allowed to retain retirement assets

- However retirement plan assets in excess of $1 mill may have to be included in the filing
Are homes included in a bankruptcy filing?
- Many states have an unlimited homestead exemption

- Home must have lived in the house for at least 40 months

- When residency is less than 40 months, home equity retention may be limited to $125K (limits vary by state)
Rules for education funds when filing bankruptcy
- Funds held in education savings accounts may be retained

- dollar limits apply based on when the contributions were made

- A $5,000 limit per beneficiary may be applied for deposits made between one and two years prior to filing for bankruptcy.