While finding no need for additional regulation of financial planners at this time, the GAO recommended that the SEC incorporate into its ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners, GAO found confusion here, and any implications a lack of understanding may have for consumers’ investment decisions. In a study mandated by Section 919C of Dodd-Frank, the GAO also urged the SEC to collaborate with state securities regulators to identify 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.
The study found that 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. The SEC has issued guidance that broadly interprets the Investment Advisers Act to apply to most financial planners because the advisory services they offer clients typically include providing advice about securities for compensation. Similarly, the 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. Moreover, financial planners that provide brokerage services are subject to broker-dealer regulation at the federal and state levels.
In addition, under Section 1011 of Dodd-Frank, the Bureau of Consumer Financial Protection regulates the offering and provision of consumer financial products or services under the federal consumer financial laws. Dodd-Frank defines a financial product or service 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 the SEC or a state securities commission to the extent that such person acts in a regulated capacity. Thus, in GAO’s view, the Bureau may have jurisdiction over financial planners to the extent that they may offer services that would not be under the jurisdiction of the SEC or a state securities commission.
With all this in mind, the GAO concluded that, while no single law governs the broad array of activities in which financial planners may engage, an additional layer of regulation specific to financial planners is not warranted at this time. At the same time, 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.
The GAO is concerned about investor confusion over the different titles used by individuals who provide financial planning services, such as financial planner, financial consultant, and financial adviser. GAO noted that Section 917 of Dodd-Frank requires the SEC to 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 planners’ titles and designations, GAO believes that the confusion over titles used by financial planners could potentially be addressed or mitigated if the SEC incorporated this issue into its overall review of financial literacy among investors. SEC staff told GAO that their 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 products, noted GAO, and so including financial planners’ use of titles and designations in the SEC’s financial literacy review could provide useful information on the implications of consumers’ confusion on this issue
The GAO study also found that the SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm. While the Commission does record and track whether federal and state-registered investment adviser firms provide financial planning services, said GAO, its data tracking systems for complaints, examination results, and enforcement actions are not programmed to readily track whether the complaint, result, or action was specifically related to a financial planner or financial planning service.
For example, the SEC staff told GAO that 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 the SEC uses to record examination results, known as the Super Tracking and Reporting System, does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers.
However, SEC staff told GAO 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 “financial planners” between November 2009 and October 2010, often involving allegations of unsuitable investments or fraud. The SEC staff also said 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 GAO’s request, the SEC and NASAA provided examples of enforcement actions related to individuals who held themselves out as financial planners. Using a keyword search, the 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 GAO 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.
Because of limitations in how data is 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. The SEC and state securities regulators do not routinely track potential problems specific to financial planners. SEC and NASAA representatives told GAO that they have 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 that oversight of financial planners in particular had not been part of these discussions. SEC staff 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 financial planners 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.
While recognizing the need to balance the cost of data collection efforts against the usefulness of the data, GAO believes that a regulatory system should have data sufficient to identify risks and problem areas and support decision making. Given the significant growth in the financial planning industry, ongoing concerns about potential conflicts of interest, and consumer confusion about standards of care, GAO suggested that securities regulators should identify ways to get better information on the extent of problems specifically involving financial planners and financial planning services.