Industry Update Articles

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Become an Expert in Sustainable, Responsible, Impact (SRI) Investing

Demand for so-called “responsible” investment options has never been higher. In fact, at the end of 2017, more than one out of every four dollars that were being professionally managed in the United States—$12.0 trillion or more—was invested according to sustainable, responsible, impact (SRI) strategies. Industry experts also confirm that a majority of investors want their investments to incorporate environmental, social, and governance (ESG) criteria.

For financial advisors, this demand presents several challenges. First, how can they acquire the insight and expertise to competently guide their clients towards ESG investments that fit their priorities? Second, how can they provide those clients with tangible evidence that they have genuine SRI expertise? Recognizing these challenges, the College for Financial Planning®—a Kaplan Company has created the Chartered SRI Counselor™ (CSRIC™) education and designation program. This article provides an overview of the program.

Introducing the CSRIC™

Developed in partnership with US SIF, The Forum for Sustainable and Responsible Investment, CSRIC is a unique program that blends SRI foundational knowledge and scenario learning. The first and only major financial credential dedicated specifically to SRI, the CSRIC is supported by top financial firms. It is designed for advanced financial advisors who wish to obtain foundational knowledge and best practices for advising clients on SRI, including:

  • Experienced advisors who desire financial planning credentials to advance their career
  • Advisors who wish to specialize in SRI investing for new or existing clients
  • Advisors who wish to pursue a Master of Science degree at a later date

Students enrolled in the program will learn the history, definitions, trends, portfolio construction principles, fiduciary responsibilities, and best practices of SRI investments.

About the CSRIC™ Course

The CSRIC™ Professional Education Program is a three-semester credit graduate-level course. The seven modules in the course are:

  • The Foundations and History of SRI
  • Approaches to SRI Shareholder Advocacy, Community Investing, and Corporate Responsibility
  • Portfolio Construction and Incorporating SRI into Financial Advising
  • ESG Performance, Risk, and Rating Metrics
  • The Fiduciary Standard and Communicating the Value of SRI
  • Current and Future Opportunities

The typical student should expect to spend approximately 90-135 hours in course-related activities to study and prepare adequately for the course examination. The CSRIC course also does “double-duty” for CFP® professionals who require continuing education (CE) credits to sustain their CFP® designation: graduates may receive up to 28 CFP® CE credits, up to 45 state insurance CE credits, and 45 credits towards the College’s professional designation CE requirements.

In addition, professionals who are considering a master’s degree can apply their CSRIC studies in that pursuit: designees receive direct credit for one course in the College’s MS in Personal Financial Planning program, saving them time and money while pursuing multiple credentials.

Learn More

U.S. SIF members receive a 15 percent discount on the CSRIC course and course-related materials. In addition, many leading financial advisory firms endorse the CSRIC™ designation and will reimburse advisors for course-related expenses. For more information, visit the College’s website.

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Posted by Kaplan Financial Education - August 28, 2019
Sustainable, Responsible, Impact (SRI) Investment Expert

New York Amends Regulation 187: What It Means for Insurance

In July 2019, the New York Department of Financial Services (DFS) announced an amendment to New York Insurance Regulation 187 that affects annuities and life insurance sales. It requires insurers to establish new standards and procedures for how agents and brokers make insurance and annuity product recommendations. In this article, I’ll explain the amendment, what it means for insurers and producers, and where you can get more education on this regulatory change.

The Best Interest Rule

The “Best Interest Rule” is an amendment to existing New York State suitability standards for annuity transactions. Prior to this change, annuity recommendations producers had to be suitable for the client. The amendment raises the bar in that it requires recommendations to be in the best interests of the consumer. These requirements also apply to life insurance recommendations.Since the DOL Fiduciary Rule was vacated, regulatory bodies and states have been seeking other ways to hold insurance producers, brokers, and financial companies to the same standards.

Amending Regulation 187 is New York’s answer to the issue. The New York DFS official announcement states that the rule “requires insurers to establish standards and procedures to supervise recommendations by agents and brokers to consumers with respect to life insurance policies and annuity contracts issued in New York State so that any transaction with respect to those policies is in the best interest of the consumer and appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction.” On August 1, 2019, the best interests rule went into effect for annuities; for insurance, the effective date is February 1, 2020.

What the Rule Means for Insurers and Producers

By mandating that life insurance or annuity recommendations to be based on the best interests of the communities, the rule is designed to keep financial compensation or incentives from influencing the recommendation made to a client. It requires insurers to develop, maintain, and manage procedures for preventing consumer financial exploitation. Basically, insurers must educate and supervise agents and brokers to make sure that they are putting their clients’ needs above their own when they recommend life insurance and annuities products. Also, insurers should take note of the “life insurance policies and annuity contracts issued in New York State” language because it means that non-resident, as well as resident producers, are affected.

There are important exemptions, however. The rule does not apply to retirement plans covered by the Employee Retirement Income Security Act (ERISA), other retirement and deferred compensation plans maintained by employers, and direct sales to consumers where no recommendation has been made by the insurer.

There is controversy around the amendment. The New York Chapter of the National Association of Insurance and Financial Advisors filed a lawsuit to stop it, claiming that exempting direct sales to consumers gives those insurers a competitive advantage over producers. Another lawsuit has been filed by several independent agents’ organizations stating that the amendment is too subjective in the use of the term “best interest.”

If Regulation 187 clears these hurdles, it is very likely that other states and organizations will follow suit. In fact, the SEC has already adopted a package of best-interest rules and regulations. The National Association of Insurance Commissioners (NAIC) is drafting a model regulation that has standards similar to those of Regulation 187. And, New Jersey and Nevada are exploring best-interest rules of their own.

Educate Yourself

Kaplan Financial Education offers several Regulation 187 courses to give you the tools and knowledge you need to establish standards and procedures that meet its resident and non-resident qualifications. You can learn more on our New York Insurance Continuing Education web page.

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Posted by Randy Kemnitz, Ph.D., CFP® - August 12, 2019
New York Skyline With Regulation 187 Overlaid

FINRA Moves to Prometric as Single Vendor for Securities Qualification Exams

As of January 1, 2018, the Financial Industry Regulatory Authority (FINRA) has chosen Prometric as the single vendor to deliver its many securities qualification examinations (learn which exams Kaplan can prepare you for here).

Historically, FINRA has provided two vendors: Pearson VUE and Prometric. The last day anyone was allowed to sit for a FINRA exam at a Pearson VUE testing center was December 31, 2017.

If a candidate did not pass an exam at a Pearson VUE testing center by December 31, 2017, they are only allowed to reschedule with a Prometric testing center.

Thinking about a career in securities? Download our free eBook, Launching Your Securities Career, to get tips and advice from 100+ securities professionals.

Prometric complies with the Americans with Disabilities Act (ADA) by supporting testing accommodations or modifications. However, the candidate must submit an accommodation request to FINRA for review and approval. If FINRA approves the accommodation, it will then let Prometric know before the appointment.

Those securities professionals who have previously taken examinations at Pearson VUE need not worry about their testing records, as they are maintained by FINRA. If a copy of a score report for a test taken at Pearson VUE is needed, contact FINRA at (800) 999-6647. 

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Posted by William James, Senior Content Specialist - April 19, 2019
Woman sitting for Securities Licensing Exam

FINRA Proposes Big Changes to Securities Continuing Education

New Rules Proposed for both Firm Element and Reg Element CE

Nothing is certain but change! Securities Industry Continuing Education (CE) programs may soon undergo significant changes if new proposals are adopted. The new ideas are now in the “testing the waters” stage and have been floated out to firms at the 2018 FINRA Conference and via new FINRA press-release and Reg. Notice. “What does this mean to me?” you ask. If you’re involved in CE program oversight, compliance, or simply a “covered person” required to complete CE, you should to read on and learn more. Change can be disruptive but may also come with some benefits for you and your firm.

CE Definitions and Historical Context

Firm Element CE (FE) is training delivered to the firm’s “covered persons” (primarily those who meet with the investing public or their direct supervisors). Firm element courses/content—“in house” or via third-party education providers—are determined after conducting a "needs analysis" that is specific to each firm and addresses the nature of business conducted and any pertinent issues affecting the firm or its registrants. The FE needs analysis must also consider the results of its registrants’ recent Reg Element CE completions (i.e., where were they deficient?). Once the needs analysis is done, a firm "training plan" is created. FE is done annually and firms must document, and be prepared to defend, their FE training program. 

Regulatory Element CE (Reg Element) is prescriptive training (i.e., determined by FINRA and NOT by the frim) and is based upon individuals’ registration type (e.g., different content for Supervisors vs RRs):

Reg Element training cycles (registrant’s exam window opens) begin at the second-year anniversary from initial registration and every three years thereafter. Reg Element is delivered online via FINRA’s Online CE System, and curriculum generally consists of important rules and regs, compliance, ethical and supervisory subjects, and sales practice standards. Reg Element must also be completed within prescribed time-frames.

Abbreviated History of Securities Industry Continuing Education (CE)

In concert with the self-regulatory organizations (SROs*), the rules for continuing education were developed by The Securities Industry/Regulatory Council on Continuing Education—or more simply the “CE Council” (CEC)—and approved by the Securities and Exchange Commission (SEC) on February 8, 1995. Firm Element and Regulatory Element (Reg Element) went into effect in July of 1995. Several key Reg Element rule changes were implemented over the years, yet Firm Element (FE) has remained largely untouched.

In 2015, with approval of amendments to FINRA Rule 1250 (Continuing Education Requirements), the “new era” for CE began. Specifically, the CE Online Program was rolled out. As a result, online Reg Element CE fees were reduced to $55 per participant, compared to the physical (onsite) test center delivery charge of $100. Another important change was the elimination of “In-Firm Delivery” of the Reg Element. In-Firm Delivery (via supervised sites set up at firms) was phased out effective January 4, 2016. All Reg Element Programs are now available and must be completed through FINRA's CE Online System.FINRA’s new system allows participants to “satisfy their CE Regulatory Element requirement from a home or office computer—anytime, anywhere.” 

The New FINRA/CEC Proposals for Reg Element and Firm Element

If implemented, the new (Sept 2018) FINRA/CEC proposals will have wide impact on firms and their “covered persons”—those who must participate in both Reg Element and Firm Element CE. The new proposals are outlined in  FINRA’s Sept 6, 2018 News Release and in more detail through FINRA’s Sept 8 Reg Notice 18-26.

What are the primary “CE Program” changes under consideration? FINRA and CEC are now soliciting feedback from member firms around the notion that Firm Element (FE) can more effectively be provided through a single platform, where content standards are more uniform, redundancies can be minimized, and delivery methodology can be more efficiently tracked and maintained. Specifically, FINRA/CEC are suggesting that all FE content should be delivered via FINRA's Online CE System and supported via email notifications through the Financial Professional Gateway (FINPRO). If these changes are implemented, this would remove both ‘in house’ (member firms) and third-party CE vendors from the CE delivery and in some instances 'tracking' business, albeit FINRA is making it clear that they will continue to 'consider' (presumably there will be a vetting process) and utilize course content from firms and education providers, as long has the content can be formatted for delivery through FINRA’s system. Moreover, FINRA has proposed one (1) course catalogue where all member firms can choose content which meets/matches their training plan along with FINRA’s new “to be defined” minimum standards; “FINRA and the CE Council would work together with third-party training providers to offer a large catalog of readily available materials that are centrally located for convenience.

FINRA and CEC are also touting the Financial Professional Gateway (FINPRO) e-notification and reporting capability; The FINRA CE delivery platform provides the most efficient and effective means of tracking their compliance with the proposed CE requirements.

FINRA/CEC arguments in favor of the proposed ‘FE move’ to FINRA Online CE System:

  • Greater consistency in content and presenting material in an optimal learning format.
  • Reduction in redundant content (i.e., not repeating topics covered during Reg Element or other credentialing programs); The CE Council is considering creating a centralized content catalog to serve as an additional source of Firm Element content.
  • Automated email notifications to “covered” registered persons and course completion reporting to firms and individual registrants; FINRA has also released a system to improve access to data and delivery of services to registered representatives, although the system is not yet widely used. This system, the Financial Professional Gateway (FINPRO).
  • Ensuring adequate CE training is delivered (they are considering“defined minimum standards”)—FINRA has observed that FE training plans vary widely (firm-by-firm), and some firms ‘over train,’ yet other firms “provide very limited amounts of Firm Element, and the CE Council is concerned that registered representatives at those firms may not be receiving adequate training."
  • Ability to offer “FE credit” to forms of training not recognized in Firm Element programs today (e.g., offering FE credit to those who recently completed industry credentialing programs—CFP®, CFA®, etc.).
  • Assisting those who’ve left the industry—more than 2 years out—by allowing them to reenter (“re-qualify”) by way of completing a TBD curriculum (consisting of both FE and Reg Element content), without having to take a new qualification exam. FINRA is making the argument that this re-qualification process is problematic unless uniformity and consistency are maintained (which can be accomplished via FINRA’s Online CE Program); The central idea is to allow previously registered individuals to complete an annual Regulatory Element as well as additional content equivalent to Firm Element while out of the securities industry.” However…Without establishing an industry Firm Element baseline expectation, it is difficult to determine the appropriate expectation for individuals who are maintaining their qualification outside the industry.

 While most of the bullet points above pertain to FE, there is one new notion affecting Reg Element. SICE/FINRA are proposing a move to annual Reg Element CE training versus the current 3-year cycle, and this makes elimination of redundant FE content all the more important from FINRA’s perspective, and no doubt an idea that firms and covered persons will also appreciate.

Timeframe

New regulations are rarely instantaneous and CE rule changes will be no exception. The CE Council is presently gathering additional info on current firm practices and needs. FINRA and the CEC are also soliciting feedback (comment period expired Nov. 8, 2018) and will continue to formulate their ideas before delivery of a formal rule proposal. Given that late time of year (Oct. 2018 as of this article’s publication date) it is unlikely any formal rule will be drafted before year-end. It is more probable that CEC and FINRA will have a new proposal coming in the first or second quarter of 2019 followed by a comment period. Bottomline -- new CE rules will likely NOT be finalized until 2020 or 2021. Yet as the saying goes, "time flies."

Footnotes:

*In May 1993, six SROs—the New York Stock Exchange, American Stock Exchange, Chicago Board Options Exchange, Municipal Securities Rulemaking Board, NASD, and Philadelphia Stock Exchange—created the Securities Industry Task Force on Continuing Education to study the issue of continuing education and to develop recommendations.

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Posted by Dan Butterfield, Solutions Engineer at SmartPros - April 9, 2019
Woman pulling back curtain on changes in securities licensing CE

MSRB Modifies the Series 52 Qualification Exam

The Municipal Securities Rulemaking Board (MSRB) filed a proposal with the SEC to modify the Series 52 exam into a specialized knowledge examination, while at the same time recognizing a passing score on FINRA’s Securities Industry Essentials (SIE) Examination as a prerequisite. This change was implemented on October 1, 2018.

Summary: General Knowledge Content Redundancy Removed

The Series 52 exam once had general knowledge content that is now tested by the SIE exam. The MSRB accepts FINRA’s new SIE exam and has restructured the Series 52 exam to eliminate duplicate testing of general securities knowledge. The exam is now a more tailored, specialized knowledge exam.

MSRB, Series 6, and Series 7

The MSRB continues to recognize, even revised, the General Securities Representative Qualification Examination (Series 7) for qualification as a “municipal securities sales limited representative,” and the Investment Company and Variable Contracts Products Representative Examination (Series 6) for qualification as an “investment company/variable contracts limited representative to further regulatory consistency.”

There is no impact to the Series 53 exam.

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Posted by William James, Senior Content Specialist - April 9, 2019
Woman learning about modified Series 52 Exam on her laptop

Why the DOL Decision Reversal Doesn’t Matter

In early July, the Department of Justice petitioned the Supreme Court to challenge the US Court of Appeals for the 5th Circuit Court’s decision to vacate the Department of Labor’s long anticipated “fiduciary responsibility” rule. This decision effectively turned back the clock 2 1/2 years and unwound years of work by the DOL to regulate, restrict, and direct financial advisors to act in clients’ best interest when managing qualified retirement accounts. While many firms are now breathing a sigh of relief, the reversal of this decision will have no material impact on the direction of the industry. Acting in clients’ best interest, whether it’s qualified or unqualified accounts, is well underway.

Underperformance

For years now, DALBAR has tracked and reported consistent investor underperformance based on fixed and equity market indexes. In its more recent “Quantitative Analysis of Investor Behavior” published in April, equity investors underperformed the S&P Index by 191 basis points over the last 20 years. While that gap is significant, it pales in comparison to the 416-basis point gap that fixed investors underperformed the Barclays Aggregate Bond Index over the same time period. For 24 years in a row now, both equity and fixed income investors have consistently lagged behind their respective market index by significant margins. The only explanation is bad investor behavior: buying and selling their investments at the wrong time.

Investors haven’t achieved this consistent level of underperformance all on their own. For decades, financial advisors and financial services firms have sold consumers what is emotionally easiest for them to buy. How can I make that claim? When is it easiest to sell an equity? When the market is rising. When is it easiest to sell a fixed asset? When the market is tanking. It’s not the asset class that creates the problem. It’s the use of the asset class that creates the issue of underperformance. Consumers are waking up to the fact that while their financial advisor may be winning, they’re losing. 

Managing Emotions: The Triple Win

I entered the industry as a new financial advisor in 1985. Back then, financial planning was the new cutting-edge tool in the industry. Planning helped clients be better investors because they now had longer term goals with defined timeframes. There was incentive for them to save more money if they weren’t on track for their goals. The net result was that clients saved and invested more, and as a result, advisors made more commissions, and their firm had more assets to manage. This was the “triple win.” 

Since then we’ve realized that many of the fundamental tools of financial planning, while necessary, are no longer sufficient. Why? Because investors aren’t rational. They act on emotion too often and when they do, it contributes mightily to their underperformance. Tools like Modern Portfolio Theory, asset allocation, and Monte Carlo simulation don’t account for investors getting emotional about their money. 

Behavioral finance helps us understand why that happens; between our emotional reflexivity and psychological decision-making-pitfalls, we have a tendency to make poor choices often. Industry-leading financial advisors in the US, Canada, and around the world are now equipping themselves with the tools and skills to recognize and manage client emotions. These new tools, when used effectively, enable clients to make better investment decisions and create an even more powerful value proposition for the advisor. By acting rationally, clients improve their return on their assets, and they end up with more assets. Advisors and their firms who use the powerful tools for behavioral financial advice exercise their fiduciary responsibility by acting in their clients’ best interest. In the end, they have more money to manage and therefore generate more revenue.  

Disclaimer: Chuck Wachendorfer is Partner and President of think2perform, Kaplan’s partner for our behavioral financial advice program. The opinions expressed in this article are solely those of the author based on personal research and observations. They should not be viewed as legal advice.

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Posted by Chuck Wachendorfer, think2perform® - April 9, 2019
Financial advisor greeting married couple in her office

POINT OF VIEW: SEC’s Best-Interest Rule Rises on the Bones of the DOL’s Fiduciary Rule

Disclaimer: William R. James is a Senior Editor at Kaplan Financial Education. The opinions expressed in this article are solely those of the author based on personal research and observations. They should not be viewed as legal advice.

Following a loss of two federal appeals court hearings and the passing of a deadline to seek a Supreme Court review, it is safe to say that the Department of Labor’s Fiduciary Rule is dead. The objective of the rule was to ensure that financial professionals (broker-dealers and registered representatives) put their customers’ financial interests ahead of their own when recommending retirement investments. President Trump ordered a review of the rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”

 So where does that leave us? After laying out $5 billion to implement the DOL’s regulatory thrust, there’s much bewildered head-scratching in the financial services industry. What was that all about? In some ways, there’s a sense of relief that regulation is settling back to its customary regulatory provider by registered advisers and broker-dealers. But, Congress’s view of two separate authorities acting in different capacities was tamped down, leaving the whole matter in a legal mess.     

The DOL Stumbled

Congress looked explicitly to the DOL for regulatory protections of retirement plans rather than the SEC, reasoning that the Commission operates under a different regulatory framework and that it has no jurisdiction over advice appertaining to an investment that is not a security. In other words, special protections would be desirable for retirement accounts and that, in the view of Congress, would be best handled by the DOL. The Fifth Circuit was mindful of that. But it then found that the DOL did not have the authority to adopt the new fiduciary advice definition (“the Fiduciary Rule…is inconsistent with the entirety of ERISA’s ‘fiduciary’ definition”) and, that by adopting the Fiduciary Rule, it acted arbitrarily and capriciously (“the Rule fails to pass the tests of reasonableness as viewed under the Administrative Procedures Act”). The court vacated the Fiduciary Rule in toto, striking down both its new fiduciary advice definition and the exemptions from it. 

What drove the DOL to turn its back on a wealth of available expertise is inexplicable. The SEC has decades of experience dealing with disclosure, and yet the DOL sought no counsel or advice. In fact, that reach was slapped by the Fifth Circuit, which called out the DOL’s highly questionable authority and vacated its controversial, checked-out rule. The Fifth and Tenth Circuits found it wanting, ordering the DOL to vacate the rule, declaring it unreasonable. It constituted "an arbitrary and capricious exercise of administrative power.” The Department of Labor’s overstepping to transform and regulate in entirely new ways many thousands of financial services providers and insurance companies for retirement plans, falls outside of what is reasonable. 

Enter the SEC

Stepping up quickly to fill the void, the SEC announced its own long-anticipated alternate rule.  Known as Regulation Best Interest (Reg BI), the Commission took a decidedly different approach. SEC Chairman Clayton voiced the concern of many that there needs to be “clarity and harmony to investment advisor, broker-dealer standards of conduct.” SEC Commissioner Michael Piwowar, who along with Clayton voted in favor of the Best Interest proposal, stated, “A solid building block, it imposes a new best-interest standard.” 

Despite Congress’s intentions, Reg BI is the Commission’s answer to the Labor Department’s now defunct rule with the aim of providing a unified fiduciary standard. Commissioner Piwowar has made his distaste for the DOL’s effort obvious. He described it as a “terrible, horrible, no good, very bad” rule due in part to the DOL acting unilaterally without any input from the SEC, FINRA, state securities, and insurance regulators.  

The SEC-proposed rule appears to offer a gentler approach than the DOL. By introducing a uniform standard of conduct for broker-dealers and registered advisers in light of their different relationship types and models for providing advice, the Commission offers a deft touch to regulation. Brokers would be required to disclose conflicts of interest and look to eliminate or “mitigate” them. But, brokerages would be required to mitigate every material conflict of interest. That means the door is open for a carefully applied sales contest. The SEC has stated: “We do not intend our standard to prohibit a broker-dealer from having conflicts when making a recommendation."

With this shift, financial services firms are now free to review their policies as they pertain to retirement accounts. Even with the departure of the Fiduciary Rule, firms want to keep clients’ best interests in the forefront and consistent with just and equitable principles of trade. 

The Defunct Fiduciary Rule vs. the Proposed Best-Interest Rule

So, how do the rules differ? Here are some of the main differences. 

Form CRS

In the view of some commissioners, one of the failings of the DOL rule was that it dismissed the SEC’s experience dealing with conflict of interest disclosure. In this requirement, the SEC is addressing the confusion from the use of misleading titles by financial services professionals. Retail investors must be able to distinguish between the types of financial service providers they can choose. This may include those member firms and associated persons who sell products and those who offer advice as a fiduciary. 

Currently, the many impressive sounding titles used by financial services professionals offer investors little help. For example, under current regulations, anyone can use financial “adviser” or “advisor,” regardless of whether they are registered investment advisers complying with investor protections or not. 

The SEC’s new Form CRS will require financial services professionals to provide their retail customers a simple disclosure form to clarify the scope of customers’ relationships with those who offer them financial services. 

Regulation Best Interest (Reg BI)

In looking for a regulatory alternative to the DOL Fiduciary Rule, the Commission is seeking to ultimately adopt a clear rule for which compliance is not so difficult that firms stop offering retail investors services they can pay for through commissions or other transaction-based fees. This is in stark contrast to the DOL rule. The “best interest” standard is altogether different from the long-established Investment Adviser’s Act fiduciary standard and FINRA’s suitability standard. The ambiguity in the SEC’s proposed rule may likely make it difficult for broker-dealers to know how to comply with it, which could then lead to a decision to stop offering transaction-based services. 

The question must be considered, will Reg BI raise compliance costs to such a level that it becomes disadvantageous for broker-dealers to offer retail investors transaction-based advice?

The SEC’s proposed rule will require:

  • Broker-dealers and registered representatives to not place their interests ahead of those of their retail customers
  • Protection of retail customers from investment strategies that drive up broker-dealer fees
  • Broker-dealers to provide customers with enhanced disclosures of conflicts of interest.

Interpretation of the Standard of Conduct for Investment Advisers

The issue hasn’t received the same hard look as the broker-dealer standard of conduct. Most would be able to identify the “fiduciary duty” as the standard of conduct for investment advisers, but readily identifiable parameters may not be so easy to find. In other words, what precisely does the fiduciary duty demand? The Investment Advisers Act offers few particular obligations related to the standard. Consequently, the proposed interpretation places its requirements from common law principles. 

The DOL’s heavy legal hand will not be missed. The specter of class-action lawsuits no matter how watered down by exemptions or looming private right of action had a chilling effect, causing the abandonment of entire lines of business, in addition to the $5 billion price tag before it was vacated. 

The Commission’s best-interest rule drubbed out the legal axe that hung over the necks of broker-dealers and their associates who failed to pick up the nuances of the DOL’s Fiduciary Rule. The DOL provided a path for customers to sue brokers in class-action lawsuits. The SEC-proposed rule has no such blade in it. This suggests to careful readers that FINRA’s Code of Arbitration will remain the backbone of dispute resolution. 

More Choice

The legality of the SEC stepping up to plug the hole left by the DOL’s Fiduciary Rule being vacated has yet to be decided. The current congress has not made any appreciable noise about it. In that absence, it is safe to say that the SEC’s take is correct. Apart from the plain language approach, which is a welcome break, providing customers more choice is a good thing. The Commission sent a clear message to the financial services industry: inform clients of and eliminate or greatly diminish (not eliminate) conflicts. Informed choice is the underlying principle over the ponderous and legal morass facing those firms that did not toe the line with the Labor Department’s rule.

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Posted by William R James, Senior Content Specialist - April 8, 2019
Arrow of a compass pointing in the correct direction

Amendments to the CUSIP Rule (MSRB Rule G-34) Effective June 14, 2018

Background

In trading, receiving, delivering, and safekeeping municipal debt securities, it is far easier for dealers to identify a specific bond if it has a CUSIP number assigned to it.1 There are millions of municipal bonds issued, and they can be very similar. For example, an Ohio Turnpike, 4.000%, maturing in October 2028 Series 67760HHE4 can easily be mistaken for an Ohio Turnpike, 4.000%, maturing in October 2028 Series 67760HHF4.

New Requirement

The Municipal Securities Rulemaking Board (MSRB) amended its Rule G-34, on CUSIP numbers. Among other things, the amendments codify the Board’s longstanding interpretive view that BDs are “underwriters” when acting as placement agents of private placements of municipal debt securities, including direct purchases.2

Also, the amendments place a requirement on non-dealer municipal advisors to obtain a CUSIP number when advising an issuer on a competitive underwriting.

That said, the revised rule provides an exception. When dealers and municipal advisors in competitive sales reasonably believe (e.g., by getting a written statement) that the present intent of a purchaser is to hold the bonds to maturity (or earlier redemption or mandatory tender3), the requirement to obtain a CUSIP number may be waived.

Clarification of the Definition of Underwriter

The amendments will delete the existing definition of “underwriter” and instead cross reference to the term “underwriter” as it is defined in Exchange Act Rule 15c2-12(f)(8)4, thus adding wider and clearer understanding of the term as understood by most municipal securities professionals.

All-Inclusive Application of the CUSIP Number Requirements

The amendments will apply the CUSIP number requirements to all municipal advisors advising on a competitive sale of a new issue of municipal securities rather than just some of them. The Board is now of the view that requiring some municipal advisors to obtain CUSIP numbers in competitive sales creates problems.

The amendments also clarify the that a municipal advisor in a competitive sale must make an application for a CUSIP number no later than one business day after dissemination of a notice of sale “or other such request for bids.”

Old Rule
“A financial advisor shall make an application by no later than one business day after dissemination of a notice of sale. Such application for CUSIP number assignment shall be made at a time sufficient to ensure final CUSIP numbers assignment occurs prior to the award of the issue.”

New Rule
“A municipal advisor advising the issuer with respect to a competitive sale of a new issue of municipal securities shall make an application by no later than one business day after dissemination of a notice of sale or other such request for bids. Such application for CUSIP number assignment shall be made at a time sufficient to ensure final CUSIP number assignment occurs prior to the award of the issue.”

The additional language looks to ensure the timing of the application for a CUSIP number where bids are sought in a competitive sale of municipal securities using documentation other than a traditional notice of sale. A municipal advisor in a competitive transaction that applies for the CUSIP number no later than one business day following the distribution of a notice of sale or other request for bids helps safeguard that trading in the new issue can begin without delay following the award.

Provides an Exception to the Requirements in Certain Circumstances

Some banks in direct purchase transactions are reluctant to engage in such a transaction if a CUSIP number is required because some bank purchasers take the view that the transaction is a loan for certain bank accounting purposes. This makes the bank less likely to participate in the financing and hindering the dealer’s ability to directly place the municipal securities, leaving issuers with fewer financing options.

Likewise, where a municipality is purchasing municipal securities to secure its other municipal debt obligations, such as in an advance refunding, there is an expectation that the underlying municipal securities being purchased are intended to be held—not traded in the secondary market.

A dealer (or municipal advisor in a competitive sale) is not required to apply for a CUSIP number in the case of sales of municipal securities to a bank, that is purchasing the municipal securities with funds that are securing or paying, the municipality’s debt issue (e.g., state revolving fund or bond bank), and the dealer (or municipal advisor in a competitive sale) reasonably believes (e.g., by obtaining a written representation) that the purchaser has the present intent to hold the municipal securities to maturity or earlier redemption or mandatory tender.

The Board expects dealers and municipal advisors to work up policies and procedures for arriving at a reasonable belief as to an investor’s intent. Obtaining a written representation from the purchaser is just one example for determining the purchaser’s present intent.

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1 CUSIP identifying numbers are provided by CUSIP Global Services, which is managed on behalf of the American Bankers Association by S&P Global Market Intelligence.

2 In a competitive sale, bids from interested dealers are opened at the appointed time and place as advertised in trade periodicals, and the issuer awards the sale to the successful (lowest) bidder that meets all the requirements laid out by the issuer and its advisor. In a negotiated sale, an issuer selects its underwriter following a negotiation of the offering terms. A newer third method to sell bonds is by direct purchase by banks or other financial institutions. Bank direct purchases (BDPs) are an increasingly popular alternative to competitive or negotiated sales.

3 Early redemption may occur on bond issuers’ or bondholders’ intentions. For example, a callable bond may be bought back (called) by the issuer often at a premium to compensate the bond owner for lost interest. This happens when interest rates are declining, and the municipality is looking to refinance its outstanding expensive debt. Most bonds are callable. Occasionally an issuer may provide a put feature giving the bond owner the right to “put” or compel the issuer to repay the bond before maturity typically at par thus allowing the bond owner to reinvest in higher yielding bonds.

4 Exchange Act Rule 15c2-12(f)(8) defines “underwriter” as any person who has purchased from an issuer of municipal securities with a view to, or offers or sells for an issuer of municipal securities in connection with, the offering of any municipal security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; except, that such term does not include a person whose interest is limited to a commission, concession, or allowance from an underwriter, broker, dealer, or municipal securities dealer not in excess of the usual and customary distributors' or sellers' commission, concession, or allowance.

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Posted by William R James, Senior Content Specialist - April 8, 2019
Abstract investment performance numbers

POINT OF VIEW: DOL Fiduciary Rule DOA, SEC Steps Up

Disclaimer: William R. James is a Senior Editor at Kaplan Financial Education. The opinions expressed in this article are solely those of the author based on personal research and observations. They should not be viewed as legal advice.

Commission Approved Best-Interest Proposal for Brokers

The continuous effort to roll back and stall the Department of Labor’s fiduciary rule by the Trump White House and a sizeable number of influential plaintiffs winning in circuit courts finally worked. Last month the DOL told CNBC, following an order by the Fifth Circuit to vacate, that pending further review it will not be enforcing the 2016 fiduciary rule. With the SEC Commissioners 4-1 approval of its “best interest” proposal on April 18, it appears that the final nail was hammered into the coffin of the Obama-era DOL’s effort to regulate certain advice to pension funds.

The 1,000-page DOL proposal was the sum of years of effort to reign in and regulate the retirement plan advisory business provided by brokers. However, both the Fifth and Tenth Circuits found it wanting, ordering the DOL to vacate the rule, declaring it unreasonable—that it constituted "an arbitrary and capricious exercise of administrative power.” The Department of Labor’s reach by looking to transform and regulate in entirely new ways many thousands of financial services providers and insurance companies for retirement plans, falls outside of what is reasonable. Stepping up quickly, the SEC announced its own long-anticipated alternate rule. Known as Regulation Best Interest, the Commission took a decidedly different approach.

SEC Chairman Clayton voiced the concern of many that there needs to be “clarity and harmony to investment advisor, broker-dealer standards of conduct.” SEC Commissioner Michael Piwowar, who along with Clayton voted in favor of the Best Interest proposal declared it to be “a solid building block...it imposes a new best-interest standard.” While he noted that he has some misgivings, he added, “No longer can people say the SEC needs to do something about this [standard of conduct].” During the obligatory 90-day comment period, Piwowar is hoping to hear comments as to whether the new regulation increases compliance costs for broker-dealers. Commissioner Robert Jackson stated the “need for SEC action has been even more urgent.”

The Bullet Has Been Bitten

I think it’s safe to say without being hyperbolic, that the dollar figure spent by the brokerage industry to comply with a now lifeless rule is staggering. A SIFMA study put the number at $4.7 billion in start-up costs to comply with the anticipated DOL rule. With that investment, it’s not surprising that sizeable broker-dealer advisors look to hang on to the momentum and get something for their money, particularly since they were moving in the fiduciary direction in the first place, seeing it as the business model of the future regardless of what happened to the DOL rule. They’ve bitten the bullet, done a lot of work, and aren’t looking to change anything at this point. Though admittedly, no one can suppress a smile knowing that the specter of class-action lawsuits, no matter how watered down by exemptions or private right of action, no longer looms.

The Commission’s best-interest rule drubbed out the legal ax that hung over the necks of broker-dealers and their associated persons who failed to pick up the nuances of the DOL’s fiduciary rule. The DOL provided a path for customers to sue brokers in class-action lawsuits. The SEC-proposed rule has no such blade in it, suggesting to careful readers that FINRA’s Code of Arbitration will remain the backbone to dispute resolution. I expect disciplinary action will find a way into further review during the 90-day comment period on the new rule.

Working more closely in a fiduciary capacity, including a clear explanation of investments and fees with customers, is a path that works with the fiduciary and best interest standards. The suitability standard is still in play, but its days are numbered by rule and business practice. Bulge-bracket and RIA firms were acting as fiduciaries well before the DOL launched its rule, and those that were gearing up for it will continue as though the Fiduciary Rule was still in force.

Belying the Commission’s nearly 1,000-page proposal that suggests to the mind a comprehensive, batten down the hatches, weighty rule, it appears to offer a gentler approach than the DOL. By proposing a uniform standard of conduct for broker-dealers and advisers in light of their different relationship types and models for providing advice, the Commission offers a deft touch to regulation. Brokers would be required to disclose conflicts of interest and look to eliminate or “mitigate” them, but the Commission does not intend to require brokerages to mitigate every material conflict of interest. That means the door is still open for a carefully applied sales contest. The SEC has stated that, “We do not intend for our standard to prohibit a broker-dealer from having conflicts when making a recommendation."

Reawakened Market Participation

With this somewhat more relaxed approach, the door may hopefully swing the other way, offering significant players that earlier withdrew from the market of servicing retirement investors due to the DOL’s heavy-handed approach a way and desire to get back in. It is possible these former players may reconsider their departure. I hope so.

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Posted by William R James, Senior Content Specialist - April 8, 2019
financial advisor meeting with married couple clients to discuss options

How Series 6, 79, and 99 Examinations Have Changed Now that the SIE Exam is Live

Now that all new representative-level applicants must take the Securities Industry Essentials (SIE) exam, the Series 6, 79, and 99 exams are now specialized knowledge examinations (a revised representative-level qualification examination) for their particular registered roles. As a result, these exams test knowledge relevant to the day-to-day activities, responsibilities, and job functions of those individuals.

Series 6 Breakdown

FINRA has changed the major job functions that are performed by an Investment Company and Variable Contracts Products Representative (Series 6):

  • Function 1: Seeks Business for the Broker-Dealer from Customers and Potential Customers, 12 questions, 24% of exam items
  • Function 2: Opens Accounts after Obtaining and Evaluating Customers’ Financial Profile and Investment Objectives, 8 questions, 16% of exam items
  • Function 3: Provides Customers with Information About Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records, 25 questions, 50% of exam items
  • Function 4: Obtains and Verifies Customers’ Purchase and Sales Instructions; Processes, Completes and Confirms Transactions, 5 questions, 10% of exam items

The fee for the Series 6 is $40 (when combined with the $60 fee for the SIE, it is the same $100 fee as previously), and the exam has 50 scored questions. Consistent with FINRA’s practice of including “pretest” questions on examinations, the Series 6 examination includes five additional, unidentified pretest questions that do not count towards the candidate’s score. The amount of time candidates have to complete the examination is 1 hour and 30 minutes.

All candidate test scores are placed on a common scale using a statistical adjustment process known as equating. Equating scores to a common scale accounts for the slight variations in difficulty that may exist among the different sets of exam items (questions) that candidates receive. This allows for a fair comparison of scores and ensures that every candidate is held to the same passing standard regardless of which set of questions they received. Currently, a score of 70 percent is required to pass the examination.

Download A Candidate's Complete Guide to the New SIE Exam now to learn more about the new proposed licensing process and SIE exam content.

Series 79 Breakdown

The Series 79 exam is designed to assess the competency of entry-level Investment Banking Representatives and seeks to measure the degree to which each candidate possesses the knowledge, skills, and abilities needed to perform the critical functions of an Investment Banking Representative.

FINRA has reorganized the content outline by dividing it into three major job functions that are performed by an Investment Banking Representative. The following are the three major job functions, denoted Function 1 through Function 3, with the associated number of questions:

  • Function 1: Collection, Analysis and Evaluation of Data, 37 questions, 47% of exam items
  • Function 2: Underwriting and New Financing Transactions, Types of Offerings and Registration of Securities, 20 questions, 27% of exam items
  • Function 3: Mergers and Acquisitions, Tender Offers and Financial Restructuring Transactions, 18 questions, 24% of exam items

The questions on the revised Series 79 examination emphasize tasks such as advising on or facilitating debt or equity offerings through a private placement or public offering, and advising or facilitating mergers and acquisitions, tender offers, financial restructurings, and asset sales.

Each function also includes specific tasks describing activities associated with performing that function. There are three tasks (1.1–1.3) associated with Function 1; six tasks (2.1–2.6) associated with Function 2; and six tasks (3.1–3.6) associated with Function 3. For example, one such task (Task 1.3) is conducting due diligence. Further, the content outline lists the knowledge required to perform each function and associated tasks (e.g., due diligence processes on both the buy- and sell-sides). In addition, where applicable, the content outline lists the laws, rules, and regulations a candidate is expected to know to perform each function and associated tasks (e.g., SEC Rule 135a).

The fee for the Series 79 exam is $245 (when that is combined with the $60 SIE fee, it adds up to the fee for the former Series 79 exam), and each candidate’s exam consists of a total of 85 questions (75 scored and 10 unscored). Also included are 10 additional, unidentified pretest items that do not count toward the candidate's score. Candidates are allowed 2 hours and 30 minutes to complete the Series 79 exam.

The passing score for the Series 79 exam is 73%. All candidate test scores are placed on a common scale using a statistical adjustment process known as equating. Equating scores to a common scale accounts for the slight variations in difficulty that may exist among the different sets of exam items that candidates receive. This allows for a fair comparison of scores and ensures that every candidate is held to the same passing standard regardless of which set of exam items they received.

Series 99 Breakdown

The Series 99 content outline is divided into two major job functions that are performed by an Operations Professional. The two major job functions, denoted Function 1 and Function 2, with the associated number of questions are:

  • Function 1: Knowledge Associated with the Securities Industry and Broker-Dealer Operations, 35 questions, 70% of exam items
  • Function 2: Professional Conduct and Ethical Considerations, 15 questions, 30% of exam items.

The questions on the Series 99 examination emphasize tasks. There are nine tasks (1.1–1.9) associated with Function 1 and four tasks (2.1–2.4) associated with Function 2.

For example, one such task (Task 1.1) is opening and maintaining accounts. Further, the content outline lists the knowledge required to perform each function and associated tasks (e.g., types of retail, institutional, and prime brokerage customer accounts). In addition, where applicable, the content outline lists the laws, rules, and regulations a candidate is expected to know to perform each function and associated tasks [e.g., SEA Rule 15c3-3 (Customer Protection—Reserves and Custody of Securities)].

The fee for the Series 99 exam is $40 (when combined with the $60 fee for the SIE, it is the same $100 fee as previously), it has 50 questions, and the test time is 1 hour and 30 minutes (90 minutes). Currently, a score of 68 percent is required to pass the examination. All candidate test scores are placed on a common scale using a statistical adjustment process known as equating. Equating scores to a common scale accounts for the slight variations in difficulty that may exist among the different sets of exam items that candidates receive. This allows for a fair comparison of scores and ensures that every candidate is held to the same passing standard regardless of which set of exam items they received.

Consistent with FINRA’s practice of including “pretest” questions on examinations, the Series 99 examination includes five additional, unidentified pretest questions that do not count towards the candidate’s score.

The exam consists of 50 multiple-choice items, and each item consists of four answer choices.

Want to Further Your Knowledge?

Now that you've gotten a deeper look at the new Series 6, 79, and 99 exams, learn more about how the SIE exam has impacted the Series 7 licensing exam

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Posted by Doug Vincens, Securities Product Director - April 8, 2019
Man learning about changes to Series 6, 79, and 99 examsd on his tablet

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