Regulatory Issues Facing Financial Planners

Numerous abuses within the securities industry have created a greater need for oversight. The Great Depression of 1929 happened in part because equity in companies was being sold without proper disclosure of the potential risks. The result was a dramatically overvalued stock market and the subsequent creation of securities laws. In fact, to secure a license to sell securities in most states, you must take an exam called the “Blue Sky Exam,” or the series 63. The name is a reference to people selling “pieces of the sky” to ordinary people back in the 1920’s. Below are the major pieces of legislation produced since the 1929 crash to protect investors.

The Securities Act of 1933: This was the first Congressional law regulating the securities industry. It required registration of initial public offerings and disclosure to investors to protect them from fraud and misrepresentations.

The Securities Exchange Act of 1940: This was a continuation of the Securities Act of 1933. It presented a new set of requirements for companies with outstanding shares to keep their shareholders updated as to any changes that might affect the value of their equity. The Securities Exchange Act of 1940 also created the SEC, which enforces federal securities laws. Another part of the Act was a requirement that brokers selling shares in companies register and report back to the SEC. This remains today the regulatory powerhouse of Wall Street.

The Investment Company Act of 1940: This further extended the SEC’s realm of control to mutual fund and other investment companies. They were required to comply with SEC rules in addition to securities brokers and dealers.

The Investment Advisers Act of 1940: A further extension of the SEC’s realm of control. As the securities industry evolved, continued legislation was necessary to protect investors from new profitable businesses being designed by entrepreneurs. Many investment professionals got into the business of “advising” rather than owning an investment company because of the easier regulations. The Investment Advisers Act defines an investment adviser as the following:

Any person 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 regulates business, issues or promulgates analyses or reports concerning securities.
Essentially, if you’re in the business of giving advice concerning securities and you’re getting paid for it- you’re an “investment adviser.” If you advise and have over $25 million in money under management, you must report to the big guy, the SEC. If you have under $25 million, you just have to register with the state in which you’re selling securities. There are a few further exceptions and exemptions which are not quite as important.

Security Investors Protection Act of 1970: This non-profit, membership corporation, was created in 1970 to protect individuals from brokerage insolvency or bankruptcy.  It is funded by the companies which are looking to protect themselves from this potential insolvency. Cash, up to $100,000 is protected under SIPC, and securities, up to $500,000 are protected. Please note that this protection is designed for brokerage bankruptcy, not to protect from investment risk. If your stocks or bonds fluctuate in value, it would not trigger action by SIPC.

Regulation FD: Enacted on October 23, 2000- regulation FD was designed to provide equal disclosure of information to both individual investors and Wall Street. Prior to regulation FD (which was enacted in part due to a heavy push by SEC chairman Arthur Levitt) “selective disclosure” gave analysts and insiders control of what information would be kept private and what would be publicly disclosed. One rule of regulation FD is that if information that may affect the stock price of a company is accidentally leaked, the company has 24 hours to disclose that information to the public. This further improves the problem of profiting from “imperfect information.”

The Sarbanes-Oxley Act: The days of Enron and Worldcom are still within recent memory. These corporations, along with handful of others have profited tremendously at the expense of individual investors (many of whom were stock-owning employees of these firms). Sarbanes-Oxley was signed into law by President Bush July 30th, 2002. It is much greater in importance than most pieces of security legislation put out since the 1930’s. It’s main points are as follows:

• Financial reports, both quarterly and annually, must be sworn by the CEO and CFO. They become liable for inaccuracy in public reporting. Inaccuracy can very easily equal jail time.
• Corporations audit committee’s must be comprised of “independent directors” to eliminate conflicts of interest.
• A five-member board must be established to oversee corporate audits. They further enhance the efficiency and accuracy of audits.
• The business of auditing firms are more closely regulated to prevent consulting and other non-audit services from the companies they audit. The auditors of a firm must also rotate so that every few years the information is viewed from an objective standpoint.
Sarbanes-Oxley continues to be a financial burden on all publicly traded corporations. Compliance with SO is difficult and expensive. Some companies have begun rethinking public organization as a result of the tremendous regulatory burdens they must endure. The government isn’t really concerned with added financial burdens to a corporation which could otherwise risk the jobs and personal funds of it’s shareholders.

The NASD: The National Association of Security Dealers is the private sector regulatory body. They oversee the activities of over 5,100 brokerage firms and almost 700,000 registered representatives. These are the people transacting business on behalf of corporations, large institutions, and private individuals around the country. They are also in charge of overseeing the licensing (the series 7 is the general securities examination) and education of people entering the private securities industry. Finally, the NASD deals with arbitration, disagreements, and sometimes consultations with the SEC over broader matters.

The above are descriptions of securities laws that have increased the efficiency of the finance industry in the United States. Often, legislation follows a period of time where discrepancies are discovered and a need for legislation exists. The legislation becomes more specific as time passes and the regulatory environment becomes more complicated.

Russell Bailyn

Wealth Manager
Premier Wealth Advisors, LLC
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673

Securities offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Financial Planning offered through First Allied Advisory Services & Premier Wealth Advisors, Inc. Premier Wealth Advisors, Inc is a Registered Investment Advisor. First Allied Securities & Premier Wealth Advisors, Inc. are not affiliated entities.


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