February 1, 2011 -- The Government Accountability Office ("GAO") on January 18, 2011 released a report to Congress entitled Regulatory Coverage Exists for Financial Planners, but Consumer Protection Issues Remain (available here). This report responds to a Dodd-Frank Act mandate that the GAO address how financial planners are regulated at the state and federal levels, the effectiveness of that regulation, and alternative regulatory approaches. The report concludes that the current regulatory framework for financial planners is reasonably satisfactory, but that several specific concerns should be addressed.

Although no statutory or single definition of financial planning exists, the report considers it broadly as a process that involves preparing plans for clients based on their financial objectives. It may also involve recommending or providing insurance products, securities, or other investments.

In its report, the GAO discusses how the primary activities a financial planner performs are already generally subject to regulation at the federal or state levels. This is mainly pursuant to existing requirements applicable to investment advisers, broker-dealers, and insurance agents. For example, the report notes that, in addition to being in most cases subject to investment adviser regulation, a financial planner who sells variable insurance products also would be subject to both state insurance regulation and broker-dealer regulation, because variable insurance products are regulated both as insurance and securities products.

Alternative Regulatory Approaches

The GAO report notes that there is currently no direct regulation of financial planners as a distinct profession and that some financial planning organizations have regarded this as an undesirable regulatory gap. The GAO recounts how various proposals have been made by these organizations, as well as other "stakeholders," including consumer groups, FINRA, the North American Securities Administrators Association, securities firms, and insurance firms. In particular, the GAO report evaluates four alternative regulatory approaches:

  • Having Congress establish a professional standards-setting oversight board for financial planners;
  • Having FINRA or a newly created self-regulatory organization augment the existing regulation of investment advisers;
  • Extending coverage of a fiduciary standard of care to all those who provide financial planning services; and
  • Clarifying the credentialing standards for financial professionals, including financial planners.

GAO Conclusions

The GAO concludes that, because financial planners nearly always fall under one or more existing regulatory regimes, regardless of their activities, the current general regulatory structure is sufficiently comprehensive. Accordingly, the GAO does not believe that an additional layer of regulation specific to financial planners is warranted at this time.

However, in response to consumer protection concerns that it identified, the GAO report makes the following recommendations:

  • The National Association of Insurance Commissioners ("NAIC"), in concert with other state insurance regulatory entities, should (i) assess consumers' understanding of the standards of care that apply to persons who sell insurance products and (ii) take appropriate actions to address any problems in this regard;  
  • The Chairman of the SEC should direct the SEC's Office of Investor Education and Advocacy, Office of Compliance Inspections and Examinations, Division of Enforcement, and other offices, as appropriate, to do the following:
    • Incorporate into the SEC's ongoing review of the financial literacy of investors an assessment of (i) the extent to which investors understand the titles and designations used by financial planners and (ii) any implications any lack of such understanding may have for consumers' investment decisions; and  
    • Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services and take actions to address any problems that are identified.  

Next Steps

The NAIC and SEC have not indicated what action they will take in response to these recommendations. The Dodd-Frank Act does not require that the SEC or any other regulatory body necessarily take any action in response to the GAO report. Moreover, some of the questions addressed in the report are entangled with questions addressed by other Dodd-Frank-mandated studies, including: (i) the study released by the SEC on January 21, 2011 concerning, among other things, the possibility of a uniform fiduciary standard of conduct for investment advisers and broker-dealers (discussed in our Client Alert available here) and (ii) the study released by the SEC on January 14, 2011 concerning, among other things, the possibility of FINRA or another selfregulatory organization for investment advisers (discussed in our Client Alert available here). Accordingly, it is not clear at this point what impact the GAO report will have.