To register or not, that's the question.

"Are you registered?" When CPAs attending this month's American Institute of CPAs investment planning conference in Chicago ask each other this question, they won't be asking if they are staying at the Sheraton Chicago Hotel & Towers. They really want to know if the individual is registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. While the answer is as simple as yes or no, the process many CPAs go through to reach that conclusion is far more complicated.

For many years most CPAs have relied on the so-called accountant's exception (see complete definition below) in not registering under the act. A recent AICPA survey of personal financial planning division members showed 20% had registered as investment advisers. Five years ago, less than 5% were registered. As CPAs expand their activities to include giving investment advice, some CPAs are no longer relying on the accountant's exception.

In May, the PFP division issued a practice aid, Guide to Registekng as an Investment Adviser, to help CPAs and CPA firms understand the issues governing the decision to register with the SEC and one or more state securities departments. According to PFP division director Phyllis Bernstein, "In survey after survey our members say their most important concern is compliance with the requirement to register as investment advisers. This practice aid makes it clear what position a firm might reasonably take based on its investment advisory activities."

This article highlights some of the guidance in the practice aid and offers the views of CPA financial planners who have gone through the process of deciding whether they or their firms needed to register as investment advisers.

WHAT IS AN INVESTMENT ADVISER?

The act defines investment adviser as "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, 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....." The SEC staff subsequently said the definition included "persons who advise clients concerning the relative advantages and disadvantages of investing in securities in general as compared to other investments."

Accountant's exception. The act says the definition does not include any "lawyer, accountant, engineer, or teacher whose performance of [investment advisory services causing him or her to meet the act's general definition of investment adviser] is solely incidental to the practice of his [or her] profession." In a 1986 no-action letter, the SEC staff lists three factors it believes relevant to determining whether investment advice provided by an accountant is solely incidental to the practice of accounting:

1. If the accountant (or the firm) holds himself or herself (or itself) out to the public as an investment adviser or as a financial planner, investment advice is not incidental.

2. If the advisory services rendered are in connection with, and reasonably related to, accounting services, they are incidental (provided the accountant or firm does not "hold out" to the public as an investment adviser).

3. If the fee charged for advisory services is based on the same factors used to determine the accounting fee, the services are incidental (again, provided the accountant or firm does not hold out to the public).

CPAs AND THE ACT

In general, CPAs or their firms are not required to register under the act if either of the following conditions applies:

1. The financial planning services provided are such that the CPA or his or her firm does not meet the general definition of investment adviser.

2. The CPA or his or her firm meets the general definition of an investment adviser but can rely on the accountant's exception.

SEC position. An SEC position published in 1987 as Investment Advisers Act interpretive release no. 1092 (IA 1092) says an accountant or accounting firm that meets the definition of investment adviser and holds out to the public as a financial planner cannot rely on the accountant's exception. IA 1092 says it is the act of holding out to the public as a financial planner that makes this exception unavailable, not the context in which the investment advice is given or whether that advice is specific or generic. The SEC staff said specific investment advice does not include advice "limited to a general recommendation to allocate assets in securities, life insurance, and tangible assets."

Jack W. Murphy is associate director (chief counsel) in the SEC Division of Investment Management in Washington, D.C. He said the SEC position hasn't changed since IA 1092 was issued. "We believe the accountant's exception is not available to those who hold out to the public as providing financial planning or other financial advisory services. That continues to be our position."

Most recently, Murphy said the division received letters in which accounting firms, particularly large firms, asked for and received no-action relief based on plans to register a subsidiary or affiliated unit. He said those letters show the SEC is willing to work with firms to reach the right conclusion. We have no desire to register and regulate a firm's accounting practice. Even if a firm registers as an investment adviser, there are limits to the extent we will regulate everything the firm does."

Murphy said the SEC gets several calls each month from accountants wanting to talk about the accountant's exception. Although IA 1092 was issued in 1987, Murphy believes some accountants probably still are looking at the statutory language and saying, "Of course what I do is incidental to my business as an accountant, I'm an accountant." However, they are not looking further, for example, at the importance of holding themselves out to the public as providing investment advice. "In our minds, that takes an accountant outside the exception."

It's important, Murphy said, for accountants to understand the limits of the exception and what it means to register and be regulated as an investment adviser. "While there are some outright prohibitions - things you can't do, or things that must be done in a certain way - the act really stands for the proposition that investment advisers should be fully disclosing to their clients."

Accountant's exception. The PFP division supports a narrow interpretation of IA 1092 that CPAs or CPA firms may provide certain services, including comprehensive personal financial planning, without meeting the act's definition of investment adviser. Common sense suggests that CPAs should fall within the accountant's exception - and not have to register - when they do not do the following:

1. Hold client funds for investment purposes, other than in a fiduciary capacity.

2. Receive compensation based on the purchase or sale of a security.

3. Give specific investment advice, unless that advice is directly related to financial statement analysis or income tax considerations.

Arizona and Illinois have included this or similar language in bills they have adopted; similar legislation has been introduced in Colorado and Iowa.

DECISIONS, DECISIONS

To help decide if they need to register, most CPAs review their level of investment planning activity, often with outside legal counsel. While investment planning is critical to the financial planning process, some financial planning engagements do not involve rendering investment advice. Moreover, some CPAs have limited their activities so registration is not necessary.

One West Coast CPA firm made a conscious decision to structure the way it provides investment guidance so it does not have to register. The firm does comprehensive financial planning for individuals. A partner of the firm said, "We believe the investment part of the financial planning process is similar to any other implementation phase." He sees their role as CPAs as being generalists, to help clients understand where they are, where they want to be and how to get there. "Clients are better served by having specialists handle implementation whether it be drafting a will or recommending investments. We are not specialists." In the investment area, this means doing nothing more than putting clients in touch with someone who can help them screen money managers.

To further make registration unnecessary, the firm accepts no commissions, does not take custody of client assets and never takes over in an agency relationship, such as paying bills, making deposits and doing bank reconciliations for entertainment clients, many of whom want such services. The partner said, "We try to make clients take responsibility for their financial affairs."

In making their decision on registration, the firm consulted outside legal counsel, describing its financial planning practice and asking for advice on any changes it needed to make. "We've always been told that based on our level of activity, IA 1092 could be interpreted to mean we should register but that the spirit and intent of the act would not encompass what we do. I think that's the right conclusion." He believes the act covers only a tiny portion of what the firm does and he is "comfortable" that his firm fits the accountant's exclusion.

CHECK STATE LAWS

Most states have adopted their own securities laws relating to investment adviser activities. While state regulation of financial planners and investment advisers is generally beyond the scope of the PFP division practice aid and this article, exhibit 1, at left, lists states' positions.

                          EXHIBIT I

              State regulation of financial planners
              and investment advisers

                        Regulation similar     Regulation beyond
   No regulation        to federal law         federal law

   Colorado             Alaska                 Alabama
   Iowa                 Arkansas               District of Columbia
   Wyoming              Arizona                Georgia
                        California             Idaho
                        Connecticut            Maryland
                        Delaware               Montana
                        Florida                North Carolina
                        Hawaii                 South Dakota
                        Illinois               Virginia
                        Indiana                Washington
                        Kansas
                        Kentucky
                        Louisiana
                        Maine
                        Massachusetts
                        Michigan
                        Minnesota
                        Mississippi
                        Missouri
                        Nebraska
                        Nevada
                        New Hampshire
                        New Jersey
                        New Mexico
                        New York
                        North Dakota
                        Ohio
                        Oklahoma
                        Oregon
                        Pennsylvania
                        Rhodelsland
                        South Carolina
                        Tennessee
                        Texas
                        Utah
                        Vermont
                        West Virginia
                        Wisconsin

Source: American Institute of CPAs state legislation department, as
of April 1995

In some cases, state law can trigger CPA firms to register. Kaycee W. Krysty, a partner of Personal Financial Network, a division of Moss Adams in Seattle, and a principal of Moss Adams Investment Advisors, said her firm had already been considering registering when Washington State passed its so-called holding-out law. "If you hold yourself out to the general public as providing personal financial planning services, Washington says that makes you an investment adviser." When the state passed that law, Krysty said, "We registered immediately." Even so, Moss Adams does not make specific investment recommendations. "We limit ourselves to classic asset allocation," Krysty said.

The law change only accelerated a process Moss Adams had already begun. One of the first steps was seeking appropriate legal counsel. From her local financial planning affiliations, Krysty knew which lawyers in Seattle represented financial planners who had gotten in trouble under the act - none of them CPAs - and that's whom she consulted. "I wanted someone with in-the-trenches experience dealing with registrations gone sour." Moss Adams wanted to do it light the first time, so Krysty sought to learn from the mistakes of others.

From her perspective, Krysty believes the most important thing CPA firms should think about is the protection registration might offer if they did have a problem. "What tipped us over the edge before the law change accelerated the process was talking to our legal counsel. They said registering was like putting on a white hat - we do this and we do it right." If there ever was a problem, Krysty says clients wouldn't be able to "make the additional charge that we were not registered." She also noted that "registration just with the federal government generally is not enough."

The documentation and recordkeeping registration imposes are things Krysty believes CPAs should do anyway as "part of good practice." She cautions CPAs not to make assumptions about what state laws do and do not say until they have gotten expert advice.

CHOICE OF ENTITY

Like Moss Adams Investment Advisors, some CPA firms establish separate entities and register them as investment advisers. The survey of PFP division members showed 12% of those who were registered had set up a separate entity to handle investment advisory services. Another such firm is Walpert, Smullian & Blumenthal in Baltimore. With help from outside counsel, they formed WS&B Financial Advisers and registered it with the SEC, Maryland and several surrounding states in early 1995.

Why did the firm register? Brian Meritt, a partner, said, "Our clients were looking for implementation assistance. By registering and being able to offer investment adviso services we felt we could complete the loop." WS&B Financial Advisers does not recommend specific securities; it suggests investments based on the goals it helps clients develop. Wealthier clients are referred to money managers.

Meritt said that in deciding to register, regulatory and compliance burdens were not the motivating factor, "although we deal with those issues. We believed it was a business we needed to be in to service our clients." Eric Norberg, a senior member of Walpert, Smullian & Blumenthal's PFP practice, said one of registration's benefits, particularly on the state level, is that it "requires you to examine your internal controls and develop documentation procedures that help you do the work better."

Norberg pointed out that registration could be time consuming. "You have to be prepared to make a time commitment." And Meritt added that a firm needs a qualified individual internally, as well as outside legal counsel. "You need someone in your organization who knows the issues and who can help move the process forward." The sidebar on page 51 outlines the steps involved in registering with the SEC.

THE CORRECT ANSWER

CPAs who have not yet considered their financial planning practices in the context of the Investment Advisers Act of 1940 and IA 1092 may wish to do so using the guidance in the PFP division practice aid and information available from securities law attorneys as well as from commercial and government sources. Exhibit 2, below, provides a list of other resources CPAs may find helpful. Only a review of individual financial planning practices can allow CPAs to make certain the answer they give to the question "are your registered?" is the correct one.

EXHIBIT 2

Registration resource list

National Regulatory Services Inc. 323A Main Street Lakeville, CT 06039 [phone] NRS is a commercial provider, for a fee, of assistance with registration on the federal and state levels.

The Consortium P.O. Box 2682 Camarillo, CA 93011-2682 [phone] The Consortium is a commercial provider, for a fee, of assistance with registration on the federal and state levels.

Securities Consultants Inc. 5301 North Federal Highway, Suite 380 Boca Raton, FL 33487 [phone] SCI is a commercial provider, for a fee, of assistance with registration on the federal and state levels.

North American Securities Administrators Association (NASAA) 555 New Jersey Avenue, N.W. Washington, DC 200001 [phone] NASAA can provide the address and telephone number to request information from a state's securities administrator on that jurisdiction's registration requirements.

Office of Filings, Information and Consumer Services Branch of Registrations and Examinations U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 [phone] The SEC can answer questions about registration and completing Form ADV, "Uniform Application for Investment Adviser Registration."

EXECUTIVE SUMMARY

* CPAs, who provide clients with investment advice may need to register as investment advisers under the Investment Advisers Act of 1940. Some CPAs rely on the accountant's exception when the investment services they provide are "solely incidental to" the practice of accounting.

* While CPAs who do not meet the definition of investment advisers under the act and who can rely on the accountant's exception generally may not need to register, the Securities and Exchange Commission says a CPA or CPA firm that holds out the public as a financial planner cannot rely on the exception.

* The American Institute of CPAs personal financial planning division supports a narrow interpretation of the SEC position. Common sense suggests that CPAs should fall within the accountant's exception if they do not hold client funds for investment purpose except as a fiduciary, do not receive compensation based on securities purchases or sales and do not give specific investment advice except as it relates to financial statement analysis or tax considerations.

* State securities laws also must be considered in examining the registration questions. Some states have securities laws that go beyond those of the federal government, and others have no rules at all.

* The decision to register should be made after examining all relevant information including a PFP division practice aid, Guide to Registering as an Investment Adviser. CPAs also should discuss their situation with an attorney experienced in securities law and with relevant federal and state agencies.

NEW GUIDE TO REGISTERING AS AN INVESTMENT ADVISER

The practice aid, Guide to Registering as an Investment Adviser was sent to members of the American Institute of CPAs personal financial planning division in May. The aid offers the AICPA position on registration as an investment adviser. Additionally, it offers guidance in Securities and Exchange Commission Investment Advisers Act release no. 1092 on the application of the Investment Advisers Act of 1940 to CPAs.

The practice aid is designed to help CPAs and CPA firms doing financial planning decide whether they are required to register as investment advisers and comply with applicable federal and state rules. It contains a completed form ADV and selected SEC no-action letters. The practice aid is available from the AICPA order department [phone], menu #1. Request product no. 017206JA. The cost is $28.25 for AICPA members, $31 for nonmembers.

STEPS TO REGISTERING AS

AN INVESTMENT ADVISER

1. CPAs who offer financial planning services will have to rely on the relevant facts and circumstances of their particular situation to determine whether the Securities and Exchange Commission considers them investment advisers. CPAs subject to SEC registration must file Form ADV, "Uniform Application for Investment Adviser Registration." Form ADV enables CPAs to register with the SEC. 2. Submit filings in triplicate to the U.S. Securities and Exchange Commission, Washington, D.C. 20549. Make sure each copy of the execution page contains an original manual signature. 3. Submit a cheek or money order for $150 payable to the U.S. Securities and Exchange Commission. The fee is nonrefundable. 4. Many states have their own requirements on investment advisers. Most of these states also require the filing of form ADV. CPAs or CPA firms that do business in more than one state may have to register in multiple jurisdictions.

PETER D. FLEMING, CFP, is a senior editor with the Journal. Mr. Fleming is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.