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Financial adviser regulation alert; federal and state efforts could make it harder for many CPAs to conduct business.

CPAs who offer any kind of financial advice increasing face the possibility of greater regulatory burdens. Although most CPAs neither sell investments nor offer lifetime personal financial plans, some traditional CPA services have been confused with products and services offered by others who are often unregulated--and occasionally unscrupulous. As a result, CPAs may find greater costs and much more administration involved in doing business as usual. Practitioners should be aware of these new legislative threats and what they can do about them.


Many services offered by CPAs have recently become known popularly as "financial planning." The personal financial planning discipline is unique because of the wide range of services it covers and the diversity of people who call themselves planners. A financial planner may be considered anyone offering advice to improve a client's total financial well-being. This definition could well cover the majority of all services now being performed by bankers, trust officers and many attorneys, as well as many practicing CPAs. At the other end of the spectrum are those who use financial planning to market investment products, providing little or no advice beyond their

Planners have a variety of credentials and come from many different industries. This diversity, together with greater public awareness of fraudulent activities by some who call themselves financial planners, has put pressure on lawmakers to increase regulation of planners at both the federal and state levels.


Both the states and the federal government regulate investment advisers. People or firms receiving compensation for and giving advice about securities must register with the Securities and Exchange Commission and the commissioner of securities sales in most states in which they do business. The Investment Advisers Act of 1940 contains a specific exclusion from the definition of investment adviser for accountants, lawyers and other professionals whose investment advisory services are solely incidental to the practice of their profession. Almost all state securities laws contain similar exclusions for most accountants. The reasoning is that all practicing CPAs already must be licensed and are regulated in each state in which they practice.

Recent years, however, have seen a dramatic increase in legislative and regulatory activity aimed at broadening the definition of investment adviser. These efforts, led in many cases by people who don't belong to a regulated profession but who wish to gain public acceptance and appear more professional, would extend investment advisory laws to all those who call themselves financial planners. This broadened definition includes accountants, attorneys and other professionals, even though many financial advisory engagements do not involve any advice. In fact, the trend in personal financial planning increasingly is moving away from the preparation of complex, comprehensive lifetime plans toward more limited, targeted client problem-solving that may not involve investment advice.

In addition, consumer abuse by financial planners usually involves the sale of unsuitable financial products or outright fraud. One of the main public concerns about financial advisers involves the conflict of interest inherent when an adviser appears to give impartial advice but is compensated through the sale of a product. Since very few CPAs in public practice offer advice about securities and even fewer are involved in the sale of specific investment products, efforts to increase the regulation of professionals who give financial advice but do not sell the product are inappropriate. Any additional regulation of financial planners should be limited to those who sell products.


It seems the original statutory intent of excluding certain professionals because of existing regulations is being forgotten. Some SEC staff interpretations seem designed specifically to make it harder for licensed CPAs to rely on their long-standing statutory exclusion. Many CPAs have registered as investment advisers rather than risk noncompliance with a federal law that ostensibly requires only a simple filing declaration, payment of a nominal fee and straightforward recordkeeping for those not directly involved in the purchase and sale of specific securities.

Unfortunately, being a registered investment adviser is not as simple as it may seem. After registering with federal authorities, a number of CPAs have no doubt been surprised at the complex administrative burden and the high cost of state investment adviser regulations. For example, most states require an audited balance sheet for investment advisers who hold client funds and many states require surety bonds or have net capital requirements for investment advisers. Also, since CPA liability insurance does not not always cover investment advisory services, many practitioners have begun to reevaluate the risks involved in giving investment advice.


One of the most serious legislative threats to CPAs is the Investment Advisers Disclosure and Enforcement Act of 1990 (HR 4441), which would extend federal investment adviser regulation to all financial planners. Introduced in the House of Representatives by Congressman Rick Boucher (D-Va.), the legislation's most onerous aspect is its holding-out provision, which destroys the accountants' exclusion. The language is very broad and appears to include many more individuals than necessary. On the one hand, the bill adopts language used by the North American Securities Administrators Association (NASAA), the organization of state securities commissioners, and defines an advisory client as one "to whom investment supervisory, management or consulting services are provided." Yet the proposed regulated titles of "financial planner," "financial consultant" and "financial adviser" encompass many more services than those contemplated by the advisory client definition. The language is so broad it could require everyone from a local credit card counselor to investment bankers who give acquisition advice to large corporations to register as investment advisers.

The Boucher bill also enables clients who have sustained losses to sue for damages under a much broader legal standard than the negligence standard to which professionals are usually held. This standard--the private right of action--could be very detrimental to practicing CPAs. Clients would find it much easier to sue advisers, possibly for a mere technical violation. In view of the litigious environment CPAs find themselves in today, any encouragement of aditional lawsuits would affect professional liability insurance rates and could require a surcharge on many practitioners because of SEC requirements. Also, liability coverage may not cover legal defense costs, even for groundless suits.

In addition, the bill requires planners to disclose to clients their qualifications and the nature and source of their compensation so that clients are aware of conflicts of interest. It would establish a list of civil penalties the SEC could enforce without having to go to court; this provision is consistent to go to court; this provision is consistent with an SEC proposal developed in response to recommendations by the National Commission on Fraudulent Financial Reporting. No similar bill has been introduced in the Senate and passage before adjournment of the 101st Congress in December is considered doubtful.


The SEC staff interpretations discussed above were the impetus for another proposal of concern to CPAs. Because the interpretations expanded the definition of those who must register as investment advisers, the number of registered investment advisers grew from 4,580 in 1980 to about 15,000 in 1989. Since the SEC staff says it can't afford to supervise the additional registrants, SEC commissioners in mid-1989 submitted draft legislation to Congress requesting the formation of a self-regulatory organization (SRO) for investment advisers.

Senators Christopher Dodd (D-Conn.) and John Heinz (R-Pa.) and Congressman John Dingell (D-Mich.) have since introduced the Investment Advisers Self-Regulation Act (S 1410 and HR 3054). The proposal would allow one or more SROs to oversee the activities of investment advisers more extensively than the SEC can with its limited resources. The National Association of Securities Dealers, which oversees broker-dealers, stock exchange members and their registered representatives, is likely to be one of these organizations. The SROs also would have the authority to develop procedures for licensing practitioners and closely supervising their activities. The cost of this new oversight, which would be borne entirely by the practitioners being regulated, is estimated by Kathryn McGrath, former director of the Division of Investment Management of the SEC, at $2,000 per registered investment adviser or adviser representative for the first year and $1,000 a year thereafter.

In response to this proposal, American Institute of CPAs President Philip B. Chenok wrote to Senators Dodd and Heinz on behalf of Institute members. The Institute strongly opposed registering all financial planners, recommending instead that any new legislation should "restate, reinforce and clarify" the applicability of the accountants' exclusion. It said that including CPAs in the SRO would result in a "duplicative and costly supervision system without commensurate benefit to the investing public." The letter urged the senators to consider to possibility that existing federal laws on investment advisers should supersede any state laws and regulations, thereby eliminating the significant differences among state approaches to securities industry regulation and ending the burden of dual regulation.

If the accountants' exclusion is clarified and reinforced, it would remove a barrier preventing some CPA firms from providing financial planning services. At the same time, many CPAs who have registered as investment advisers would be more confident that the definition of investment adviser no longer included them. The resulting reduction in registered advisers might allow the commission to adequately oversee the activities of those remaining. Presumably, these people would be engaged primarily in the investment business, which was certainly the objective of the 1940 act.

The SEC might reconsider the need for an SRO, according to comments by Commissioner Mary Shapiro at a July congressional hearing.


Along with the action taking place in Washington, there are continuing attempts to increase regulation in various states. The NASAA has sponsored a number of legislative initiatives at the state level in recent years. These efforts are strongly backed by product sales-oriented financial planners, who generally oppose accountants' efforts to retain their exclusion. The NASAA amendments to its model state securities statute broaden the definition of investment adviser to include financial planners and others who hold themselves out as providing investment advice. These amendments tend to restrict use of the accountant's exclusion. Some states have even considered requiring that anyone using the title "financial planner" should be licensed and regulated regardless of the services offered.

State investment adviser regulation is rooted in securities laws and administered by securities commissioners. In some states, the regulatory authority is the banking or insurance department and in others the department of law and public safety or even the office of the comptroller or state auditor. Securities commissioners are most concerned with the regulation of securities offerings under "blue sky" laws, not with financial consulting. The NASAA model amendments specifically refer to securities purchase, sale or exchange recommendations made to a client "to whom investment supervisory, management or consulting services are provided." The existing state regulatory mechanism appears to be entirely inappropriate for investment advisers who are not concerned with their clients' purchase and sale of specific securities--in other words, for almost all CPAs in public practice, whose investment advice is limited to generic discussions and asset category allocations.

Yet misguided efforts of consumer groups and some financial planning organizations continue to favor enactment by the state of expensive and redundant investment advisory regulation tied to the securities industry. The costs of compliance for CPAs and other professional advisers appear to be in excess of any possible benefit to the public. The the extent that these costs cannot be passed on to clients, many CPAs may be forced to abandon this practice area. Since CPAs usually are considered the most professional and knowledgeable financial advisers, such a development would be counterproductive.


Although NASAA model amendments narrowing the use of the accountants' exclusion have passed in several state legislatures, CPAs have successfully mitigated some of the effects. In Idaho, the investment adviser law was changed to exclude all licensed CPAs in public practice. In Maryland, licensed CPAs are exempted if they don't accept commissions and don't take custody of the funds or securities of any client to whom they provide financial counseling or advice. Maryland overcame the strong legislative opposition not only of NASAA but also of some financial planning organizations.

Another success for CPAs came in Georgia, which in 1988 enacted the first law completely invalidating the accountant's exclusion for those holding themselves out as financial planners or offering financial planning services. The holding-out provisions of this law have been repealed for licensed professionals who don't take custody of client assets or receive commissions from product sales. The repeal was passed unanimously by both houses of the Georgia legislature and signed into law by the governor this year.

Unfortunately, however, even in states in which NASAA model amendments were either defeated or enacted without provisions narrowing the accountant's exclusion, CPAs still face the rule-making efforts of some state securities commissioners who attempt to impose administratively the very restrictions rejected by the legislatures. The challenge for state CPA societies and their members is to develop the same close working relationships with regulators in state securities departments they have already established with state departments that license and regulate CPAs who are in public practice.


Calls for increased regulation of personal financial planners are not likely to go away. The public would be better served, however, if regulators looked at the substance of professional services provided rather than nomenclature and if they attempted to prevent conflicts of interest rather than trying to regulate those subject to existing standards. Those concerned about this issue should establish clearer definitions of the specific services and practitioners requiring more regulation.

The AICPA will continue to monitor and vigorously oppose unnecessary congressional regulation of CPAs. Its most recent effort was to testify on both the Boucher bill and the SRO legislation in July. CPAs may wish to work with their state societies to help fight redundant regulation at the state level. Success is most likely if Institute and state society members coordinate their efforts against the regulatory problems facing the profession.

CURTIS C. VERSCHOOR, CPA, CFP, ChFC, is a professor at DePaul University, School of Accountancy, Chicago, and a member of the American Institute of CPAs personal financial planning executive committee and PFP legislation and regulation subcommittee. WILLIAM J. GOLDBERG, CPA, APFS, is national director of personal financial planning services at KPMG Peat Marwick and chairman of the AICPA PFP legislation and regulation subcommittee. PHYLLIS J. BERNSTEIN, CPA, is a senior technical manager at the AICPA.

MS. Bernstein is an employee of the American Institute of CPAs and her views, as expressed in this article, do not necessarily reflect those of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
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Author:Bernstein, Phyllis J.
Publication:Journal of Accountancy
Date:Sep 1, 1990
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