GAO to Congress: No Need for More Regulation of Planners

In its much-anticipated report to Congress on the regulation of financial planning, the Government Accountability Office (GAO) told lawmakers on Tuesday that “an additional layer of regulation specific to financial planners does not appear to be warranted at this time.” The SEC’s report to Congress on the need for a self-regulatory organization (SRO) for advisors was expected to be released later Tuesday.

The GAO report, which was sent Tuesday to the House Financial Services Committee, the Senate Banking Committee, and the Senate Special Committee on Aging, noted that while the views of “stakeholder interests vary,” a majority of the regulatory agencies and financial services officials that GAO spoke with “did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities.”

GAO noted that there was “no specific, direct regulation of ‘financial planners’ per se at the federal or state level, but various laws and regulations apply to most of the services they provide.” Financial planners, GAO continued, “are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states, and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities. Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners.”

The Financial Planning Coalition—comprised of the Financial Planning Association (FPA), the Certified Financial Planner Board (CFP) of Standards, and the National Association of Personal Financial Advisors (NAPFA)—was the collective brainchild urging Congress to appoint another body to regulate planners.

Marty Kurtz, the FPA’s president for 2011, released a statement saying that “the Coalition hopes that Congress and the various regulators who oversee the activities of financial planners heed the GAO recommendation to continue to study this issue and consider recommending an effective regulatory structure in the future.” The Coalition, he continued, “believes the study highlights the need for taking important steps to better protect consumers.”

David Tittsworth (left), executive director of the Investment Adviser Association (IAA) in Washington said after the GAO released its report that “while there may be problems associated with financial planning activities—for example, in the sale of annuities—lack of regulation is not one of them.” Noting that the GAO report is “well-written and well-researched,” Tittsworth added that “instead of creating another layer of regulation, [IAA] supports better coordination among existing regulators.”

GAO offered recommendations to the National Association of Insurance Commissioners (NAIC) and the SEC on how to enhance oversight of financial planners and address consumer protection issues going forward. While the current regulatory structure applicable to financial planners “covers the great majority of their services,” GAO said, “the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain.” First, GAO continued, “consumers may be unclear about when a financial planner is required to serve the client’s best interest,” which the SEC will address under its fiduciary duty ruling that’s due out by Friday.

While the SEC is studying investor confusion issues in “regard to securities transactions,” under its fiduciary duty study, “no complementary review is under way” by NAIC related to the sale of high-risk insurance products, GAO said. Also, the numerous titles that financial planners can adopt often confuse consumers.

The GAO recommended the SEC and NAIC do the following:

• NAIC assess consumers’ understanding of the standards of care associated with the sale of insurance products;
• SEC assess investors’ understanding of financial planners’ titles and designations, and
• SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers.

The NAIC, GAO stated in its report, said it would consider GAO’s recommendation while the SEC provided no comments.