Top Financial Regulators That Oversee Financial Advisors

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As per an independent report by Vanguard, clients working with a financial advisor on average earned 3 percent more annually compared to those working without a professional advisor. The study however did not take into account the performance of the investment fund. It merely reported the changes in earnings based on the financial advice offered by the advisor. At first glance, 3 percent may not appear to be a significant number, but, with the power of compounding, it can add up and increase your overall net worth significantly.

It is important to know the difference between different kinds of financial advisors. A capable financial advisor will be governed by the regulator in the advisor’s specific field of service and hold all the necessary qualifications to be able to do so. It is important for investors to elect a financial advisor who best suits your financial needs and requirements. This can be a little tricky as you may not know what to look for while evaluating the competency and skill set of the said advisor. Despite providing counsel to millions of people on various matters pertaining to financial planning, investments, wealth creation, retirement planning, estate planning, tax planning, and more, there is no one separate or distinct financial regulatory authority for these professionals. Specifically, although several aspects of the financial advisory domain such as investment advice, trading securities, insurance, and investment products, etc., come under the purview of regulatory authorities, the central component of financial planning does not have a definite financial regulation. Individuals working as financial advisors are therefore regulated by the kind of service they offer. For instance, accountants are required to adhere to rules and regulations stated by the Board of Accountancy whereas an investment advisor is governed by the Securities and Exchange Commission (SEC).

Seeing as how important sound financial advice is for your present and future financial security, it is advised that you study the different entities responsible for regulating financial advisors. Not only will this enable you to assess the advisor’s credentials - their licenses, certifications, and authorizations - and make an informed choice, but it will also help you gain peace of mind that the professional advice you receive is in your best interest.

Let's go through some of the important financial regulators in the United States that you must know of:

  1. Securities and Exchange Commission (SEC)
  2. After the historic stock market crash of 1929, the Securities and Exchange Act of 1934 was passed under the shadow of the Great Depression, which led to the formation of the U.S. Securities and Exchange Commission. SEC works to protect investors’ interests and promote fairness in dealings across the securities markets in the United States. In addition, the SEC also shares and compiles information about companies and financial professionals to assist investors in making informed decisions and invest their money wisely.

    To put it succinctly, SEC plays a three-part role:

    • Protects investors
    • Facilitates capital formation
    • Maintains fair, organized, and efficient markets

    The main purpose of the SEC is to monitor and observe the key participants in the financial services industry like the brokers, financial advisors, financial planners, dealers, investment advisors, securities exchangers including electronic markets like the NASDAQ, and more. Herein, the SEC endeavors to ensure that all entities operating in the financial markets or offering financial services of any kind including financial advice reveal all relevant information truthfully to their investors. This practice ensures that instances of fraud and financial crimes such as insider trading, money laundering, etc are minimized.

    Typically speaking, the SEC aims to:

    • Define and apply federal securities laws
    • Issue and revise any existing rules and regulations
    • Supervise inspection of various entities in the financial system such as securities firms, brokers, financial advisory firms, investment advisors, and rating agencies
    • Regulate private governing organizations operating in the securities, accounting, and auditing domain
    • Manage the different securities regulations across different levels – federal, state, and foreign authorities in the United States

    The SEC holds the power to recommend a federal investigation in cases wherein a firm or a registered individual is found in violation of the law. It can also direct the case to the Enforcement division. It also maintains a database of financial firms and professional financial advisors to help investors stay informed and stop (and minimize) fraudulent and manipulative practices in the financial markets. To conduct any business activity, all brokers, advisory firms, asset managers (including their professional representatives) must register with the SEC. Large investment advisors having AUM (assets under management) over $100 million also have to register with the SEC while small investment advisors must register with the state regulators.

    How does the SEC work?

    To put it in simple words, the SEC governs all organizations and professionals involved in the securities market that include brokerage firms, financial advisory firms, asset managers (including their representatives) investment fund managers, securities exchanges, and more. To ensure fair dealings and provide protection against fraud, the SEC ratified strict rules and regulations. In addition, the body encourages all its stakeholders to furnish accurate and complete market-related information. Moreover, the SEC also makes important data such as periodic financial reports, registration statements, financial misconduct, securities firms, etc available to investors.

    Furthermore, the SEC can initiate civil action proceedings against financial corporations and individuals that step astray of the securities laws enforced by the body. The SEC also teams up with federal and state law enforcement agencies to initiate civil and criminal action against those entities and advisors who may have violated financial regulations and securities laws.

  3. Financial Industry Regulatory Authority, Inc. (FINRA)
  4. FINRA was established in 2007 after the merger between the New York Stock Exchange (NYSE) and the North Association of Securities Dealers (NASD) was approved by the SEC. It is an independent, non-government, and self-regulatory organization responsible for framing and enforcing rules that govern registered brokers and broker-dealer firms in the United States. The underlying objective of the body is the protection of the investors and the general public against any kind of financial fraud or malpractice.

    FINRA is the largest independent financial regulator for securities in the US having over 35,000 brokerage firms, 625,000 registered securities representatives, and more than 154,000 branch offices under its umbrella. It oversees the trading of equities, futures and options, and corporate bonds. FINRA also conducts professional qualification exams like the Series 7 General Securities Representative Qualification Examination and the Series 3 National Commodities Futures Examination that certify advisors and securities professionals. In addition, the non-government body administers the licensing of registered investment advisors, broker-dealers, including their representatives.

    Financial advisors ratified with the General Securities Representative license (Series 7) possess basic knowledge of investments, markets, regulations, etc. These advisors are qualified to offer financial counsel. While advisors having the Series 63 license (Uniform Securities Agent State license) can work across state lines without being flagged by regulatory authorities. Another important license coveted by advisors is the Series 65 license (Uniform Investment Advisor Law exam) that enables them to levy a fee for their services.

    How does FINRA work?

    FINRA works in conjunction with the SEC and the North American Securities Administrators Association (NASAA) to oversee and govern firms and individuals that deal in securities or offer professional securities training and testing. These regulatory bodies also maintain a database on financial professionals and conduct examinations mandatory for investment advisors and broker-dealer firm principals and representatives.

    FINRA is also responsible for maintaining the electronic system for state and federal registration of the firms and financial professionals. Investment advisors and their representatives must register with the Investment Adviser Registration Depository (IARD) whereas broker-dealer firms have to register themselves with the Central Registration Depository (CRD).

    In addition, FINRA has the authority to open disciplinary proceedings and take action against a registered individual or firm that may have breached or been found in violation of the financial regulations. FINRA has the power to levy fines, criminal penalties, order reparations, take civil action, and even ban registered firms and individuals from offering their services or selling any financial products to investors.

  5. North American Securities Administrators Association (NASAA)
  6. Established in 1919, the NASAA is one of the oldest financial regulators in the United States. It is a voluntary organization that regulates state and provincial securities from the US, Canada, and Mexico. NASAA’s main purpose is to protect investors from fraud by educating them about how to identify and avoid fraud. It works in conjunction with FINRA and the state regulators to help and educate investors. Further, NASAA investigates instances wherein the state and provincial law has been violated and also files enforcement actions.

    As stated above, NASAA works with state regulators as well who are responsible for licensing investment advisors and their representatives where the client assets are worth less than $100 million. Apart from this, they also take care of resolving consumer complaints and educating and advocating for the investors.

    It must be noted that the state regulatory agencies must register with the NASAA, however, that’s not the case when it comes to individual investment advisors and investment advisor representatives. Moreover, the Series 63, Uniform Securities Agent State Law Examination, which is conducted by FINRA, is drafted by the NASAA.

  7. State Securities Regulators
  8. Every single state in the United States has a separate department of financial and professional regulation. The purpose of a state regulator is to regulate the sale of securities in their state. These regulators enforce the securities laws, such as the Blue Sky laws, in their respective states.

    The state securities commission mandates investment advisory firms, their representatives, broker-dealers and their agents must register themselves in the state that they operate in. It should be noted that this regulation is enforceable only for those that have less than $100 million in client assets under management (AUM). The registration process with the state securities regulators is the same as with the federal U.S financial regulators with the key difference being that the state regulators might have additional requirements for agents and advisors.

    State law enforcement agencies are empowered to take legal action against investment advisors who act in violation of financial regulations and securities laws as framed by state securities regulators.

    Why should you inquire about the financial regulation of your financial advisor?

    Since your advisor is in charge of your hard-earned money and you make decisions based on his advice, it falls on you to ensure that the advisor chosen by you is qualified, skilled, and authorized to manage your money and related financial matters. It is important to understand that a lack of exhaustive financial planning coupled with inadequate financial advice can have a negative bearing on your financial security. In addition, inept, unqualified, or biased financial advice can result in seriously impacting the timeline of attainment of your major financial goals such as the creation of a retirement corpus for yourself.

    If you decide to go with a financial advisor who possesses the right registrations and licenses, you can be assured that you will receive skilled advice that matches your financial needs. Moreover, financial advisors who are registered with the SEC or FINRA, also follow and comply with fiduciary standards, wherein they are mandated by law to act in your best interest at all times. They offer unbiased advice with their main purpose being ensuring your financial wellbeing. Lastly, by engaging financial advisors that adhere to the regulation of the financial services, you can rest assured that the services or counsel (concerning tax, insurance, legal, retirement, debt management, etc.) that you’ll receive will be in-depth, well-researched, and based on experience.

    To conclude

    It is important to ensure that the financial advisor you hire is competent and ethical in the services he provides and holds the necessary certifications and licenses from the federal and state regulators. Do cross verify the credentials of the advisor that you’re engaging with in SEC and FINRA databases. This will help you gauge the authenticity of the person concerned including their educational qualifications, certifications, professional designation, disciplinary records, and more. Further, you should also check the validity and legality of licenses and verify the advisor’s discipline history, conflicts of interest, etc. for which you can use the FINRA Disciplinary Actions Online database. Some state regulators keep a separate discipline database which you can use for verifying your advisor’s credentials.

    Your financial advisor is an important part of your financial journey and will work with you towards helping you achieve your financial goals. They lay the foundation to ensure you have a financially secure future. So, exercise caution when it comes to picking a professional financial advisor for meeting your financial needs and requirements.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.