The hierarchy of regulatory agencies that provide oversight for investment advisers and their representatives, brokerages, securities sales agents, as well as the actual securities and other investment products in which they all deal, consists of federal and state regulatory commissions as well as a number of non profit organizations referred to as self-regulatory organizations (SROs). Together, these financial regulators are responsible for registration, examination, compliance, and discipline of broker-dealer and investment advisory firms, as well as their representatives. The Securities Exchange Act of 1933 and the Investment Advisers Act of 1940 serve as the basis of regulation for these regulatory organizations.
Securities and Exchange Commission
The United States Securities and Exchange Commission (SEC) was created in 1934 by an act of Congress to regulate the stock market and oversee corporations that offered securities. Today, the SEC enforces federal securities laws and regulates the securities industry, securities exchanges, including electronic markets like the NASDAQ. The SEC is allowed to bring civil action against financial companies and individuals acting in violation of securities laws, and even partners with law enforcement agencies in pursuing charges when violations are criminal in nature.
Large investment advisers with more than $100 million in assets under management are required to register with the SEC. Smaller advisers must register with state security regulators. In order to register, investment advisers must file a Form ADV. Form ADV is composed of two parts; Part I contains information used to review the application, and Part II discloses the investment adviser’s background and business practices. Form ADV also contains several schedules, including Schedule I which must be filed with the SEC on an annual basis. The SEC will grant an adviser its registration or begin proceedings to deny it within 45 days of it being filed. Most broker-dealer firms must also register with the SEC by filing a Form BD and becoming a member of a self-regulatory organization (SRO).
Investment advisers must comply with the registration requirements of the SEC. Each year, advisers must submit a Schedule I to the SEC, regardless of whether any changes have been made or not, and must also submit an updated Form ADV with any material changes that occur. Investment advisers also submit quarterly and annual financial reports as part of policies regarding transparency. Financial statements and other reports filed with the SEC are maintained by EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system), which can be accessed online. Investment advisers must also comply with the “brochure rule,” which states that advisers must provide clients and prospective clients with background information regarding the business. Completing Part II of Form ADV constitutes fulfillment of the brochure rule.
The SEC and the self-regulatory organizations that it monitors enforce securities laws. In most cases, the SEC will rule on and impose disciplinary actions on violators. In certain cases, state securities regulators are entrusted with upholding state security regulations known as Blue Sky laws. Federal and state law enforcement agencies are often instructed by the SEC to take legal action against investment advisers who may have acted in violation of securities laws.
The Financial Industry Regulatory Authority, Inc (FINRA)
The Financial Industry Regulatory Authority, Inc. (FINRA) is an independent self-regulatory organization that was created in 2007 when the SEC approved a merger between the enforcement division of the New York Stock Exchange (NYSE) and the North Association of Securities Dealers (NASD). FINRA’s primary responsibility is to supervise firms that publically deal in securities, and any firms that offer professional securities training and testing. FINRA also oversees the licensing of registered investment advisers, broker-dealers and their representatives. In addition, major securities exchanges like NYSE, NASDAQ, the International Securities Exchange, and the American Stock Exchange are regulated under contract by FINRA. FINRA works in conjunction with the SEC and the North American Securities Administrators Association (NASAA) to maintain a database on financial professionals, uphold continuing education standards, as well as administer the exams required of investment adviser and broker-dealer firm principals and representatives. FINRA also developed an maintains the electronic systems used for state and federal registration of these firms and financial professionals: Broker-dealer firms and registered representatives register through the Central Registration Depository (CRD), while investment advisers and their representatives register through the Investment Adviser Registration Depository (IARD).
Member firms are required to submit an annual audit report, register new securities offerings, and ensure that their representatives complete continuing education training. Continuing education consists of a Regulatory Element which is due every three years and is administered by FINRA, and a Firm Element, which must be completed each year and is administered by the member firms themselves.
The Financial Industry Regulatory Authority has established, and enforces its Sanction Guidelines in accordance with existing federal law. Firms and individuals that are found to be in violation of federal securities laws, as well as FINRA’s rules and regulations, face disciplinary actions. These actions can result in an investment adviser and representatives being suspended or barred, as well as monetary fines and other civil actions, or criminal penalties depending on the severity of the violation.
The North American Securities Administrators Association (NASAA)
North American Securities Administrators Association (NASAA) is a self-regulatory organization made up of an association of state and provincial securities administrators from the United States, Canada, and Mexico. The NASAA serves as an investor protection agency, working in conjunction with FINRA and the state security regulators that comprise the association. State regulator NASAA members license investment advisers and their representatives when firms manage less than $100 million in client assets. They also register certain state securities, investigate consumer complaints, and educate and advocate for the investing public.
While state regulatory agencies are registered with the NASAA, individual investment advisers and investment adviser representatives are not required to register with the NASAA.
The Series 63, Uniform Securities Agent State Law Examination, is written by the NASAA and administered by FINRA. This test is primarily taken by representatives of broker-dealer firms and is required by a majority of state securities regulators.
State Securities Regulators
Each state has its own division or department that regulates the sale of securities in that state. State securities regulators are in charge of enforcing state Blue Sky laws, as mentioned above. Blue Sky laws can vary from state to state, although most tend to reflect federal law.
Investment adviser firms that have less than $100 million in assets under management (AUM) must register with the state securities commission in the state in which they operate. Investment adviser representatives, as well as broker-dealers and their agents, must also register with the state. Registering with state securities regulators is the same as federal registration in that a Form ADV must be submitted to the state agency. Some state regulatory agencies may have specific requirements for their agents, so refer to specific state regulators for registration details.
For smaller investment advisers, those with less than $100 million in AUM, a Schedule I, updated Form ADV, and financial reports must be submitted yearly to the state regulator with which the adviser is registered.
State securities regulators are in charge of enforcing state security regulations known as Blue Sky laws. State law enforcement agencies handle legal action against investment advisers in violation of securities laws as determined by state securities regulators.