© Tim Voorhees, JD, MBA 1996-2005 1 Session G – Overcoming Regulatory Obstacles.

© Tim Voorhees, JD, MBA 1996-2005

1

Session G – Overcoming

Regulatory Obstacles


2

1. Regulatory Guidelines

A. Regulatory bodiesB. Relevant statutesC. Case lawD. Other standardsE. Safe Harbors


3

1 (A) Regulatory Bodies

• FINRA• SEC• State Securities Commissions• State Insurance Commissions• Internal Revenue Service


4

FINRA:

1. Registration

2. Rules of Conduct

3. Responsible for

Discipline•Stocks•Bonds•Mutual Funds•Partnerships

SEC:

1. Filing by Product Sponsors

2. Supervision of NASD

3. Direct Regulation of Investment Advice under 1940 Act

•Fee Based Investment Advice

State Securities Division:

1. Regulation of Blue Sky Issues

2. Regulation of Sales Practices in State

3. In State Fee Based Investment Advice

4. Small State Registered Inv. Advisers

State Insurance Commissioner:

1. Licensing

2. Insurance Regulations• Anti-rebating rules• Other regulations for General Account, Group, and Property Casualty insurance

Variable Life

Variable Annuity

Group Variable Annuity

Fee Based Investm

ent Advice

Smal

l Int

rast

ate

Offe

rings

© 1998-2002 Life Marketing Systems, Inc.

4


5

1 (B) Relevant Statutes

• The Investment Advisers Act of 1940

• The Uniform Securities Act of 1956• SEC Release No. IA-770 (1981)• SEC Release No. IA-1092 (1990)• SEC Release No. IA-1862 (1997)• SEC Release No. IA-1897 (2000)


6

Three Point Test from the 1940 Act:

Does the Practitioner Provide Advice or Analysis about a Security for

Compensation? • What is a security? • What is advice or analysis? • What is compensation?


7

What Is a Security?

• Defined broadly• Even a passbook savings

account could be a security


8

• The Business Test: Hold out as being in the business of providing financial advice?

• Can include estate planning• What do company name, yellow pages,

business card, and front door say?• What designations listed after name? • Does letterhead list insurance and

investments or Investment planning and financial planning?

What is Advice or Analysis?


9

What Is Compensation?

• What is compensation? • Not just charging a fee• Includes soft-dollars• Can even include working for a

charity


10

Does the Three-prong Test Still Apply?

• Look at regulations, especially IA1092 issued in 1990

• Statute says almost nothing new


11

1 (C) Case Law

• Establishes Liability• Establishes need for

disclaimers• Establishes need for

disclosures


12

Cases Establish Liability

• SEC can sue adviser that fails to register, who charges fees improperly, or who makes misrepresentations

• Where a client asserts tort claim or malpractice, civil courts have jurisdiction

• Suits for damages or injunction


13

Cases Affirm the Need for Disclaimers

• Must be thorough• Get client’s initials


14

Cases Affirm the Need for Disclosure• Need not disclose exact

amount of commission• Just simply disclose that will

receive compensation• Be sure that the ADV fee is

consistent with the fees actually charged


15

1 (D) Other Standards

• ABA Model Rules– Conflicts of Interest– Liability

• AICPA Code of Professional Conduct • Treasury Circular 230

– Governs practice before the IRS by CPAs, attorneys, and enrolled agents

– Establishes standards for avoiding conflicts of interest in tax practice


16

Treasury Circular 230 Issues

• Do not charge a fee based on tax savings

• Instead base fees on 15 criteria discussed in Session 3


17

1 (E) Safe Harbors

• “Incidental to Primary Profession” – does not apply if accept commissions

• Charitable exemption – Hard to get E&O coverage

• De Minimus exceptions for state-registered RIAs

• Contract away the liability


18

2. Engagement Letter Elements

A. Parties to the agreement

B. Type of RIA or safe harbor

C. Engagement Phase

D. Client’s responsibilities

E. Fees

F. Cancellation

G. Arbitration

H. Exclusions

I. Entire Agreement clause

J. Signatures

K. Addendum A: Fees

L. Addendum B: Privacy Notice


19

2 (A) Parties

• List name of your client and name of your RIA

– Name of law firm if to be paid by the law firm–Name of your own RIA


20

2 (B) Type of RIA or safe harbor

i. Federal Regulationii. State Regulation


21

When Use Federal Registration?

• If have 25 million of assets, permitted to register federally

• If have more than 30 million of assets, must become fed registered

• Can choose if between 25 and 30 million

• Less than 25mm only state registration allowed


22

Use State Registration if…

• Less than $25 Million under management.

• More than $30 Million under management but money managed by third party managers. Funds with SEI, Lockwood, and similar third parties do not count toward the $25 million unless RIA actively involved with asset allocation or security selection.


23

Problems with State Securities Registration

• Some states like CA, MN, WA have timeframe for using IARD.

• Many other states have no plan. • Some states may not even know what

the IARD is.


24

2 (C) Engagement Phase

• Phase 1 for Wealth Statement, Financial Checkup, Value Proposition Letter (or just a VPL)

• Phase 2 for Planning and Phase 3 for Implementation

• Phases 1, 2, and 3 may be combined if

– Developing a Tactical Plan– Having much client control and clarity about objectives


25

Offer Seven Levels of Service


26

Provide Clear Value Before

Upgrading the Level of Service


27

Access Seven Levels of Service


28

2 (D) Client’s responsibilities• Provide us with copies of

all necessary documents for our review.

• Provide timely responses to our questions during the analysis process.


29

2 (E) Fees

• Set forth in the attached Addendum A.

• Request that you pay one-third at the time of the engagement and the balance upon delivery.


30

2 (F) Cancellation

• May cancel this agreement within five business days after signing.

• Thereafter, may cancel the agreement by written notice and receive refund for prepaid fees not related to services already provided.


31

2 (G) Arbitration

• Choose model language from one of the following:

• Institute for Christian Conciliation • National Association of Securities Dealers• American Arbitration Association

• Include language about panels, waiver, discovery, costs, written opinions


32

2 (H) Exclusions

• Clarify that will not provide legal and accounting advice

• Ideally, state who will provide the advice


33

2 (I) Entire Agreement Clause

• Clarify that this agreement supersedes prior agreements

• Or give clear references to existing agreements that remain valid


34

2 (J) Signatures

• Request signatures of husband and wife

• Fax copy of signed agreement to ValMark for execution


35

2 (K) Addendum A: Fees

• List different deliverables and corresponding prices

• Have client select relevant deliverables


36

2 (L) Addendum B: Privacy Notice

• Affirms that confidentiality is highest priority

• Lists entities that may have access to information


37

2 (M) Application of RIA Statute to

Teams of Planners• Engagement letters must designate

who provides which services.• If operating as a collaborate, see if

advisers want to preserve the attorney-client privilege. If so, the engagement letter should be with the attorney.


38

3. Engagement Kit Elements

A. Wealth Planning Brochure (or folder)

B. Soft Data Factfinder – “vision-inspired life questionnaire”

C. Hard Data Factfinder – Details about Financial Legal, Insurance, and Tax documents

D. Form ADV

E. Engagement Letter


39

4. Variations for Allied Advisers

A. The above slides apply to RIAs or IARs

B. Allied Advisers have unique rules because they are not registered as RIAs. Allied Advisers include unlicensed and unregistered:

i. CPAs

ii. Lawyers

iii. Bank Trust Officers

iv. Charitable Development Officers


40

Working with Allied AdvisersA. Form Collaboratives

i. Allied Adviser gives his/her engagement letter to the client

ii. RIA gives his/her engagement letter and Form ADV to the client

B. RIA serves the Allied Adviser as a back office

i. The Allied Adviser hires RIA as a back office

ii. The Allied Adviser guarantees larger than normal wholesale fees on cases that do not produce commissions

C. RIA recruit the Allied Adviser into a Professional Partnership


41

Best Practices CD - Session G Resources

#33 Compliance Resources


42

Best Practices Training

Session AAdapting to Planning Trends and Presenting Valuable Deliverables to Clients

Session B Charging Fees and Using Appropriate Engagement Letters

Session CDelegating Technical Work to a Virtual Back Office and Advanced Sales Department

Session DDeveloping the Value Proposition Letter after a Discovery Session, and Preparing the Family Wealth Statement During/After a Client Retreat

Session EDeveloping Relationships With CPAs, Bankers, Lawyers, Charitable Development Officers, and Other Referral Sources

Session FPresenting Your Materials During Client Seminars, Training Workshops, and One-On-One Presentations

Session GComplying with IRS, SEC, NASD, AICPA, ABA, FPA, and Other Relevant Guidelines

Session HFocusing on Your Unique Talents by Delegating “Administrivia” to a Relationship Manager

Session IConducting a Strategy Session to Integrate Tools Needed to Achieve All of Your Clients' Wealth Optimization Goals

Session JTracking cases and portfolios with web-based project management and CRM systems


43

Phone: 800-447-7090 (949-453-2900 in CA)

Fax: 866-447-7090Voicemail: 877-447-7090Email: [email protected]

Family Office Services

© Tim Voorhees, JD, MBA 1996-2005 1 Session G – Overcoming Regulatory Obstacles.

Documents

injunction tim voorhees

charity tim voorhees

disclosures tim voorhees

new tim voorhees

tax practice tim voorhees

sec release

liability sec

financial advice