GAO: NAIC, SEC Should See What Consumers Know
January 19, 2011 by Arthur D. Postal
WASHINGTON BUREAU — Officials at the Government Accountability Office (GAO) see no reason to impose another layer of regulation on financial planners at this time, but they would like more information about what consumers think about issues such as titles and designations.
The GAO prepared the report to implement Section 919C of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The provision called for the GAO to study oversight of financial planners.
“Some financial planning organizations have raised concerns that no single law governs providers of financial planning services, broadly describing this situation as a regulatory gap,” Alicia Puente Cackley, a GAO director, writes in a letter summarizing the GAO’s findings. “Concerns also exist that financial planners may have an inherent conflict of interest in recommending products they may stand to benefit from selling.”
GAO officials looked at how financial planners are regulated and overseen at the federal and state levels, what is known about the effectiveness of the current planner regulatory system, and the advantages and disadvantages of several different regulatory approaches.
The Federal Trade Commission and the Better Business Bureau have received few complaints about financial planners, Cackley said. The U.S. Securities and Exchange Commission (SEC) “has limited information on the extent to which the activities of financial planners may be causing consumers harm,” Cackley says. “[The] SEC generally does not track data on complaints, examination results, and enforcement activities associated with financial planners specifically, and distinct from investment advisers as a whole.
A coalition of planning groups has asked Congress to establish a professional standards-setting oversight board for planners, and others have suggested that the Financial Industry Regulatory Authority or a new self-regulatory organization should oversee investment advisors.
Cackley notes that planners also have asked Congress to apply a fiduciary standard, which requires financial professionals to act in clients’ best interests, to insurance agents who sell products such as variable annuities that are classified as securities. Today, insurance agents who sell variable annuities must meet a suitability standard, which requires them to verify that the products sold to a consumer suit the needs of the consumer.
Working under the current rules, “financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission, as long as the product is suitable and the broker-dealer complies with other requirements,” Cackley says. “Because the same individual or firm can offer a variety of services to a client—a practice sometimes referred to as ‘hat switching’—these services could be subject to different standards of care. As such, representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care, if any, applies to a financial professional.”
The SEC is studying standard of care issues with regard to securities transactions, but the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., is not conducting a complementary review of the standard of care issues related to the sale of high-risk insurance products, Cackley said.
The GAO has recommended that:
- The SEC include an assessment of investors’ understanding of financial planners’ titles and designations in a financial literacy study it will be conducting.
- The SEC collaborate with the states to identify methods to better understand the problems associated with the financial planning activities of investment advisors.
- The NAIC assess consumers’ understanding of the standard of care associated with the sale of insurance products.
Andrew Beal, chief operating officer of the NAIC, told the GAO that the NAIC generally agrees with the GAO report and has no substantive comments to make at this time. The SEC provided no comments.
The Financial Planning Coalition, Washington, says it would have liked the GAO to recommend more regulation but is pleased that the GAO outlined steps to deal with significant consumer protection concerns.
Charles Moran, chairman of the Certified Financial Planner Board of Standards Inc., Washington, says the “study will help inform our ongoing discussions with policymakers and will provide an important building block in our efforts to achieve recognition of the rapidly growing financial planning profession.”
Susan John, chairman of the National Association of Personal Financial Advisors, Arlington Heights, Ill., says the GAO confirmed what planners have known for years. “There is great confusion among the public about the profession of financial planning,” John says.