I applaud the North American Securities Administrators Association (“NASAA”) for proposing a model rule to assist state securities regulators in implementing a mandatory continuing education program for investment adviser representatives (“IAR”) in their jurisdiction. These efforts are long overdue to convince the public that the rendering of financial advice is a legitimate profession. A copy of the press release announcing the model rule is available here. A copy of the model rule is available here.
There are a few problems with the proposal, but the biggest ones are:
- The model rule is only a model rule. It doesn’t require any NASAA member to implement the rule. Based on my experience, very few NASAA members adopt non-core model rules, and those that do, usually take quite a bit of time to do so. Some states have extensive rulemaking processes that need to be followed and others are at the discretion of their legislators. Reputable designations like the CFP, the CFA , IMCA, and CPAs have continuing education programs already, but other financial professionals could potentially take advantage of the resulting patchwork framework by moving their places of business to avoid continuing education.
- The model rule, if implemented by members, wouldn’t and couldn’t require any continuing education for the hundreds if not thousands of financial professionals who do not meet the definition of “investment adviser representative” under Rule 203A-3. These professionals might cater to only a few clients or high net worth clients and thereby avoid meeting the definition of “investment adviser representative”.
- If the model rule is adopted by a NASAA member, if challenged, it could be deemed unconstitutional as it relates to IARs associated with investment advisers registered with the U.S. Securities and Exchange Commission (“SEC IARs”).
The Constitutionality of the Proposal
The remainder of this post deals with the last issue. By the numbers, there are almost 4 times more SEC IARs than their state counterparts (roughly 97,000 to 27,000). So any policy change or rule seeking to further legitimize the profession and improve education must guarantee that it reaches the entire universe of SEC IARs.
Why is the model rule potentially unconstitutional? Section 203A(b) of the Investment Advisers Act of 1940 (the “Advisers Act”) states:
Federal law preempts states from registering, licensing, or qualifying a “supervised person” of an investment adviser, except that it may license, register, or qualify an “investment adviser representative” who has a place of business within that state. This begs the question whether a continuing education program with ongoing requirements is a form of qualification or goes beyond the statute’s authority.
One of the principle canons of statutory constructions states: “Where the language is unambiguous, there is no occasion for the application of rules of construction.” By that, lawyers mean that where a law is clear on its face, we need not look any further. Reasonable minds might disagree on whether continuing education is a form of qualification. Merriam Webster defines “qualification” as “a condition or standard that must be complied with (as for the attainment of a privilege).” I leave it to readers to form their own opinions.
Another canon of statutory construction states that courts, “determine legislative intent by examining not only the literal words of the statute, also the reasonableness of proposed constructions, the public policy behind the statute, and its legislative history.”
Assuming that the statute is ambiguous, where would courts look for legislative intent? The National Securities Markets Improvement Act of 1996 (“NSMIA”) amended Section 203A of the Advisers Act by creating the current federal-state licensing dynamic and the qualification issue. The intent of Congress, in the words of Senator Paul Sarbanes is a bit murky:
Senator Sarbanes’ remarks can be interpreted in a few ways. First, they suggest that the Senate is content with the status quo and there aren’t need for wholesale changes–in terms of the regulation of investment professionals. His statement makes clear that state regulators are being limited–albeit not in an unduly manner. On the other hand, his statement seems to suggest that the law grants states with continued authority to prevent investors from facing “sharp practices.”
At the time of the passage of NSMIA, the only requirement for an “investment adviser representative” to become licensed to render advice in most states was to take and pass the Series 65 examination or the Series 7 and the Series 66 examinations. The new continuing education requirement could be viewed as a substantial change of the status quo.
If the model rule is to be accepted as constitutional, judges would be wise to examine the public policy implications. Assuming education accomplishes its goal, states that adopt the model rule will likely have a more educated and ethical body of licensed financial professionals. As a practicing lawyer, I have substantial doubts about the efficacy of continuing education. I attend courses regularly where every attorney is doing other work or playing on their phones.
Putting aside the efficacy of continuing education, not all states will adopt the model rule and the timing of adoption can vary greatly. Each state can also tweak the requirements of the educational requirement (e.g, 6 ethical credits and 6 product/practice credits vs. 2 ethical credits and 10 product/practice credits). It will likely result in a patchwork of different requirements for continuing education depending on where the financial professional resides and could be susceptible to evasion or identifying the least burdensome jurisdiction.
I think NASAA’s heart and head were in the right place. However, I think there are a number of issues with the proposal, and I look forward to continue tracking the legislation as it is proposed throughout the country.
 NSMIA; Conference Report; Congressional Record Vol. 142, No. 139 (Senate – October 01, 1996).