Financial planners are likely to find themselves subject to state as well as federal law.

The federal government is not alone in attempting to regulate the securities business. Several years before Congress commenced enacting its series of federal securities laws in the 1930s, the states had already entered into this regulatory sphere. Virtually all states came to adopt some form of securities legislation, often referred to as "Blue Sky Laws." When Congress did act, it opted to preserve rather than preempt state securities regulation, thereby setting the stage for dual regulation, including dual regulation of investment advisers.

The complex nature of securities regulation combined with the added complexity stemming from differences in regulatory philosophy and details from state to state led to the drafting of the Model Uniform Securities Act, which was adopted by the National Conference of Commissioners on Uniform State Laws in 1956. Over time, most states have come to pattern their securities regulation after the Uniform Securities Act and most states do regulate investment advisers pursuant to their securities laws. As a consequence, states, as well as the federal government, regulate financial planners from a securities perspective.

Most states regulating investment advisers have adopted the Uniform Securities Act, which is similar in approach to the federal Advisers Act. Since Congress expressly made clear that it had no intent of preempting state law in this area, financial planners are likely to find themselves within the regulatory ambit of state securities administrators.

If a financial planner falls within the definition of an investment adviser under the federal Act, he or she will most likely also constitute an investment adviser under the state law. Under the Uniform Securities Act, it is unlawful for any person to transact business as an investment adviser unless he or she is registered as an investment adviser. In the mid-1980s, to reduce the state variations in the registration process and to alleviate some of the burdens of dual state and federal regulation, most states accepted the Uniform Form ADV for registration which was jointly developed by the SEC and the National Association of Securities Dealers (an association of state securities administrators). The Uniform Act authorizes the securities administrator to deny, suspend, or revoke registration of an investment adviser if such action would be in the public interest. The grounds for rejection are similar to those in the federal law. However, many of the state investment adviser laws, unlike their federal counterpart, address the question of competence by requiring successful completion of an examination testing the applicant’s basic knowledge of the securities law in general and of specific provisions of the state’s securities law in particular. Also akin to the federal act, the various state investment adviser laws require registered investment advisers to maintain fairly detailed record keeping. They require investment advisory contracts to be in writing and to make clear that the adviser’s fee is not based on appreciation of the client’s funds. Furthermore, virtually all state investment adviser acts include antifraud provisions akin to those in the federal Act. Hereto, the antifraud provisions of the state acts apply to investment advisers whether or not exempt from registration.

In short, insurers and insurance agents offering financial planning services are likely to be subject to dual federal and state regulation under their respective investment adviser laws. Either the SEC or the state securities administrator or both can bring enforcement actions for failure to comply with the registration, record keeping, advertising, and other regulatory requirements.

The NAIC Model Unfair Trade Practices Act contains provisions generally prohibiting misrepresentations in conjunction with insurance activities. These prohibitions against misrepresentations apply to those financial planners whose financial planning activities include an analysis or discussion of insurance coverages whether or not the financial planners are licensed as insurance agents. The 1980s amendments to the NAIC Unfair Trade Practices Act defined certain activities of an insurance producer in the context of financial planning as constituting unfair trade practices. It is unlawful for an agent to hold himself or herself out as a financial planner, investment adviser, or other specialist engaged in the business of giving financial planning or investment advice when such person is, in fact, engaged only in the sale of insurance policies. Even if such person is engaged in the business of financial planning, he or she must disclose that he or she is also an insurance salesperson and that a commission for the sale of an insurance product will be received in addition to any fee paid by the prospect for the financial planning service. (The disclosure requirements can be met by including such a statement in any disclosure required under state or federal securities laws.) An insurance producer may not charge a fee for financial planning unless based upon a written agreement. However, states vary as to whether a life insurance agent can collect a fee for financial planning services and, if yes, under what conditions.

Generally, states permit a life insurance agent to act as a financial planner. But, he or she cannot use that or a similar designation to imply that the agent is generally engaged in an advisory business in which compensation is unrelated to sales unless that is actually the case.

Also under the authority of the Unfair Trade Practices Act, the NAIC adopted a regulation governing the replacement of life insurance policies. Financial planners may be subject to the requirements thereunder if their planning advice includes recommendations for replacement.

Financial plans often involve an analysis and recommendations as to a client’s insurance needs, existing coverage if any, and/or potential additional coverage or replacement coverage. Such recommendations may arise in a variety of scenarios. First, the financial planner may merely recommend a generic insurance product and encourage the client to pursue such recommendation with an insurance agent of the client’s own choice. Second, the planner may also, in addition to the generic recommendation, refer the client to a licensed insurance agent with whom the planner has a business relationship. The planner may receive a referral fee. Third, the financial planner may be a licensed life insurance agent through whom the client purchases new or replaces existing insurance in accord with the generic recommendation. Under each of these scenarios, the financial planner may be subject to insurance regulation, including the possibility of licensing requirements.

Clearly, the financial planner selling life insurance products is subject to the licensing laws for insurance agents.

But, even if the financial planner did not actually sell the insurance, he or she may still be subject to licensing requirements. A number of states have enacted statutes providing for the licensing of "insurance consultants" or "insurance advisers." Although the definitions of such terms vary by state, they tend to be similar to the definition of "insurance consultant" as set forth in the NAIC Model Agents and Brokers Licensing Act. That Act defines an insurance consultant as one who, for a fee, holds himself, herself, or itself out to the public as being engaged in the business of offering advice as to the benefits, advantages, or disadvantages promised under any policy of insurance. Under this definition, a financial planner who charges a fee for financial planning advice which includes advice concerning any insurance policy would appear to be an insurance consultant and to be subject to the licensing requirements of those states which license insurance consultants. In turn, this would bring financial planners under a given state’s licensing procedures, competency tests, general and specific mandated duties and prohibitions, and bases for license denial, suspension, or revocation. However, an argument can be made that the insurance consultant licensing statutes were not intended to apply to the financial planner situation. This issue can be resolved only on a state by state basis.

Furthermore, the insurance agent licensing provisions of several states apply to those persons who provide advice concerning insurance products regardless of whether the person offering the advice actually sells the insurance products and receives commissions therefrom. Also several states have enacted statutes defining an "insurance broker" as one who, for compensation, in any manner aids in negotiating contracts for insurance or placing risks or effecting insurance for another. Under such definition, a person receiving referral fees from an insurance agent may be deemed to be aiding in the placement of insurance, hence an insurance broker subject to broker licensing requirements. (It should be noted that several states prohibit insurance agents from sharing insurance commissions with unlicensed persons.) Consequently, regardless of whether the financial planner actually sells insurance products, he or she may be subject to the agent licensing or broker licensing requirements, if not the insurance consultant licensing requirements noted above.

There are other state insurance regulatory provisions also relevant to the financial planning situation. Several states prohibit insurance consultant (or adviser) licensing of a person who is an insurance agent. Several other states, while permitting such dual licensing, restrict the compensation a dual-licensed person can receive. States that license insurance advisers may prohibit such adviser from receiving compensation for insurance advice provided to a client and a commission for sales of insurance to the same client. Generally, in such states, the person may receive either the advisory fee or the insurance commission, but not both. Several other states permit dual compensation, usually on the condition that the person disclose in writing the dual capacities in which he or she acts and receives compensation.

In summary, financial planning services have arrived as a major element in the financial services marketplace. Both individuals and organizations have become active participants. Although financial planning involves numerous elements such as investments, insurance, and retirement programs, because of disposition or training, a planner might concentrate on some elements more than others. (For example, a life insurance agent may focus more upon the insurance aspects of a financial plan while a person with a securities background is more likely to focus on investments.) Other planners may possess a broader perspective and perhaps be a bit more objective in developing an overall financial plan. In any event, the likelihood that such planning activities are subject to both state and federal regulatory law is substantial.

Relevant laws include both federal and state securities laws (the investment adviser acts in particular), ERISA, state insurance unfair trade practices acts, and state insurance agent, broker, and consultant licensing laws. In view of the increasing frequency of life insurance agents engaging in financial planning, or holding themselves out as financial planners, SEC and state securities administrators’ sensitivity as to adequately supervising financial planning activities, state regulatory concerns as to misrepresentation, potential conflicts of interest and licensing concerns, and private litigants’ tendency to sue those with the deepest pockets (for example, insurers), both insurers and agents who engage or appear to engage in financial planning need to be alert to their registration, antifraud, and other responsibilities under the securities law and their trade practice and licensing responsibilities under state insurance law.