Federal or state securities laws require brokers, investment advisers, and their firms to be licensed or registered, and to make important information public. But it's up to you to find that information and use it to protect your investment dollars. The good news is that this information is easy to get, and one phone call or web search may save you from sending your money to a con artist, an unscrupulous financial professional, or a disreputable firm.
Before you invest or pay for any investment advice, make sure your brokers, investment advisers, and investment adviser representatives have not had disciplinary problems or been in trouble with regulators or other investors. You also should check to see whether they are registered or licensed.
This is very important, because if you do business with an unregistered securities broker or a firm that later goes out of business, there may be no way for you to recover your money — even if an arbitrator or a court rules in your favor.
Brokers and Brokerage Firms
The Central Registration Depository (CRD) is a computerized database that contains information about most brokers, their representatives, and the firms they work for. For instance, you can find out if brokers are properly licensed in your state and if they have had disciplinary problems with regulators or received serious complaints from investors. You'll also find information about the brokers' educational backgrounds and where they've worked before their current jobs.
You can ask your state securities regulator or the Financial Industry Regulatory Authority (FINRA) to provide you with information from the CRD. Because your state securities regulator may provide more comprehensive information from the CRD than FINRA, especially when it comes to investor complaints, you may want to check with your state securities regulator first. You'll find contact information for your state securities regulator on the website of the North American Securities Administrators Association. To contact FINRA, either visit FINRA's BrokerCheck website or call FINRA's toll-free BrokerCheck hotline at (800) 289-9999.
People or firms that get paid to give advice about investing in securities generally must register with either the SEC or the state securities agency where they have their principal place of business. As discussed in greater detail below, the rules governing the registration of certain investment advisers have changed.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd- Frank Act”) was signed into law. The Dodd-Frank Act amends certain provisions of the Investment Advisers Act of 1940 by delegating generally to the states responsibility over certain mid-sized investment advisers – i.e., those that have between $25 million and $100 million of assets under management (“AUM”).
The Dodd-Frank Act and SEC rules increased the threshold above which all investment advisers must register with the SEC from $30 million to $110 million of AUM. Prior to July 2011, an investment adviser regulated by the state in which it maintained its principal office and place of business generally was prohibited from registering with the SEC unless the adviser had at least $25 million of AUM, and was required to register with the SEC once it had at least $30 million of AUM. Now, investment advisers with less than $110 million of AUM may be prohibited from registering with the SEC, depending on the size of the adviser’s AUM and whether the adviser meets other requirements.
This means that state securities authorities will have primary regulatory authority over a substantial number of investment advisers that previously were subject to primary regulation by the SEC. Larger investment advisers, generally, those with over $100 million of AUM, will continue to be registered with the SEC and will be subject to federal regulation (state investment adviser laws requiring registration, licensing, and qualification have been preempted for these advisers).
Some investment advisers employ investment adviser representatives, the people who actually work with clients. In most cases, these people must be licensed or registered with your state securities regulator to do business with you. So be sure to check them out with your state securities regulator.
To find out about an investment adviser and whether it is properly registered, read its registration form, called "Form ADV." Form ADV has two parts. Part 1 contains information about the adviser's business and whether the adviser has had problems with regulators or clients. Part 2 sets out the minimum requirements for a written disclosure statement, commonly referred to as the “brochure,” which advisers must provide to prospective clients initially and to existing clients annually. The brochure describes, in a narrative format, the adviser’s business practices, fees, conflicts of interest, and disciplinary information. Before you hire an investment adviser, always ask for and carefully read both parts of the Form ADV.
Where applicable, each brochure provided to clients must be accompanied by a “brochure supplement” that includes information about the specific individuals, acting on behalf of the adviser, who actually provide investment advice and interact with the client. An adviser must deliver the brochure supplement to the client before or at the time that the specific individual begins to provide investment advice to the client.
You can view an adviser's most recent Form ADV online by visiting the Investment Adviser Public Disclosure (IAPD) website. You can also obtain copies of Form ADV for individual advisers and firms from the investment adviser, your state securities regulator, or the SEC, depending on the size of the adviser. You'll find contact information for your state securities regulator on the website of the North American Securities Administrators Association.
If the investment adviser is registered with the SEC, you can get a copy of Form ADV (Part 1 only) by accessing information on "How to Request Public Documents" at http://www.sec.gov/answers/publicdocs.htm. In addition, at the SEC’s headquarters, you can visit our Public Reference Room from 10:00 a.m. to 3:00 p.m. to obtain copies of SEC records and documents.
Because some investment advisers and their representatives are also brokers, you may want to check both BrokerCheck and Form ADV.
Once you've checked out the registration and record of your financial professional or firm, there's more to do. For example, if you plan to do business with a brokerage firm, you should find out whether the brokerage firm and its clearing firm are members of the Securities Investor Protection Corporation (SIPC). SIPC provides limited customer protection if a brokerage firm becomes insolvent — although it does not insure against losses attributable to a decline in the market value of your securities. If you've placed your cash or securities in the hands of a non-SIPC member, you may not be eligible for SIPC coverage if the firm goes out of business.
Here are a few questions to get you started.
- What experience do you have, especially with people in my circumstances?
- Where did you go to school? What is your recent employment history?
- What licenses do you hold? Are you registered with the SEC, a state, or FINRA?
- Are the firm, the clearing firm, and any other related companies that will do business with me members of SIPC?
- What products and services do you offer?
- Can you recommend only a limited number of products or services to me? If so, why?
- How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
- Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
- For registered investment advisers, will you send me a copy of both parts of your Form ADV?