CFP - Professional Conduct and Regulation (8% of the exam) - Section A.4

Financial services regulations and requirements

Registration and regulatory requirements for investment advisers (SEC versus state), broker-dealers, and insurance producers; Form ADV disclosure; the SEC and FINRA framework; anti-fraud provisions; and how a CFP professional's activities determine which regime applies to them.

Investment Advisers Act of 1940Form ADVFINRA rules

Practice question for this objective

Free sampleProfessional Conduct and Regulationhard

Nadia's planning firm has 46 individual clients and 62 million dollars of regulatory assets under management. The firm's principal office is in a state whose securities regulator both registers and examines investment advisers, and Nadia has three clients resident in each of four neighbouring states. She relies on no exemption and holds the firm out to the public as a financial planning practice. Which registration position is correct for the firm?

ARegister with the Securities and Exchange Commission, because a firm holding itself out as a financial planner with more than 25 million dollars of assets under management sits above the federal registration threshold.
BFile with the Securities and Exchange Commission as an exempt reporting adviser, because the firm advises natural persons rather than private funds and is therefore relieved of full registration.
CRegister with her home state regulator as a mid-sized adviser, because that state registers and examines advisers, while the firm stays subject to the antifraud provisions of the Investment Advisers Act of 1940. Correct
DRegister in each of the four neighbouring states as well as the home state, because holding client relationships inside a state defeats that state's de minimis position for an adviser without a place of business there.

A mid-sized adviser registers with its home state where that state examines advisers, and federal antifraud rules still apply. Registration is allocated by regulatory assets under management. Nadia's 62 million dollars places the firm in the mid-sized band that runs from 25 million to 100 million dollars, and the deciding fact is that her home state both requires registration and conducts examinations, which sends her to the state rather than to the Commission. State registration does not buy an escape from federal law: the antifraud provisions of the Investment Advisers Act of 1940 reach any person meeting the definition of investment adviser. The out of state clients change nothing here, because three clients in a state where the firm has no place of business falls inside the customary de minimis allowance.

Why A is wrong: This was the correct answer before the Dodd-Frank Act reallocated supervision of mid-sized advisers, so it is tempting to a candidate working from older material. The 25 million dollar line no longer decides federal registration for an adviser of this size, and holding out as a planner is not itself a federal trigger.

Why B is wrong: Exempt reporting adviser status is genuinely available, which makes it plausible, but it is reserved for advisers relying on the private fund adviser or venture capital fund adviser exemptions. Advising individual clients is not a basis for that status, and Nadia relies on no exemption at all.

Why C is correct: A mid-sized adviser, one with regulatory assets under management between 25 million and 100 million dollars, registers with its home state where that state requires registration and conducts examinations. Federal antifraud liability under the Investment Advisers Act of 1940 continues to apply to a state registered adviser.

Why D is wrong: The de minimis idea is real, which makes this attractive, but it works the other way round. An adviser with no place of business in a state may generally avoid registration there while it has fewer than six clients in that state, and three clients per state sits inside that allowance.

See more CFP practice questions, answers explained.

Exam traps in Professional Conduct and Regulation

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

Hold the disclosure until the next annual updating amendment, which is due within 90 days of the fiscal year end, and describe the order there in the summary of material changes given to clients.
Why it is wrong: The 90 day annual updating amendment deadline is real, which makes the timing feel authoritative. It sets the outer limit for routine updating, not for new disciplinary information, and waiting nine months would leave clients evaluating the firm on a brochure known to be materially incomplete.
Disclose the increase in his compensation in writing before making the recommendation and then proceed, because complete written disclosure of a conflict discharges the care obligation and the fiduciary duty together.
Why it is wrong: Disclosure is a genuine requirement, and a candidate who remembers the disclosure obligation may treat it as the whole answer. Telling a client about a conflict does not establish that the recommendation is in her interest, so a disclosed but unanalysed rollover still fails the care and best interest standards.
He must record the arrangement on his firm's annual compliance questionnaire covering outside business activities, which is sufficient because the partnership is not a product the firm itself offers.
Why it is wrong: Outside business activity reporting is a real obligation and an annual questionnaire is a common way firms collect it, so this feels procedurally correct. Selling securities away from the firm for compensation is treated as a private securities transaction, which demands prior notice and approval rather than an annual disclosure.

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