Core Compliance has published a number of items on the North American Securities Administrators Association Investment Adviser Representative Continuing Education Model Rule over the past few years and, in light of some recent activity among various states adopting the Model Rule, we thought this would be an opportune time to provide a brief update on the continuing education landscape as it pertains to Investment Adviser Representatives (IARs) of Registered Investment Advisers. We hope the following information will be helpful for IARs looking into whether they may be subject to continued education in the various states in which they are registered.
Background
As you may be aware, the members of the North American Securities Administrators Association (NASAA) approved the Model Rule in November 2020. In a nutshell, the Model Rule requires IARs to complete at least 12 CE credits each year. IARs who fail to complete the required CE credits will ultimately see their securities registration terminated, a result that no financial professional would want to see.
The basis for establishing these requirements, in the eyes of NASAA, was that IARs have historically not been subject to any substantive CE requirements, despite the fact that so many other financial professionals for years have been subject to fairly extensive requirements, including registered representatives of broker-dealers, CFPs, insurance agents, among others. Ultimately the goal is not only the educational element for the IARs, but also the resulting benefit to – and protection of – the investors they serve.
Guidelines
As noted above, the Model Rule calls for 12 CE credits each year. NASAA defines a credit as a learning unit that includes no less than 50 minutes of education instruction. Of the total of 12 such credits, the Model Rule requires 6 credits of Products and Practices instruction and 6 credits of Ethics and Professional Responsibility instruction. Let’s briefly dig in on those two buckets.
The Products and Practices instruction is intended to focus on an IAR’s knowledge and familiarity with the kind of products and strategies that would be offered to an investor. In addition, this branch of the instruction should address the standards of care and important compliance practices that IARs should be aware of and are applying to their day-to-day interaction with their clients.
For the remaining 6 credits to be earned as part of the Ethics and Professional Responsibility element, the focus is intended to be on the various duties and obligations that an IAR owes to his or her clients, most importantly of course, the fiduciary obligation. Notably — and not surprisingly — the Model Rule requires that at least half of the Ethics and Professional Responsibility content must be related to ethics for IARs.
Meeting CE Requirements
So how, exactly, can an IAR meet the various new CE requirements in those states that have adopted some version of the Model Rule? It’s relatively straightforward. IARs must enroll for courses offered by a continuing education provider approved by NASAA and must receive a passing score for the exam that will be part of each such CE course. For what it’s worth, this is similar to what BD registered representatives have been doing for years as part of their Regulatory Element CE requirements. Digging in a bit further on passing the exams, a score of 70% is required for courses that have been approved for any of the professional designations (CF, CFP, ChFC, CIC and PFS), all of which provide waivers for the Series 65 examination, as most IARs are likely familiar with. For any other courses, IARs must achieve a 100% score in order to satisfy the requirement, according to the Model Rule.
What if an IAR fails to pass the exams with the applicable score? It could absolutely impact their registration status. If the required CE credits are not effectively earned during each annual reporting period, the IAR will be deemed “CE Inactive” at the end of the year. If the IAR doesn’t cure that Inactive status by the end of the following calendar year by successfully obtaining the CE credits, the Model Rule states that the IAR will be ineligible for a renewal of their IAR registration. Of course, different states may take different approaches to the consequences of non-completion, but clearly the message is that NASAA wants states to ensure that their IARs are taking the CE requirement as seriously as possible.
State Adoption
With those fundamentals in place, let’s now look at some of the most recent state adoption activity with regard to the Model Rule’s increased significance in the registered investment adviser space. Florida, North Dakota, Nevada, Tennessee and Colorado are part of the latest group of states to adopt an IAR CE requirement. Of course, not every state adopts every element of the Model Rule, so it’s important to look at each state’s specific rule, but simply knowing which states are on board is a great place to start your analysis. Each of those five states’ IAR CE requirements have an implementation date of January 1, 2024.
Prior to this most recent group of states, there were eight other states (MI, WI, OK, KY, AK, SC, OR and the District of Columbia) that adopted a CE requirement that had an implementation of January 1, 2023 and three others (MS, MD and VT) that went live effective January 1, 2022. That brings us to a grand total of 15 states, plus Washington, DC that have adopted a continuing education requirement for IARs. There are also three other states (RI, HI and CA) that have begun the rulemaking process on their specific CE requirements, and we expect that the implementation date for those states will be January 1, 2025.
Conclusion
Clearly the momentum here suggests that over the next several years, additional states will follow suit and establish continuing educations requirements for the IARs registered in those states. Will we see nationwide adoption? Impossible to tell, but it seems quite possible. With that in mind, we would encourage all IARs, in conjunction with the compliance officers at their advisory firms, to be aware of the CE requirements in the various states in which they are registered to ensure that they avoid the potential for non-compliance with those states’ versions of the Model Rule. If you have questions regarding the Model Rule or state-specific CE requirements and how they may impact you, the team at Core Compliance is here to help. Reach out to us at (619) 278-0020, or at info@corecls.com.
Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and private fund managers on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon regarding any particular facts or circumstances without first consulting with a lawyer and/or tax professional.