The California Department of Financial Protection and Innovation (DFPI) has proposed to adopt rules that would require investment adviser representatives (IARs) to complete 12 credit hours of continuing education courses each year (CE). If adopted, California would join a growing number of states that have implemented the model rules adopted by the North American Securities Administrators Association (NASAA) a little over two years ago.1 The model rules are designed to work in tandem with updates to FINRA rules that, beginning in January 2023, will require broker-dealer representatives to complete regulatory CE annually rather than in three-year cycles.

Consistent with NASAA's model rules, the proposed California CE rules would require six credit hours of Ethics and Professional Responsibility courses and six credit hours of Products and Practice courses each year.

Background

NASAA, a voluntary association of state-level securities administrators, began considering a model rule regarding CE for IARs in 2014. NASAA released a public survey regarding a proposed model rule to the securities industry in 2018 and reported that it received overwhelming support for the proposal across nearly 1,200 respondents.2 According to NASAA, its members indicated that an IAR CE program could improve the quality of advice given, increase professionalism, and reduce the number of compliance deficiencies discovered by regulators during examinations. Following a public comment period throughout 2020, NASAA released its final model rule in November 2020. Because NASAA has no inherent regulatory authority, however, it is up to the states to elect to implement the model rule.

California and Model Rule Requirements

The California rule proposal substantially mirrors the NASAA model rule. The high-level requirements and exemptions are as follows:

  • An IAR must complete 12 hours of continuing education every calendar year, including (1) six credits of Regulatory and Ethics Content with at least three credits covering ethics, and (2) six credits of Products and Practice Content.
    • An IAR who is also a registered agent of a FINRA member and who complies with FINRA's CE requirements will be considered to comply with (2), so long as the course content is NASAA-compliant.
    • An IAR who holds a credential that qualifies for an examination waiver under 10 CA ADC § 260.236, subdivision (c)(3) (such as a certified financial planner)3 will be considered to comply with both (1) and (2) under many circumstances. Such credentials are subject to separate continuing education requirements already.
  • The proposed rule includes a concept of reciprocity, which is a key element of the NASAA model. Accordingly, an IAR who is registered in multiple states may satisfy the CE requirements of all states by complying with the CE requirements of the IAR's home state, so long as the IAR's home state has CE requirements at least as stringent as those in the relying jurisdictions.

The California proposal includes two differences as compared to the model rule. First, the California proposal does not include a provision affording discretion to DFPI to waive any requirements of the rule, as the NASAA model rule does. Second, the California proposal includes an additional exemption from the CE requirements for IARs who exclusively "offer or negotiate for the sale of investment advisory services of an investment adviser."

Next Steps

While NASAA and its members report strong industry support for the CE rules, it is possible that different requirements across multiple states could in some cases discourage IARs from maintaining licenses in states that require CE versus states that do not. This could be especially true for smaller firms located in states without CE requirements that do not want to take on the additional costs and compliance program updates necessary to adhere to the model rule as implemented elsewhere. Nevertheless, NASAA hopes for all 50 states to implement regulations consistent with the model rule, and California's potential adoption could accelerate what appears to be growing momentum toward this goal. California-based investment advisers and advisory firms located in other states should evaluate any current continuing education programs they are bound by, including FINRA compliance requirements, to assess the potential impact of complying with the proposed rule on the investment adviser representatives working with their firm.

DFPI is accepting comments on the proposal until January 16, 2023.

Footnotes

1. See Model Rule 2002-411(h), alternatively 1956-204(b)(6)-CE. States that have adopted or are finalizing requirements based on the NASAA model rules are: Arkansas, Kentucky, Maryland, Michigan, Mississippi, Nevada, Oklahoma, Rhode Island, South Carolina, Vermont, Washington, D.C., and Wisconsin. States that are currently proposing adoption of the model rules are: California, Colorado, Hawaii, and Tennessee.

2. NASAA 2019 IA Section Report.

3. The regulation explicitly exempts those who hold a CFA, ChFC, CFP, CIC, or PFS.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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