By Robert R. Boeche, Partner, Robert D. Conca, Partner, and Andrew R. Steiger, Associate of Shustak Reynolds & Partners, P.C. posted on Friday, February 24, 2023.

On November 16, 2022, the California Department of Financial Protection and Innovation (“DFPI”) proposed new regulations under the Corporate Securities Law of 1968, which would establish annual continuing education (“CE”) requirements for Investment Adviser Representatives (“IARs”).[1] As we recently reported[2], the North American Securities Administrators Association (“NASAA”) designed a set of model rules for state regulators to adopt, and thereby implement, IAR CE requirements that are consistent from state to state.[3] In its current form, the DFPI’s proposal  would result in California adopting a rule substantially similar to the NASAA model rules; however, the comment period for interested persons to argue for changes to the proposed rule remains open until January 16, 2023.[4]

Requirements of California’s Proposed CE Rule

Under the proposed rule, IARs would have to annually report their continuing education to the DFPI, at a cost of $36 for the annual reporting fee, plus the cost of the education courses.[5] NASAA is expected to offer some CE courses for free, while also authorizing certain vendors to provide compliant CE courses at varying prices.[6]

One key feature of the proposed rule is reciprocity for IARs who are registered in multiple states, or have multiple registrations (i.e., registered agents, or CFPs). A summary of the proposed rules’ requirements and exemptions are as follows:

• Each IAR must complete 12 hours of CE each calendar year, including
  • 6 hours of regulatory and ethical content, with at least 3 hours of ethics, and
  • 6 hours of product and practical content [7]
• If an IAR is also a registered agent [RC1] of a FINRA member firm,[8] by meeting the FINRA CE requirements the IAR will also have satisfied six hours of product and practical content, but must still complete the six hours of regulatory and ethical content.[9]
• If an IAR is also a CFP,[10] the CE mandatory requirements for maintaining that designation will also satisfy all 12 IAR CE hours, provided it is approved IAR CE content.[11]
• If an IAR is also registered in other states, satisfying California’s CE requirements also meets the CE requirements of other states that have adopted the NASAA model rules, provided those CE requirements are not more stringent than California’s.[12]
• In all cases, IARs must annually report their compliance with California’s CE rules to the DFPI.

Consequences of Non-Compliance

The consequences of failing to complete or report CE to DFPI annually are severe. Any IAR who does not comply with the rule by the end of a reporting period will renew their registration with the status “CE Inactive.”[13] An IAR who does not clear the CE Inactive status by the close of the calendar year will not be permitted to renew their IAR registration, and therefore may not serve their clients until their IAR registration returns to good standing. IARs may clear their status by catching up on CE for all intervening years or by passing the examination again.[14]

Minor Deviations from the NASAA Model Rule

The proposed rule deviates in two ways from the NASAA model rule. First, the DFPI is not giving itself discretion to waive the CE requirements.[15] Second, the proposed rule includes an exemption from the CE requirements for IARs who are employed by an Investment Adviser only to offer or negotiate for the sale of investment advisory services.[16]

Our Services

The DFPI reports strong positive sentiment in favor of adopting the proposed IAR CE rule. With any change to the patchwork of regulations that govern Investment Advisers and IARs, each firm must update their internal compliance policies and procedures to ensure they remain reasonably designed to prevent violations of applicable securities laws. If your personnel will be subject to the proposed CE rule, if you are considering an update to your firm’s compliance program, or have questions about how the proposed IAR CE rule could impact your practice, we are here to help.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisers, IARs, broker-dealers, registered representatives, and businesses.
Attorneys Robert R. Boeche, Robert D. Conca, and Andrew R. Steiger can be reached in the firm’s San Diego office at (619) 696-9500.

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