There are just a few licenses that most arbitrators need to recognize for
securities matters. Some are more restrictive than others and some allow
Series 22: Direct Participation Program (DPP) license. This restricted license
allows individuals to sell only limited partnerships. No mutual funds, stocks,
bonds, municipals, etc.
Series 6: Mutual funds and Variable Products (the latter only if combined with a life insurance license). The individual cannot sell individual stocks, bonds or municipals but can utilize all the mutual funds organized in those categories (but not closed end funds). The variable products include variable and variable universal life insurance and variable annuities.
Series 7: The essential stock brokerage license allows the licensee to sell
most investment vehicles- stocks, options, bonds, municipals, mutual funds,
etc. This license is required by most of the brokerage houses.
Series 24: This is a General Securities Principals license. The individual
will be able to supervise the general securities business of a broker dealer.
At least one principal is required to review and approve all the daily trades
of the brokers.
Series 26: Investment Company/Variable Contracts Limited Principal. This
individual may supervise only mutual fund sales and certain insurance products-
no individual stocks or bonds.
Series 4: Registered Options Principal. This individual is able to supervise
the sales and trading of options.
Series 53: Municipal Securities Principal. The individual is able to supervise
the sales and trading of municipal securities only- no stocks, corporate
bonds or mutual funds of any type.
Series 8: This license is more encompassing than the series 24, 4 and 53
in that it covers supervision of all the areas listed.
Certified Financial Planner : This designation is offered by the CFP Board
of Standards and covers six courses (five as of 1995. The insurance course
was deleted.) It is well recognized as a comprehensive overview of financial
planning but should not be perceived as a panacea for knowledge in the area
since it primarily represents a minimum "standard" for those involved in
financial planning. It is important to note that this is not a license to
sell anything at any level. It is simply an acknowledgment of coursework
Chartered Financial Consultant (ChFC): This designation is offered by the
American College, covers about 12 courses and is a continuation of the Chartered
Life Underwriter (CLU) designation. Though some feel that it is more life
insurance oriented than true financial planning, it probably should be considered
in the same manner as the CFP designation. It is not a license to sell anything.
Chartered Financial Analyst (CFA): This highly regarded designation represents
coursework reviewing extensive statistical analysis of investments. Mainly
used by portfolio managers designing and monitoring stock and bond portfolios.
Masters of Science in Financial Planning: Degrees are offered by the College for Financial Planning, American College, Golden Gate University and others across the U.S. Unquestionably, the most intensive and comprehensive knowledge of investment, retirement, estate, insurance issues, etc. The majors incorporate estate planning, investments, retirement planning, taxes and several other disciplines.
Registered Investment Adviser: This is neither a designation nor a degree
though some states do call it a required license to practice. It is a filing
of a registration package with the SEC and the Department of Corporations
(many states). It is required for any individual who wishes to charge a fee
for investment advice. The documentation must contain the educational background,
experience, fee structure, conflicts of interest, balance sheet if discretionary
funds are held- literally all information necessary to determine whether
the individual has the expertise to provide such advice. There are no initial
educational requirements (though certain licenses/background may be needed
to show competency in an area where the advisor wishes to charge fees) nor
any continuing education. The Registered Investment Adviser must give potential
clients either a copy of the forms filed or a brochure outlining such material.
Some states require the adviser take the Series 65 course in order to become
Continuing Education: Securities licenses require continuing education as of 1995. But most courses seem to be relatively sophomoric or are a rehash of licensing material. Therefore, absent some personal work toward an accepted designation or degree, a registered representative- even with the more comprehensive series 7 license- may be suspect in overall knowledge and capabilities. Further, as an instructor in securities licensing for over 10 years for all licenses indicated above, the material presented in class or in the textbook is adequate for passing an exam, but woefully inadequate as background for the utilization of any investment or the understanding of suitability. Experience may/will provide some essential background but, by and of itself, is not adequate to address the radical and far reaching changes in both national and international economics.
The CFP, CFA CLU and ChFC designations all require continuing education each year. However the annual education might fall under only one or two areas. Further review of background may be necessary to determine competency in other areas. Also note that absent some additional degree in finance, business, etc. the designations may not provide much substantive knowledge at all.
Titles: Many titles have been bestowed on individuals irrespective of any educational background or substantive training. The term "financial planner" is utilized by many individuals- though few have any education in the field whatsoever (minimum designations are CFP or ChFC). By the same token, many firms "award" their registered representatives with the titles of "investment consultant", "investment specialist", "financial consultant", etc. These impart a perception to potential investors of an expertise far above the normal licensee. But perception and reality are seldom the same.
The use of other terms such as "vice president" and "senior vice president"
also denote a special ability beyond basic license preparation. However,
many are bestowed due to the amount of sales activity- not advanced education
or designations. If an investor is harmed because of reliance on such titles-
which a prudent man might reasonably rely upon- misrepresentation could be
Attorneys- Literally anyone may conduct a securities case in arbitration,
though most are performed by attorneys. While the law degree- and perhaps
passing of the bar- might provide an attorney with certain expertise for
court cases, neither contains much background to securities law or application.
I received a law degree- though close to twenty years ago- and found negligible
securities information in any of the course work. Admittedly an attorney
can scour some court cases in regards to securities practices, there is scant
information available securities APPLICATION. Securities law does recognize
suitability and other similar issues but it does not specifically present
a definitive definition of use and misuse. Without some other formalized
background in such area of securities APPLICATION- many attorneys tend to
present cases more on procedural issues than content. As verification of
that problem- and the reason for this Guide- is the fact that the majority
of any NASD arbitrator education forums are based almost solely on procedures,
not substance. Arbitrators must recognize the limitations of attorney
presentations and be ready and forearmed to ask the pertinent questions to
ferret out the truth and intent.
CPA's- CPA's do not have training in securities, insurance or investing as
part of the course work required for the CPA license. Further, I have written
and taught courses accepted for CPA continuing education to CPA's and personally
find they do not have any significant comprehension of securities application.
There are some CPA who have acquired the APFS designation may/will have a
much greater depth of knowledge in regards to planning issues- though not
necessarily significant review of securities and investing since they may
be neither licensed nor registered.
Expert Witnesses- Most witnesses to date have been individuals who have acted in the supervisor's capacity at various brokerage firms. Their background may consist of only a securities license acquired many years ago. Absent some continuing education in the area of security application, statistics, planning, etc., their background is relatively shallow. Admittedly however, they may be extremely well versed in procedural areas in B/D firms and can provide significant insight to review procedures conducted by a firm. But I caution arbitrators not to imply too much knowledge in securities APPLICATION since, if it isn't taught at initial licensing nor acquired later on in specific courses or designations, where is it?
Industry Arbitrators- The same limitations noted above also exist with securities
arbitrators. Most securities representatives work in a limited field and,
absent continuing education, may not have that much insight into other areas
nor might remember much of the licensing training. Further, in conversation
with other arbitrators, some have sided with the industry, since, due to
their limited knowledge, they may feel..."there but for the grace of God
go I." However I also acknowledge that there are securities arbitrators who,
because of their high ethical commitment to their work. are not adverse to
reaching a conclusion adverse to the industry.
Non Industry Arbitrators- Public arbitrators bring a varied range of experience and background to the arbitrations. However, it is rather apparent in the interviews of these arbitrators that few really understand the major issues of securities application. That can be determined by simply asking any member what diversification actually means (by the numbers). If that is not fully comprehended, then their level of expertise in understanding the true issues that need be considered (not just those presented).
Additionally, I think it is necessary to explain the purpose of what the
arbitrators are actually there to do. It is not an opportunity to simply
be active after retirement.
To make these points most evident, I worked an arbitration with a law professor
and an ex judge as chairperson. The plaintiffs attorney was second rate since
he had missed not only the unsuitability of an investment, but the illegality.
Neither other arbitrator noted the problem, but I made a specific issue in
addressing this issue during the arbitration and demanded to know how this
sale could have ever happened. Since the award could not properly address
the illegal action, I requested that the matter be turned over to the DBCC
for further action- at least censure. Upon hearing that, the ex judge turned
and said "so what's the big deal? This happens all the time". In the subsequent
weeks, I had to make further request to the NASD and demand that the issue
go to a higher authority- all the while while being stonewalled by an arbitrator
who should know better.
Arbitrators have a responsibility to follow through. His actions were unconscionable and unethical in regards to his responsibility to the process, industry and public. Though I did make reference to this in my review, he is still actively doing arbitrations.
SUMMARY: Arbitrators need to recognize that most licenses convey little understanding of investing fundamentals and securities APPLICATION. Additionally, attorneys tend to be limited in the knowledge as well. And since the exchanges refuse to provide such background to arbitrators, it is my contention that all the players are limited in their ability to adequately address suitability (the major crux of investing) and many other securities issues.