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January 14, 2000(Date)
March 31, 2000
Re: Gramm-Leach-Bliley Act Privacy rule, 16 CFR Part 313 Comment
The Financial Planning Association ("FPA") is pleased to provide comment on a proposal that will have significant long-term implications on the way business is conducted in the financial services industry. With respect to the proposed Rule, FPA appreciates the efforts of the Federal Trade Commission ("FTC") to coordinate its comments with other federal and state regulatory authorities. Many of FPAs 29,300 members are affiliated with investment advisers regulated under the Investment Advisers Act of 1940 (the " Advisers Act") and/or with broker-dealers under NASD Regulation, Inc. Many of these same members are also affiliated with state-registered investment advisers and therefore have an equal interest in the privacy rule promulgated by the Securities and Exchange Commission ("SEC"). FPA therefore greatly appreciates the consistency built into the coordinated rulemaking process and flexibility provided for complying with similar privacy rules of different agencies.
Given the rapid consolidation of services and products offered to consumers within the broader financial services industry, FPA is supportive of the privacy protections established by the Gramm-Leach-Bliley Act ("GLB Act"). Because of the highly sensitive nature of the personal information collected as part of the financial planning process, professional organizations like FPA have for many years voluntarily mandated strict confidentiality with respect to client information. Although a new organization, FPA has continued the strict ethical standards established by its predecessors in establishing a specific confidentiality requirement for its members. Further, the majority of FPA members are CFP licensees and subject to a nearly identical set of ethical and professional standards of conduct by the CFP Board of Standards, Inc.
As registered investment advisers or affiliates, most FPA members have a longstanding fiduciary relationship with their clients. Much of what the Rule proposes has already been incorporated into the compliance and contractual agreements of our members. As stated earlier, most financial planners are regulated under the federal or state securities laws as investment advisers. Many are also licensed as insurance agents under state laws. However, the comprehensive nature of advisory services that they provide to their clients frequently falls outside of these aforementioned regulatory jurisdictions. These advisory activities include educational planning, long-term elderly care, closely held small business planning, and estate planning. Overall, third parties with whom a financial planner may share confidential information include nonaffiliated broker-dealers, insurance companies, mutual fund complexes, attorneys, accountants, trustees, executors, and others.
FPA believes that it is critical that the FTC provide additional clarification or examples for these areas where federal agencies have not provided examples relevant to financial planners. In particular, examples are needed for estate planning and other activities involving disclosure of nonpublic personal financial information to third parties that may be excepted from the disclosure and opt out requirements of sections 313.10 and 313.11.
Because of the obvious overlap in financial service activities of financial planners under the proposed FTC and SEC privacy rules, we strongly urge both agencies to coordinate closely the rulemaking process with respect to financial planning activities commented upon herein.
Our comments follow in the order listed by the proposed Rule.
Section 313.3 Definitions.
(e)(1) Consumer. Although we believe that most clients of financial planners are likely to meet the FTCs definition of "consumer," we request clarification of how to determine whether an individual is a "consumer" if a business pays for the advisory service. In the FTC Release, a consumer is defined as "an individual who obtains or has obtained a financial product or service from you that is to be used primarily for personal, family, or household purposes, and that individuals legal representative."
In one example, a financial planner may be retained by the corporate client to meet with individual employees, gather personal financial data, and provide financial advice to the client on his or her personal financial goals. In these situations the nonpublic personal information collected by the financial planner is not shared with the employer, e.g. the client information is treated confidentially in the same manner as if the person were an individual client of the planner, even though the services are paid by the employer. Clarification or an example is requested to confirm our impression that the employee, and not the employer, is the consumer.
In a second example, the financial planner may have a client engagement in which the owner of a small business seeks advice on financial issues related to managing his or her small business. The business also happens to be the principal asset of the individual. If the client does not request advice with respect to his or her personal, family or household finances, but only in connection with the business itself, would the small business owner be considered a consumer? Using the same example, if the business owner were a sole proprietor, would he or she be a consumer because the personal assets may be intertwined with the business?
Section 313.5 Annual notice to customers required.
(c)(1) Termination of customer relationship. Paragraph (c)(1) voids the annual notice requirement once a customer relationship has ended. The Release provides a clear example, in our opinion, that illustrates the termination of a customer relationship in which a termination date has not been specified in the client agreement. Paragraph (c)(2)(iii) states: "For other types of relationships, you have not communicated with the consumer about the relationship for a period of twelve consecutive months, other than to provide annual notices of privacy policies and practices." The SEC does not provide a similar example in its corresponding provision, Section 248.5(c)(2). We strongly encourage the FTC to work with the SEC to incorporate this same example. In many financial planning engagements the planner does not provide ongoing portfolio management services or is not on a retainer, so there is no clear end to the relationship. The planner will likely recommend an annual review to determine if the clients financial plan is being implemented consistent with the recommendations. However, if the client does not respond, and if the client agreement does not specify any future obligation of the planner to monitor the financial plan, then the example set forth above serves as a "bright line" indicator that the relationship no longer exists.
Section 313.7 Limitation on disclosure of nonpublic personal information about consumers to nonaffiliated third parties.
(a)(1) Conditions for disclosure. Comment was requested in the SEC Release to this corresponding section concerning opt outs by multiple beneficiaries of a trust in which the account is managed by an investment adviser. Because the majority of individual investment advisers fall under state authority, FPA believes it would be helpful for the FTC to provide the same example and consistent interpretation to this scenario for advisers regulated on the state level. Financial planners often serve as trustees or advisers to trusts with multiple beneficiaries. Providing individual opt outs would be cumbersome and costly for an investment adviser who, for example, acted as an investment management consultant to the trust and needed to discuss investments in the account with the portfolio manager. Similar to our comments to the SEC, we urge the FTC to treat the trust as the customer, and not the individuals within the trust.
Section 313.10 Exception to notice and opt out requirements for processing and servicing transactions.
FPA believes that the exceptions provided in this section will be heavily relied upon by financial planners who conduct routine business on behalf of the client. Such activities require the regular sharing of nonpublic personal information with nonaffiliated third parties. In many instances these nonaffiliated third parties may even be the same person. This somewhat unique situation is fairly common, though, in the financial planning profession when a financial planner maintains an investment adviser registration to conduct the financial planning business but also is a registered representative of an independent broker-dealer. Either registration may be on the state or federal level. These exceptions for not disclosing information that is already routinely shared with the broker-dealer to meet the customer suitability requirements under NASD rules are critical for the financial adviser to perform different services efficiently and in a cost-effective manner on behalf of the client.
The comments listed below request clarification on this issue.
(a)(1) Effecting a transaction by the consumer. Paragraph (a) specifies that a transaction must be authorized or requested by the consumer to qualify for an exception from the notice and opt out requirements. Many financial planners maintain discretionary authority on behalf of clients to rebalance portfolios, execute related transactions, etc. FPA believes that a power of attorney permitting the investment adviser to execute multiple transactions on behalf of the client should satisfy that requirement. We believe that an example illustrating such a scenario would provide considerable clarification, or that such activity should be excepted under (b)(2)(iii) or Section 313.11(1).
Section 313.11 Other exceptions to notice and opt out requirements.
(a)(1) Consumer consent to exception from notice and opt out requirements. As mentioned previously, FPA believes that the FTC should to determine whether discretionary authority is considered to be a part of section 248.10, where the Release characterizes such activity as "the administration, processing, servicing, or sale of a consumers account," or whether it is a part of Section 313.11. If discretionary activity is considered to be a part of the latter section, then the investment adviser or broker-dealer would be required to secure consent of the specific release of information in lieu of providing initial disclosure or an opt out notice. Further, we strongly urge the FTC to make its interpretation consistent with any interpretation set forth by the SEC for the corresponding sections.
Other exceptions to notice and opt out requirements.
There are numerous other financial planner activities with respect to the sharing of nonpublic personal information with third parties that are not addressed in the Release. Many of these financial planning activities are very routine and involve the clear, but often informal, consent of the customer. Nearly all of these activities appear to fall under the broad definition of "activities that are financial in nature," as defined under the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)) that the Rule relies upon in defining a financial institution.
A typical example that requires further guidance as to whether the activity fits within the exceptions for notice and opt out requirements is when a financial planner reviews a clients estate and tax planning needs and determines consultation is needed with the clients attorney and/or accountant. In most cases, financial planners do not work in full-service firms that provide in-house legal and accounting services. As the team quarterback in advising the client during the development of the financial plan, the financial planner may be required to consult with any number of outside specialists.
FPA believes that there are at least two alternative solutions to this problem. One would be for the FTC to clarify in Section 313.11(a)(1), through examples or otherwise, that "consent" or "at the direction of the consumer" means oral consent or direction.
The other, more preferable alternative, is to exercise the FTCs authority under Section 504(b) of the GLB Act to add an exception to the notice and opt out requirements for the disclosure of nonpublic personal information to a bona fide agent of a client, including an accountant and a financial planner, acting on behalf of a client.
We believe that this sharing of personal information with other financial professionals, including attorneys, trustees, guardians, executors of a consumer estate, all of whom have a fiduciary obligation to the client, has always been part of a very traditional way of providing financial services to a client. Such activities should be specifically excepted under Section 313.11(a)(2)(v) where the phrase "acting in a representative capacity" could be broadly interpreted to include such agents listed above. The sharing of such information is quite apparent to the client and probably was not an issue considered by Congress in its review of the privacy issue during passage of the GLB Act, which focused primarily on large institutional sharing of confidential information.
We would be pleased to respond to any questions in connection with these comments. Please do not hesitate to contact the undersigned at 202.626.8770.
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