A Primer On CFP Board's Ethical Standards and Enforcement Process

By James Eccleston

ecently I had the pleasure of participating in a panel discussion before an audience of financial planners to address customer complaint issues. One of my co-panelists, Michael P. Shaw, CFP Board's Managing Director of Professional Review and Legal, discussed CFP Board's ethical standards and enforcement process. That is a topic that should be of great interest not only to financial planners but also to investors who benefit from the work of CFP Board. Let's examine why.

Preliminarily, CFP Board certifies and sets ethical standards for approximately 60,000 individuals who hold the CFP® certification. The CFP® certification stands for Certified Financial Planner™, and approximately 70% of all CFP® professionals identify themselves as practicing financial planners. Among other functions, CFP Board ensures that CFP® professionals "meet high standards of ethics and professionalism." When a CFP® professional fails to meet those standards, sanctions may result. "CFP Board has developed a stringent body of principles and rules that apply to all CFP® professionals. Included in these rules is a requirement that CFP® professionals abide by a fiduciary standard of care when providing financial planning services to clients. The fiduciary standard has led the CFP® certification to be considered the gold standard of the financial planning profession" said Mr. Shaw.

In terms of ethical standards, CFP® professionals must comply with Rule 1.4 (effective as of July, 2008), which provides in material part that the CFP® professional "owes to the client the duty of care of a fiduciary." The term "fiduciary" is defined as: "one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client." Acting in the client's best interest requires the CFP® professional "to understand the individual client's goals, needs and current financial situation, to make recommendations based on the best available options, and to exercise professional judgment in determining the best of those options." In recommending the best possible option available, CFP® professionals are expected to disclose any limitations placed upon them "within the business and regulatory setting in which they practice." Likewise, Rule 2.2 requires written disclosure about compensation that the CFP® professional will receive as part of the financial planning process as well as any conflicts of interest that may exist.

The enforcement process is triggered either by a customer complaint or by a CFP® professional's self-disclosure. CFP® professionals must disclose to CFP Board instances where they are a defendant or respondent in a criminal proceeding, in a governmental agency or self-regulatory organization proceeding, or in a civil action (which includes a mediation or arbitration) related to their professional or business conduct. Additionally, CFP® professionals must disclose instances where they simply are the "subject of a governmental agency or self-regulatory organization inquiry or investigation."

After the customer complaint or self-disclosure, CFP Board assigns the case file to a compliance analyst. That person will issue a Notice of Investigation, to which the CFP certificant must respond within 30 days (failure to file a response may result in the case file being referred to a hearing panel). The compliance analyst and CFP Board staff counsel then will analyze that response as well as the documents that are received. There are three possible outcomes at this stage. They are, first, that the case is dismissed due to a lack of evidence. Alternatively, it could be decided that further investigation is needed. This results, for example, when securities regulators (such as the SEC or state securities officials) or self-regulatory organizations (such as FINRA) also are involved and the CFP Board opts to delay any enforcement action. Finally, a completed investigation may be moved to PCD Review.

PCD Review stands for "probable cause determination." At this stage, CFP Board staff counsel determine whether: 1) to dismiss the allegations as being without merit; 2) to dismiss the allegations with a letter or caution recommending remedial action and entering other appropriate orders; or 3) to begin preparation and processing of a complaint against the CFP® professional.

Should CFP Board staff counsel issue a complaint, the CFP® professional must answer within 20 days, and must submit documents to CFP Board no later than 30 days prior to the scheduled hearing. Failure to answer the complaint will be deemed a default, with all of the allegations set forth in the complaint deemed admitted, and the CFP® professional will have his or her CFP® certification revoked.

Like other proceedings, CFP® professionals have the right to discovery. Specifically, they may obtain copies of all documents in CFP Board's disciplinary file which are not privileged and which are relevant.

At least 30 days before the scheduled hearing, CFP® professionals must identify any witnesses whom they intend to call. At the hearing, the CFP® professional may present evidence and cross-examine witnesses. On the other hand, CFP® professionals also may choose to waive attendance at the hearing. CFP® professionals cannot be required to testify or to produce documents over objection if to do so would violate the CFP® professional's constitutional privilege against self-incrimination in a court of law.

After the hearing, the hearing panel will issue its findings of fact and recommendations to CFP Board's Disciplinary and Ethics Commission ("Commission"), which accepts ("ratifies"), rejects or modifies the proposed findings of fact and recommendations. Prior to the hearing, the CFP® professional can make an offer of settlement. The hearing panel in turn can make a counter settlement offer. All settlement agreements are ratified by the Commission. When the Commission issues its order, the CFP® professional can appeal that order. However, he or she must do so by filing a notice of appeal within 30 days of the order; otherwise the order is final. Discipline can include CFP® certification revocation, suspension, public letter of admonition and/or private censure.

As one can see, CFP Board's ethical standards and enforcement process ensures a considerable measure of investor protection, as well as due process for the CFP® professional.

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About the Author:
James J. Eccleston is the president of Eccleston Law Offices, P.C. The Chicago-based firm represents investors and advisers nationwide in securities and employment matters. 312-332-0000 www.EcclestonLaw.com.