More On Legal & Compliancefrom The Advisor's Professional Library
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- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
While the number of certified financial planners (CFPs) misrepresenting themselves or the features of products they sell tops the list of disciplinary trends tracked by the CFP Board, bankruptcies among CFPs is the fastest growing category of misconduct, catching up quickly with misrepresentations.
Michael Shaw, managing director for professional standards and legal at CFP Board, gleaned that information from a review of the CFP Board’s disciplinary trends from 2008 to 2011. According to the CFP data, while there have been 30 public sanctions involving misrepresentations since 2008, with suspensions arising from those cases also experiencing an uptick, denying and revoking use of the CFP mark among certificants is down somewhat.
Common examples of “misrepresentation” include a CFP failing to accurately represent product features, suggesting experience or expertise in related areas they don’t actually have, and not coming clean with their firm or with a regulator when faced with investigatory questions.
The number of CFP certificants currently stands at 62,000, but Shaw says that number is increasing by 1,000 per year. All CFPs must adhere to the CFP Board’s Standards of Professional Conduct, which includes the Code of Ethics and Professional Responsibility, Rules of Conduct and Financial Planning Practice Standards.
“We are seeing an increase in the number of investigations we open each year,” says Shaw, referencing all disciplinary activity over the past few years. “The economy has something to do with it. When clients lose money, they complain,” he says. “Some [complaints] are legitimate, some are not.” The CFP Board “opened 1,500 investigations in 2010. The vast majority of those we closed; there’s no probable cause to support a rule violation. We dismissed 1,200 with no probable cause to support a rule violation, [and of the 300 left] 103 went to hearing.”
Shaw and Edward Mora, chairman of CFP Board’s Disciplinary and Ethics Commission, held a webinar recently in which they discussed bankruptcy situations and mitigating factors that might cause the CFP Board to step back from pursuing a disciplinary measure.
Two or more bankruptcies, they noted, are grounds for revocation or denial of certification, while medical bankruptcies are perceived more mildly than those bankruptcies arising from speculative real estate deals and other poor financial management situations.
Another mitigating factor in taking disciplinary action would be attempts to pay creditors through Chapter 13 bankruptcies.
Bankruptcies referenced include personal and firm bankruptcies due to investments, poor financial management, medical bills and even divorce.
Failure to disclose vital information to clients such as compensation model, conflicts of interest, and “anything that is material that the client should know before make a decision,” is another trend among misconduct cases that the CFP Board has opened, Shaw says. There have been 22 public sanctions since 2008 involving a failure to disclose.
Indeed, the more severe measures of suspensions, denial, revocations and barring CFPs from using the CFP mark in the misconduct category of disclosures have also risen, according to CFP Board statistics.
CFP Board also scored a victory recently in its efforts to protect consumers by receiving a no-action letter from the SEC, which gives CFP Board the right to see CFPs’ and CFP applicants’ disciplinary histories. Since the Reg S-P no-action letter was issued in March, Shaw says there has already been evidence of firms sending in background information. “We have one investigation under way,” he notes, “where, when the firm became aware of Reg S-P, it sent us additional documents, which were very helpful.”
Shaw expects it will take CFP Board months to educate compliance attorneys at RIAs and small firms on the change allowed under Reg S-P.