More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
As the difficult economic environment continues, bankruptcy filings in the United States are occurring at an elevated rate. And it appears that financial planners are having their share of bankruptcies as well, requiring the CFP Board via their disciplinary process to adjudicate whether a CFP certificant should receive a public letter of admonition or have his mark suspended or revoked.
With a rising number of financial planner bankruptcies putting pressure on their disciplinary resources, the CFP Board has proposed a change to how it treats such bankruptcy situations. The upshot: a bankruptcy by a financial planner will no longer bar him or her from getting or keeping the CFP marks. However, going forward, any bankruptcy by a financial planner will be publicly disclosed for the following 10 years on the CFP Board's website.
The inspiration for today's blog post, my first (but not last) for AdvisorOne, was a recent announcement that came out from the CFP Board, proposing changes to the way the CFP Board addresses bankruptcy filing for CFP certificants and opening up a comment period for the community to respond.
To put it in context; in the past the CFP Board has required individuals to disclose whether they have had a personal or business bankruptcy in the past five years at the time of initial application for CFP certification. According to the Fitness Standards for Candidates and Registrants, an individual who has had a bankruptcy is presumed to be barred from becoming a CFP certificant unless the individual petitions the CFP Board's Disciplinary and Ethics Committee (DEC) for relief. If there are two or more bankruptcies, the individual would always be barred from certification.
In addition, existing CFP certificants are required to disclose any new or recent bankruptcies that may have occurred at the time the CFP certification is renewed; such a bankruptcy notification can similarly result in either a public letter of admonition, a suspension, or a revocation of the CFP certification at the discretion of the DEC after reviewing the facts and circumstances of the situation (and of course, lying to the CFP Board on a new or renewal application to conceal any bankruptcy history would itself be grounds for revocation of the marks, if discovered). The CFP Board's position on bankruptcy was established "to ensure that an individual's prior conduct would not reflect adversely upon the profession or the CFP certification marks."
So what's changing? Under the newly proposed rules, a financial planner's bankruptcy would no longer be a disciplinary event; it would not result in a potential suspension or revocation of the CFP marks, nor would it be a matter for consideration before the DEC. Instead, the CFP Board proposes a disclosure-oriented approach to the issue of financial planner bankruptcies, where the CFP Board would still require new and renewing CFP certificants to disclose any bankruptcies, which in turn would be disclosed to the public on the CFP Board's website through the “Find a CFP Professional” or “Verify an Individual's CFP Certification” features.
(However, if there were other improprieties tying in to the bankruptcy, the situation may be investigated; the proposed rule changes are for "bankruptcy-only" situations, and only if there has been one single bankruptcy incidence. On the other hand, a single bankruptcy would now only be treated as a mitigating or aggravating circumstance as it pertains to other rule violations, not a matter for discipline itself.)
The notification of a financial planner's bankruptcy would remain in his CFP Board public record for 10 years from the date of notification. If or when the CFP Board becomes aware of a bankruptcy, the CFP certificant would have 30 days to dispute the placement of the bankruptcy public disclosure (e.g., if the financial planner had not actually filed for bankruptcy and/or the bankruptcy had been dismissed). Those who have previously had their CFP mark suspended or revoked due to bankruptcy could request under the proposed rules to have their prior discipline retracted and instead submit themselves to the new public disclosure process.
So what does all this mean? On the one hand, in the CFP Board's own words, it means more disciplinary resources available to focus on other (arguably more concerning) matters, such as allegations of fraud, misrepresentation, or misappropriation of funds. At the same time, the public can become aware of financial planners that have a troubled financial past of their own through the new public disclosure process, information that was never previously available through the CFP Board's resources to the public.
On the other hand, if one accepts the CFP Board's long-standing principle that an individual with a history of bankruptcy may reflect adversely upon the profession or the CFP marks in particular, this new path appears to be directly contrary to their prior goal. Ironically, now the CFP Board will not only allow those with recent/current bankruptcies to become/remain CFP certificants and hold themselves out as financial planners to the public, but the CFP Board will make sure the public knows that there are many financial planners who failed to manage their own financial affairs through the public disclosure requirement!
And given the explosion of discussion around financial planner Carl Richard's story in last year's New York Times regarding losing his home to a short sale, the financial planning community clearly has some strong feelings about maintaining a credible public image.