More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
(In Part I of this two-part blog series, I discussed the ins and outs of the CFP Board's proposed new rules regarding advisor bankruptcies. In Part II below, I present the arguments for and against the proposed rules.)
So what, specifically, are the arguments both for and against the bankruptcy rule change? And how can you most effectively voice your opinion?
Arguably, the CFP Board's existing policy regarding bankruptcy (that can result in public admonition, suspension or revocation of the mark) was also a matter of public protection, too. The unfortunate reality is that those under financial duress do represent an elevated risk of conducting other improprieties with clients, from inappropriate recommendations in an effort to earn a little more income to the outright misappropriation of client funds in some extreme situations.
From this perspective, the CFP Board's change arguably represents a step down in public protection, as public disclosure of questionable conduct (assuming the public even seeks to verify their financial planner's CFP certification on a regular basis, which is doubtful) is clearly a lesser standard than simply barring that individual from the marks in the first place.
On the other hand, barring individuals from CFP certification doesn't prevent them from still engaging clients in the financial services industry, and the reality is that neither FINRA nor the SEC bars an individual for bankruptcy, either.
I suspect some people will object to the CFP Board's proposed rules simply on the basis of the public disclosure itself. Is it "fair" that the CFP Board will announce an individual's prior financial difficulties for the world to see, for up to a decade after the event has happened, as the new rule proposes? Should it do so in a world where a bankruptcy can affect everything from your credit to your ability to get a job?
On the other hand, if a hiring firm presumably cared that much about an individual's prior bankruptcy, they could just ask anyway, or run a background or credit check, and find out the same answer. And the reality is that a prior bankruptcy must already be disclosed by FINRA registered representatives on their U-4, and by RIAs on their Form ADV Part II, so the new CFP Board disclosure doesn't necessary put forth information that wouldn't already have been public.
At the other extreme, though, I suspect a few will ask "Why 'just' bankruptcies?" If the CFP Board wants to be a central resource to disclose the improprieties of a CFP certificant, why doesn't the CFP Board post all such matters of concern on a certificant's public profile, such as SEC or FINRA regulatory filings as well?
In addition, if FINRA and the SEC, as bona fide regulators, already publicly announce bankruptcies, and already investigate improprieties like fraud, misrepresentation and misappropriation of funds, why does the CFP Board need to allocate additional resources to such investigations? Is the CFP Board really implying that they intend to engage in redundant investigations that overlap regulators? Does the CFP Board intend to become the primary investigator on sicj matters and actually report wrongdoing by its certificants to the regulators, instead of the other way around? Is this a step for the CFP Board towards beefing up its enforcement resources to become a future regulator of financial planners?
The plus side to the rules change, likely to be cheered by many financial planners who have faced bankruptcy or may in the near future, is that at least the individual can continue to use the CFP mark while attempting to rebuild their own personal financial situation.
Many I have spoken to privately in such situations have suggested that it is unduly cruel for someone who is already in the midst of financial difficulties to also lose their CFP marks, making it even more difficult to recover (even though, again, the CFP marks are still "just" a certification at this point, and losing them does not prevent an individual from continuing to operate a financial services practice). In addition, some planners actually came to the planning profession due to a bankruptcy itself...and in righting their own financial ship chose to help others as well. Perhaps in the future the CFP Board should make a distinction between those who had a bankruptcy before obtaining the marks, versus those who went through a bankruptcy after already obtaining their marks holding themselves out to the public?
At this point, the CFP Board's proposal is just that...a proposal. In its ongoing effort to improve transparency and connection with its stakeholders, the CFP Board has put the new rules out for public comment, so now's your chance to respond if you wish.
So what do you think? Is the CFP Board lessening the fitness standards of the CFP marks by allowing those with a personal bankruptcy to continue holding themselves out to the public and on behalf of the profession as a CFP certificant? Does the public deserve to know about the prior bankruptcy of a financial planner through public disclosure? Is disclosure on the CFP Board's website an effective means to protect the public? Do you think your fellow financial planners who went through a personal bankruptcy should lose their marks so they will not be "representing" CFP certificants or the profession at large? Does it matter whether the bankruptcy occurred before or after they got their CFP marks?
And will you be submitting a comment to the CFP Board (comment deadline Feb. 17th)?