More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
On Monday, the CFP Board announced that it has retracted its prior disciplinary actions against seven CFPs, whose only ethical violations were filing for bankruptcy, along with the names of 112 other CFPs who have filed for bankruptcy within the past five years. These retractions and disclosures where made pursuant to new rules adopted by the Board last April, which took effect on July 1.
Under these new rules, the Board “will no longer investigate, and the Disciplinary and Ethics Commission will no longer adjudicate, bankruptcy-only cases … The new rules also provided any CFP® professional who, as a result of having a bankruptcy-only case, received a public discipline from CFP Board, with the option of applying the bankruptcy disclosure procedure retroactively.” For the record, those “public disciplines” included the suspension or revocation of the CFP mark and a public letter of admonition.
The bankruptcy of a Certified Financial Planner is one of the thorniest issues faced by the CFP Board. On the one hand, it’s a public relations nightmare: at a bare minimum, financial planning is supposed to keep people out of bankruptcy court, and financial planners who fail to keep their own financial houses in order are easy targets for today’s “sound-bite” media.
I suspect those earlier, now seemingly harsh “public disciplines” were written at least in part, with an eye toward the damage this kind of media exposure could have done to the credibility of the fledgling planning profession.
On the other side of the coin, of course, is the fair treatment of CFPs who have filed for bankruptcy. As we all know, personal finance can be a complex affair, and bankruptcy is no exception: sometimes, it’s the unavoidable consequence of circumstances beyond one’s control, or, as can be in the case in reorganization under Chapter 11, the financially responsible thing to do. For instance, I know of two financial planners who had most of their clients literally stolen by their partner (with the help of the firm’s BD), and their local reputations severely damaged by ultimately baseless accusations.
To keep their doors open so they could continue to serve their clients and pay their creditors, they had no choice but to file for bankruptcy protection. It worked: they got back on their feet, paid back everyone 100 cents on the dollar, and built up a successful practice. Which raises the issue of piling on: By revoking planners’ CFP designations, and public admonishing them for their bankruptcy, I have to believe that the Board often did more harm than good—both to the planners involved, and to their clients—by making it that much harder to recover from the events that created the need to file bankruptcy in the first place.
On balance, it seems that with its new rules, the CFP Board has done exactly the right thing: taken itself out of the business of “judging” bankruptcy filings, and leaving those judgments up to the clients, through disclosure. That way, if a bankruptcy is a disqualifying screen for a prospective client, they can do what they think is best, or others could give the advisor in question the opportunity to explain the circumstances, and can then decide whether it’s material.
I certainly understand the concern that financial problems can put pressures on an advisor to act more in their own interest than the clients’. But I also suspect that having gone through a nightmare like a bankruptcy will make some financial planners better advisors. I remember my father, after dealing with the treatments for what eventually became terminal cancer, telling me how he would have been a far better doctor for the experience. Bankruptcy seems to be one the circumstances where full disclosure will enable the clients to make the best decision for themselves.