More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The financial planning community was stunned recently by the unexpected announcement that Alan Goldfarb, chairman of the Board of Directors for the CFP Board, along with two unnamed members of the CFP Board's Disciplinary and Ethics Commission (DEC), had resigned amidst allegations that they had violated CFP Board's Standards of Professional Conduct.
Critics of the CFP Board were quick to step forward and use the announcement as a moment of weakness and an opportunity to bash the organization. Nonetheless, it's still notable in a sign of strength that the CFP Board does have an enforcement process, and isn't afraid to use it—even to the point of ousting its own board chair and some DEC members.
In the long run, though, whether this proves to be a sign of strength or weakness for the CFP Board depends upon the transparency it uses in resolving the matter. While light on the details right now—it is, after all, an ongoing investigation—the real question is how much the CFP Board ultimately discloses about what the allegations were, the process of the investigation, the outcomes of that process, and how the matter was adjudicated, along with whatever steps it intends to take to ensure the problems, whatever they were, don't happen again. We can't ask for or expect any answers yet, but we can ask for and expect a commitment, now, for transparency at the end of the process to maintain the integrity of the organization.
The Facts as We Know Them
The press release issued by the CFP Board itself contains most of the details that are known at this point.
The CFP Board became aware of "broad" allegations that members of the Board of Directors and other volunteers may have violated provisions of the CFP Board's Standards of Professional Conduct. Given that the chair of the Board of Directors was involved in the allegations, the Board created a special committee compromised from their public/independent board members (i.e., those who have no internal ties to the financial services industry) to look into the matter. The special committee in turn retained outside counsel to investigate the allegations and report the findings directly back to the committee.
The conclusions of the investigation and the special committee was that there was "sufficient merit in the allegations against Mr. Goldfarb and the two members of the DEC to refer them for further proceedings under CFP Board's Disciplinary Rules and Procedures." When Goldfarb and the others were made aware of the committee results, they resigned from their positions (Goldfarb's Oct. 30 resignation letter is publicly available).
On Oct. 31, the Board of Directors held a special meeting to elect new leadership, and 2012 Chair-elect Nancy Kistner was chosen to fill the remainder of Goldfarb's term, in addition to filling her own previously-elected term as Chair through 2013. On November 2nd, the CFP Board issued the aforementioned public press release announcing the incident and the changes.
Still Lacking in Key Details
Unfortunately, though, little information has been released regarding many of the key details of the allegations themselves.
In an interview and e-mail correspondence between Goldfarb and Financial Planning magazine after the CFP Board announcement was made, Goldfarb stated "I can’t discuss much, since the process is confidential, but I can say that the alleged violation concerns representing my compensation as 'salary,’ which it is, as opposed to 'fee and commission,’ since I am also the principal of an [affiliated] M&A-based broker-dealer [Weaver Tidwell Capital LLC].” However, CFP Board CEO Kevin Keller responded to Financial Planning magazine in the same article "Alan Goldfarb’s description of the alleged violation that is being referred for further proceedings under our disciplinary rules and procedures is not correct," yet provided no further elaboration about what the allegations actually are.
In addition, no detail was provided in the CFP Board's announcements regarding the allegations against the two DEC members, nor even whether the allegations between the DEC members and Goldfarb are related (although it seems difficult to imagine they're purely coincidental). However, in a follow-up inquiry regarding this matter to the CFP Board, Keller did state regarding both Goldfarb and the DEC members that "the allegations related only to possible violations of the Standards of Professional Conduct and not their service on either the Board of Directors or the Disciplinary and Ethics Commission.”
Unfortunately, little further information beyond this is likely to be forthcoming soon. The CFP Board has indicated that they will not provide any substantive details regarding an ongoing investigation, which means at best there will be no further public resolution to the matter until the next meeting of the Disciplinary and Ethics Commission where the matter can be reviewed and adjudicated in/around March of 2013.
Furthermore, the CFP Board does not generally disclose disciplinary matters even after they are resolved, unless they actually result in a public disciplinary outcome like a suspension or revocation of the CFP marks, or a public letter of admonition; if the incident ultimately results in a private censure, or a finding of innocence, there would typically be no public discussion of the matter at all. Under the CFP Board's Sanction Guidelines, whether the incident at hand would lead to a public sanction depends on the nature of allegations; unfortunately, though, not knowing the allegations, there's little way to know whether the outcomes are likely to ever be made public.
In part two of the post we'll specifically discuss whether all of this helps or hurts the CFP board, and what's next from here.