In formal comments submitted on September 25 to the CFP Board of Standards, Financial Planning Association President Daniel Moisand said that proposed changes to the CFP Code of Ethics and Professional Responsibility will “weaken, not strengthen,” consumer protections for the 51,000 certificants who hold the most widely recognized financial planner designation in the U.S.
Moisand detailed the concerns of the FPA in an 8-page comment letter to the CFP Board, Denver, Colo., which is preparing to adopt new standards after 3 years of internal review. Absent a recommendation for further revisions, the CFP Board is expected to issue a final ruling on the proposed changes during its October 24 meeting.
“The changes have the potential to adversely affect an estimated 5 million clients of CFP certificants in the U.S. and potentially millions of future clients,” Moisand said in a statement accompanying the comment letter. “Protecting the public should be of utmost concern.”
The FPA’s unease with the proposed ethics changes include the manner in which the changes were developed, which Moisand said lacked transparency. He observed that the board prepared the revisions behind closed doors without “the benefit of broad stakeholder or public input.” He called for the entire proposal to be withdrawn pending further discussion with consumers and stakeholders.
The CFP Board was unprepared at press time to comment on Moisand’s letter, according to a CFP Board spokesperson. Moisand was also unavailable to elaborate on the letter, which he addressed to CFP Board of Standards Chair Barton Francis.
Chief among the FPA’s objections to the proposed Code revisions was Rule 1.1 of the Rules of Conduct, which would require a CFP certificant to indicate in writing what legal standard will govern the agreement between the certificant and the client. If no legal standard is designated, the default standard is that of a fiduciary. In his letter, Moisand contends the proposed rule would result in “greatly varying standards of conduct for CFP certificants,” rather than a strengthening of standards that the Board seeks, and thus placing the rule in conflict with the CFP Board’s mission.
Absent a fiduciary standard of care, Rule 1.1 would require the client to “read the fine print” of an engagement letter to determine whether the certificant must place the client’s interest first–a point on which, the Moisand said, “there should be no equivocation in ethical parlance.”
Moisand asserted that elimination of Rule 202 of the current Code of Ethics, which requires that practitioners “act in the interest of the client,” aims to minimize the impact on CFP certificants–life insurance agents, registered representatives, registered investment advisors and broker-dealers–who otherwise don’t have to designate a lower standard of care because a fiduciary disclaimer is already incorporated into their customer account forms.
Moisand added in his letter that he has “serious concerns” about the apparent effort to revise the Code of Ethics to comport with an SEC staff interpretation (staff letter) from December 2005 relating to the so-called “broker-dealer rule.” As communicated in a previous letter, the FPA believes the staff letter “has seriously diminished previously existing investor protections and undermined the value of financial planning.” The revisions purportedly do so by allowing registered reps to hold themselves out as CFP certificants without being required to register as investment advisors, so long as they do not provide financial planning services.
Moisand further objected in his letter to the proposed elimination of Rule 402, which requires certificants in a financial planning engagement to disclose “all material information relative to the professional relationship,” such as conflicts of interest and sources of compensation. Moisand described as “vague” proposed rules that call for a written description of compensation arrangements as required by regulatory rules governing the engagement. He additionally questioned new rules that require certificants to discuss terms for offering proprietary investment products, but do not mandate written disclosure of such terms or the potential conflicts of interest in receiving higher rates of remuneration based on the sale of proprietary products.
Moisand recommended that the CFP Board implement a “more concise standard” mandating written disclosure of all material information relative to sources of compensation, conflicts of interest and proprietary product offerings. He additionally encouraged the Board to reinsert into its Rules of Conduct (currently omitted from the proposed revisions) a requirement that certificants notify the Board of any activities that could affect their right to maintain their certification or to disclose “material” disciplinary actions to clients (e.g., censure by a regulatory body or suspension of an insurance license).
While not opposed to a requirement in the proposed Rule 1.1 that a certificant and client enter into a binding written agreement governing the services to be provided, the FPA is “concerned” about the effect of the rule on pro bono client engagements. Because such services are rendered without compensation and are not always included in written agreements, the association fears that pro bono clients may not enjoy the same protections under the Code as do paying clients.
Moisand concluded his letter by calling on the CFP Board to maintain the Practice Standards, now removed from the proposed revisions. He specifically questioned the ostensible reasons for their removal: first to eliminate redundant and conflicting language in the current Code and Standards; and second to improve enforceability of the Code to preclude certificants from claiming they are not engaged in financial planning, and thus exempt from review in the event of an ethics complaint.
While lauding these goals, Moisand wrote the FPA is “not convinced that the removal of the Practice Standards is required to achieve the desired clarifications. The problem can be solved,” he added, “by revising the definition of a financial planning engagement in clarifying the application of the Standards to the work of a certificant.”
Moisand’s comments are the culmination of a process that began on July 24, when the CFP Board released Exposure Draft Revisions to each of 2 sections of the Standards of Professional Conduct: the Code of Ethics and Professional Responsibility; and the Financial Planning Practice Standards. The Code contains principals and rules that govern CFP certificants. The Practice Standards supplement the Code’s provisions, establishing a level of professional practice expected of certificants engaged in financial planning.
The Exposure Draft revises the Code and replaces the Practice Standards with Rules of Conduct. “Activity-specific” portions of the Practice Standards, as now envisioned, will be incorporated at a later date into a series of “Best Practices” or guidelines.
The FPA’s release of its comprehensive response to the Exposure Draft on Sept. 25 coincided with the end of the CFP’s Board’s public comment period. The FPA’s Professional Issues Committee, a volunteer group of experienced planners, spearheaded analysis of the draft for the association.