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CFP Board’s Mandatory Arb Plan: Significantly Better Than FINRA’s

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By now most CFPs and other advisors are aware that last week the CFP Board announced changes to its “Terms and Conditions of Certification” agreement with CFPs (see Melanie Waddell’s March 24 ThinkAdvisor story: CFP Board to Require Arbitration for CFP Holders).

As the article’s title suggests, interest in the Board’s changes have largely focused on a new provision for “mandatory arbitration” of claims by CFPs against the Board, including: “…those relating to disciplinary proceedings conducted pursuant to CFP Board’s Disciplinary Rules and Procedures and Appeal Rules and Procedures.” 

The fact that the Board hasn’t modified its “Terms and Conditions” in nearly eight years raises the question of “Why now?” particularly with FINRA’s mandatory arbitration program facing increasing criticism and scrutiny (see my February Investment Advisor column in sidebar below).

Waddell intimated the suspicious of many CFPs and other observers when she wrote: “The changes come as the CFP Board remains embroiled in a lengthy legal battle with [Jeff and Kim Camarda of] Camarda Wealth Advisory, over the firm violating CFP Board’s fee-only definition. The Camardas sued the CFP Board in federal court in 2013; they said they would appeal in August 2015, after a U.S. District Court for the District of Columbia judge dismissed their case.”

Waddell also quoted CFP Board general counsel Leo Rydzewski as stating that the changes to the Terms and Conditions (T&C) agreement would not apply to the Camarda case, which “will remain in the courts; an appeal is pending and it will remain in court.” However, industry observers have put the CFP Board’s costs to defend the Camarda suit in excess of $600,000 so far (see Michael Kitces’ Is the CFP Board’s New Mandatory Arbitration Requirement Really Fair?), and as Mr. Rydzewski pointed out, the Camardas case is not over yet.

So the Board certainly has a vested interest in avoiding additional, costly lawsuits down the road. And to be fair, it also has a responsibility to existing CFPs and the public to limit any repeats of Camarda-scale diversions of resources and staff time in the future. Yet the Board’s timing and use of “mandatory arbitration as the “solution” virtually cry out for comparisons to FINRA’s controversial arbitration program. And on that front, the CFP Board seems to have done its homework. 

To start with, according to its release, to resolve disciplinary disputes between it and CFPs that persist after allegations of misconduct have been reviewed by the CFP Board’s Counsel, its Disciplinary and Ethics Commission, and the Appeals Committee of its Board of Directors, the Board will use panels of three “independent arbitrators who each have more than 5 years experience as a judge,” provided by the American Arbitration Association, and chosen with “input from the CFP professional and the CFP Board.” That’s a big difference from FINRA arbitrators who are screened, trained and hand-picked by the securities industry SRO. Securities attorneys I have talked with over the years, including Brian Hamburger, of the Hamburger Law Firm and MarketCounsel LLC, have expressed a preference for the professionalism and fairness of AAA arbitrators.  

“The Board’s new mandatory arbitration clause will provide an independent review by AAA arbitrators of disciplinary decisions ordered by the CFP Board’s internal adjudicators,” wrote Sharron Ash, chief litigation counsel at MarketCounsel, in an email. “Perhaps most significant, this change appears to finally give [CFPs] access to outside independent review of the Board’s disciplinary findings before any potential public announcement. Prior to this change, once the Board concluded its own internal disciplinary proceedings, a press release could go out.”

Then, also in contrast to FINRA arbitration where each party covers its own legal costs, according to its March 24 release, under the CFP Board’s new arbitration procedure: “In the event that a CFP® professional prevails, CFP Board will pay for the full costs of the arbitration as well as up to $30,000 in attorney’s fees and costs. Otherwise, arbitration costs will be split between the parties, with each side paying its own attorney’s fees.”

Of course, these things are rarely perfect, and Sharron Ash does have one reservation about the Board’s arbitration process: “Still remaining, however, are those cases where clients of CFPs file a grievance with the CFP Board, but never actually file an action against the adviser,” she wrote. “The adviser can still be subject to public discipline, even exhausting this new level of appeal, [emphasis added] without the customer’s allegations [ever] having been decided… Perhaps these latest reforms lay the groundwork for future reforms there as well, to protect CFPs from public discipline stemming from unsubstantiated allegations.” 

Michael Kitces also has a reservation about the Board’s changes, specifically its modification of Section q (Limitation of Liability). “CFP Board’s arbitration requirement that keeps the outcome confidential (even if ruled against the CFP Board), coupled with a separate (and already existing) rule that limits any CFP Board liability to no more than $1,000 (plus legal fees),” Kitces writes, “effectively means the CFP Board has remarkably little accountability or transparency whatsoever in any dispute (or worse, a series of disputes) with CFP certificants.”

To my mind, transparency is an essential element for ascertaining the fairness in self-regulatory situations. While mandatory arbitration as described will most likely increase the fairness of CFP Board disciplinary disputes with CFPs—and will most certainly reduce the costs to both parties of resolving them—a lack of transparency (and “accountability”) can cast a shadow over them that will be hard to overcome. 

To its credit, FINRA does release figures for the number of its arbitration cases each year, along with the percentage of cases in which aggrieved investors were awarded “some monetary damages,” which provides a factual basis (if limited) to assess the fairness of its proceedings.

Hopefully, the CFP Board, despite its plans to keep the details of individual arbitration cases confidential, will also release collective outcome data, to provide a context to assess the fairness of its new system as well.

See these related arbitration articles:

The Mysterious Case of the Unpaid Arbitration Awards

FINRA Mulls Crackdown on Arb Award Deadbeats

Beyond Mandatory Arb: 4 Options for Advisor-Client Dispute Resolution