Another Cop on the Beat? CFP Board Signals Increased Enforcement Focus

Financial advisors have long used the Certified Financial Planner designation as an indicator to potential clients that they meet high standards of professionalism and ethics within their field. The Certified Financial Planner Board of Standards, Inc. (the “CFP Board”), which grants the designation, markets it as demonstrating that its holder meets strict ethical standards. Yet last year the CFP Board came under heavy criticism when investigative reporting showed a not insignificant number of CFP holders failed to disclose potential ethical violations, which resulted in incomplete or inaccurate information on the CFP Board’s website. This criticism had a major impact: the CFP Board revised its ethics code, revamped its disciplinary procedures, and is now signaling an increased focus on enforcing its standards. As a result, financial advisors who previously did not face substantial scrutiny from the CFP Board may soon find themselves the focus of an enforcement regime eager to show its teeth.

Broker-dealers and registered investment advisers are principally regulated by the Financial Industry Regulatory Authority (“FINRA”), the Securities and Exchange Commission (“SEC”), and the states. As part of this regulatory regime, broker-dealers and registered investment advisers are required to disclose to their regulators a wide variety of background information, such as criminal disclosures, customer complaints, and past bankruptcies, either through Form U4 (certain associated persons of broker-dealers) or Form ADV (investment advisers). In turn, this information is made available to the general public through BrokerCheck or the Investment Adviser Public Disclosure (“IAPD”) so that investors may learn about and evaluate potential financial advisors.[1]

The CFP Board, on the other hand, is not a regulator but rather a 501(c)(3) non-profit that describes itself as “set[ting] standards for financial planning.” Financial advisors who meet certain criteria and pass a written exam can earn the CFP accreditation, which they can in turn use to market themselves. Additionally, the CFP Board maintains a public list of “CFP Professionals,” whom it describes as “rigorously trained,” held to “strict ethical standards,” and “committed to working in your best interest.”

Established in 1985, the CFP Board has grown exponentially in recent years to more than 87,000 professionals in the U.S. currently holding the certification.[2] This represents almost a 50% increase over the number of certifications as of 2007.[3] It may come as no surprise that significant growth in an industry creates greater risk of potential disciplinary problems.

Yet despite marketing the “strict ethical standards” of the CFP certification, the CFP Board was the subject of a series of articles in the Wall Street Journal last year detailing the organization’s failure to ensure accurate disclosure of CFP Professionals’ disciplinary and financial disclosure information. The Wall Street Journal found that over 6,300 CFP-certified advisors were listed on the CFP Board’s website with “clean” backgrounds when in fact they had made disclosures—running the gamut from bankruptcies to possession of child pornography—on their U4s.[4] The CFP Board came under heavy criticism for its practice of allowing advisors to self-report potential violations required to be reported to the Board, without independently checking publicly available information to ensure that necessary disclosures were made.

In response to the Wall Street Journal’s reporting, the CFP Board formed a task force, headed by a former state securities regulator, to review its enforcement and disclosure procedures. The task force, in a thorough report issued in December of 2019, found that “the primary cause for the failings” reported by the Wall Street Journal “are systematic, long-standing, governance-level weaknesses.” Among other recommendations, the task force recommended a number of changes to its enforcement program, including among other things, the retention of “a seasoned Director of Enforcement who has prior supervisory enforcement experience with a financial services regulatory entity, reports to the CEO, [and] does not also serve as General Counsel…” and a significant increase in resources devoted to enforcement.[5]

Following release of the task force’s report, the Board of Directors of the CFP Board issued its “Preliminary Response to Task Force Report and Recommendations.”[6] In that response, the Board of Directors noted that the “CFP Board has conducted hundreds of investigations each year and, since its inception [in 1985], has issued more than 1,000 public sanctions for noncompliance with its Code and Standards.” The response also noted that it had already taken steps to revise its program so that it no longer relied on self-reporting to trigger an investigation and enhanced access to publically available disciplinary information. Finally, the response detailed the steps the Board planned to take to implement certain of the recommendations of the Task Force Report.

The CFP Board appears to have made significant strides in implementing the task force’s recommendations. First, the CFP Board issued a revised Code of Ethics and Standards of Conduct, which became effective June 30, 2020, the same date as the SEC’s Regulation Best Interest.[7] Notably, the CFP Board’s Code sets a higher standard for financial advisors associated with broker-dealers than Regulation Best Interest; unlike that widely watched rule, the CFP Board’s Code explicitly states that CFP professionals “must act as a fiduciary” for their clients and owe fiduciary duties.

On May 29, 2020, the CFP Board announced new procedural rules for investigations and disciplinary actions concerning violations of its Code of Ethics and Standards of Conduct. These procedural rules outline a trial-like process for disciplinary proceedings that bears a strong resemblance to the rules for FINRA disciplinary proceedings. CFP Professionals found to have violated the revised Code may be subject to a variety of sanctions, including permanent revocation of certification and censure. The CFP Board also indicated it will no longer rely on advisors to self-report required disclosures or potential misconduct but instead will periodically review disclosures that are publically available through, among other sources, BrokerCheck and IAPD.

The CFP Board’s actions suggest a zeal to show it has rectified past shortcomings. The CFP Board is likely to actively pursue investigations and commence disciplinary proceedings against certified financial planners who fail to meet its new revised Code of Ethics and Standards of Conduct. In addition to the expense incurred in responding to an investigation and participating in a proceeding, advisors may face the reputational hit of losing a prized designation. Financial advisors who hold the CFP designation would therefore be well advised to review the CFP Board’s revised Code of Ethics and Standard of Conduct, and to ensure they have notified the CFP Board of any disclosures made to FINRA or the SEC, less they run afoul of this new cop on the beat.

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