CODE OF ETHICS and PROFESSIONAL RESPONSIBILITY

Transcription

1 CODE OF ETHICS and PROFESSIONAL RESPONSIBILITY Written and Researched by: Edward J. Barrett CFP, ChFC, CLU, CEBS, RPA, CRPS, CRPC 2014 EJB Financial Press Inc., Printed in U.S.A. All rights reserved 1

2 Disclaimer This course is designed as an educational program for financial professionals. EJB Financial Press is not engaged in rendering legal or other professional advice and the reader should consult legal counsel as appropriate. We have tried to provide you with the most accurate and useful information possible. However, one thing is certain and that is change. The content of this publication may be affected by changes in law and in industry practice, and as a result, information contained in this publication may become outdated. This material should in no way be used as an original source of authority on legal and/or tax matters. Laws and regulations cited in this publication have been edited and summarized for the sake of clarity. Names used in this publication are fictional and have no relationship to any person living or dead. This presentation is for educational purposes only. The information contained within this presentation is for internal use only and is not intended for you to discuss or share with clients or prospects. Financial professionals are reminded that they cannot provide clients with tax advice and should have clients consult their tax advisor before making tax-related investment decisions. Note: Unless otherwise noted, all quoted passages are taken from CFP Board s Standards of Professional Conduct, as updated February 2014, and used with permission. EJB Financial Press, Inc Congress St. New Port Richey, FL (800)

3 About The Author Edward J. Barrett CFP, ChFC, CLU, CEBS, RPA, CRPS, CRPC, began his career in the financial and insurance services back in 1978 with IDS Financial Services, becoming a leading financial Advisor and top district sales manager in Boston, Massachusetts. In 1986, Mr. Barrett joined Merrill Lynch in Boston as a Financial Advisor and then becoming the Estate and Business Insurance Planning Specialist working with over 400 Financial Advisors and their clients throughout the New England region assisting in the sale of insurance products. In 1992, after leaving Merrill Lynch and moving to Florida, Mr. Barrett founded The Barrett Companies Inc. and Wealth Preservation Planning Associates, a financial and insurance brokerage agency. During the same period, Mr. Barrett also formed Broker Educational Sales & Training Inc., a premier provider of training and continuing education programs to financial and insurance professionals in all 50 states and the District of Columbia. Mr. Barrett is also a highly sought after speaker for financial advisors, insurance professionals, attorneys, CPA s and general audiences. He has written over 1,000 financial articles for newspapers and magazines and has authored several books. Mr. Barrett was a qualifying member of the Million Dollar Round Table, Qualifying Member Court of the Table and Top of the Table producer. He has a number of professional designations including: Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU), Certified Employee Benefit Specialist (CEBS), Retirement Planning Associate (RPA), Chartered Retirement Planning Consultant (CRPC), and Chartered Retirement Planning Specialist (CRPS). About EJB Financial Press EJB Financial Press, Inc. ( was founded in 2004, by Mr. Barrett to provide advanced educational and training manuals approved for correspondence continuing education credits for insurance agents, financial advisors, accountants and attorneys throughout the country. Broker Educational Sales & Training Inc. Broker Educational Sales & Training Inc. (BEST) is a nationally approved provider of continuing education and advanced training programs to the mutual fund, insurance, financial services industry and an approved sponsor of CPE courses with the National Association of State Boards of Accountancy and Quality Assurance Service (QAS). For more information visit their website at: Or call them at

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5 Table of Contents Table of Contents... 5 Introduction Course Learning Objectives Terminology CHAPTER 1 CODE OF ETHICS AND PROFESSIONAL RESPONSIBILITY Overview The Seven Principles Principle 1: Integrity Principle 2: Objectivity Principle 3: Competence Principle 4: Fairness Principle 5: Confidentiality Principle 6: Professionalism Principle 7: Diligence Review Questions Answers to Review Questions CHAPTER 2 RULES OF CONDUCT Overview Rules of Conduct Rule 1. Defining the Relationship with the Prospective Client or Client Rule 2. Information Disclosed To Prospective Clients and Clients Rule 3. Prospective Client and Client Information and Property Rule 4. Obligations to Prospective Clients and Clients Rule 5. Obligations To Employers Rule 6. Obligations to CFP Board Review Questions Answers to Review Questions CHAPTER 3 FINANCIAL PLANNING PRACTICE STANDARDS. 29 Overview What Is Financial Planning? Format of Practice Standards Series: Establishing and Defining the Relationship with the Client: : Defining the Scope of the Engagement Explanation of this Practice Standard Relationship of this Practice Standard to CFP Board s Code of Ethics and Rules of Conduct Series: Gathering Client Data : Determining a Client s Personal and Financial Goals, Needs and Priorities Explanation of this Practice Standard Relationship of this Practice Standard to CFP Board s Code of Ethics and Rules of Conduct : Obtaining Quantitative Information and Documents

6 Explanation of this Practice Standard Relationship of this Practice Standard to CFP Board s Code of Ethics and Professional Responsibility Series: Analyzing and Evaluating the Client s Financial Status : Analyze and Evaluating the Client s Information Explanation of this Practice Standard Relationship of this Practice Standard to CFP Board s Code of Ethics and Rules of Conduct Series: Developing and Presenting the Financial Planning Recommendation : Identifying and Evaluating Financial Planning Alternative(s) Explanation of this Practice Standard Relationship of the Practice Standard to CFP Board s Code of Ethics and Rules of Conduct : Developing the Financial Planning Recommendations Explanation of this Practice Standard Relationship of the Practice Standard to CFP Board s Code of Ethics and Rules of Conduct : Presenting the Financial Planning Recommendation(s) Explanation of this Practice Standard Relationship of the Practice Standard to CFP Board s Code of Ethics and Rules of Conduct Series: Implementing the Financial Planning Recommendation(s) : Agreeing on Implementation Responsibilities Explanation of this Practice Standard Effective Date: January 1, Relationship of the Practice Standard to CFP Board s Code of Ethics and Rules of Conduct : Selecting Products and Services for Implementation Explanation of this Practice Standard Relationship of the Practice Standard to CFP Board s Code of Ethics and Rules of Conduct Series: Monitoring Explanation of this Practice Standard Relationship of the Practice Standard to CFP Board s Code of Ethics and Rules of Conduct Financial Planning Subject Areas When Does Financial Planning Occur? Determining the Financial Planning Engagement Case Study Background Question 1: Is Liz performing financial planning? Analysis Question 2: Is Liz providing material elements of financial planning? Analysis Conclusion Additional Duties Owed When Providing Financial Planning

7 Fiduciary Duty Defining Best Interest Establishing Standards of Care Required Disclosures and Written Agreement Required Disclosures Compensation Disclosures Written Disclosures Written Agreement CFP Disclosure and Agreement Forms Form FPDA Form FPD Form OPS Other Disclosure Forms Summary of Rules that Apply to Financial Planning Review Questions Answers to Review Questions CHAPTER 4 DISCIPLINARY RULES AND PROCEDURES Overview ARTICLE 1: INTRODUCTION ARTICLE 2: DISCIPLINARY AND ETHICS COMMISSION Function and Jurisdiction of the DEC Powers and Duties of the Board Powers and Duties of the CEO of CFP Board Hearing Panel Disqualification CFP Board Counsel, CFP Board Designated Counsel and CFP Board Advisory Counsel, and the duties thereof: Venue ARTICLE 3: GROUNDS FOR DISCIPLINE ARTICLE 4: FORMS OF DISCIPLINE Private Censure Public Letter of Admonition Suspension Revocation ARTICLE 5: INTERIM SUSPENSION STATUS Issuance of a Show Cause Order Service Response Failure to Respond to the Order to Show Cause Show Cause Hearing Interim Suspension Automatic Interim Suspension Proceedings Subsequent to Interim Suspensions Automatic Reinstatement Upon Reversal of Conviction or Professional Discipline ARTICLE 6: INVESTIGATION

8 6.1 Commencement Procedures for Investigation Probable Cause Determination Procedures Disposition Relinquishment ARTICLE 7: COMPLAINT - ANSWER DEFAULT Complaint Service of the Complaint Answer Default and Orders of Revocation Request for Appearance Request for Extension or Continuance ARTICLE 8: DISCOVERY AND EVIDENCE Discovery Documents Witnesses Respondent s Counsel Administrative Dismissal ARTICLE 9: Motions Motion Response Length Disposition of Motion ARTICLE 10: REPORT, FINDINGS OF FACT AND RECOMMENDATION Notice Designation of a Hearing Panel Procedure and Proof Recommendations ARTICLE 11: REPORT OF FINDINGS OF FACT AND RECOMMENDATION Recommendation of the Hearing Panel Powers of the DEC ARTICLE 12: APPEALS ARTICLE 13: CONVICTION OF A CRIME OR PROFESSIONAL SUSPENSION Conviction Of A Crime or Professional Discipline Duty to Report Criminal Conviction or Professional Discipline Commencement of Disciplinary Proceedings Upon Notice of Conviction or Professional Discipline Definition of Professional Discipline ARTICLE 14. SETTLEMENT PROCEDURE Offer of Settlement Acceptance of Offer Rejection of Offer; Counter Offer ARTICLE 15. REQUIRED ACTION AFTER REVOCATION OR SUSPENSION ARTICLE 16. REINSTATEMENT AFTER DISCIPLINE After Revocation Reinstatement after Suspension

9 16.3 Investigation Successive Petitions Reinstatement Fee ARTICLE 17. CONFIDENTIALITY OF PROCEEDINGS Confidentiality Exceptions to Confidentiality ARTICLE 18. GENERAL PROVISIONS Quorum Notice and Service Submissions Costs Electronic Signature Publication Anonymous Case Histories and Sanction Guidelines FITNESS STANDARDS Conduct Deemed Unacceptable Conduct Deemed a Presumptive Bar Petitions for Consideration Review Questions Answers to Review Questions CHAPTER 5 APPEAL RULES & PROCEDURES Overview ARTICLE 1: SCOPE OF RULES ARTICLE 2: APPEAL PANEL Function and Jurisdiction Composition Disqualification ARTICLE 3: STANDARD OF REVIEW Appeals from Orders of the DEC ARTICLE 4: RIGHT TO APPEAL AND REPRESENTATION ARTICLE 5: APPEAL PROCEDURES Initiation of Appeal Petition for Appeal ARTICLE 6: MOTIONS Filing Content ARTICLE 7: AUTOMATIC STAY OF ORDER ARTICLE 8: THE RECORD ON APPEAL Composition Omission from or Misstatement in the Record ARTICLE 9: APPEAL HEARING Notice of Hearing ARTICLE 10: DECISIONS Order of the Appeal Panel Service of the Order of the Appeal Panel

10 ARTICLE 11: REVIEW BY THE APPEALS COMMITTEEE OF THE BOARD OF DIRECTORS OF CFP BOARD Presentation to Appeals Committee Definitions Review Questions Chapter 5 Answers to Review Questions APPENDICES Appendix A Sample Disclosure Forms Appendix B Anonymous Case Histories Appendix B Anonymous Case Histories Appendix C Notices to CFP Professionals Appendix D Sample Engagement Letter CONFIDENTIAL FEEDBACK

11 Introduction Broker Educational Sales & Training Inc. is pleased to offer this course which has been approved by the Certified Financial Planner Board of Standards, Inc. to meet the required two (2) hours of credit in Code of Ethics for the ongoing continuing education of certificants and registrants. Course Learning Objectives The learning objective of this course is to assist certificants and registrants to understand the required standards of ethical and professional conduct and responsibilities of all certificants and registrants, as set forth by the directives established by CFP Board in January Upon successful completion of the course, students should be able to: Define the Seven Principles of the Code of Ethics that guide the manner in which all CFP professionals must conduct their professional activities; Define the Rules of Conduct that demonstrate how CFP professionals must conduct their actions and activities; Demonstrate an understanding of, and be able to define financial planning, the financial planning process, and financial planning subject areas; Communicate any potential conflicts of interest to a client at the initiation of client engagement; Determine if a CFP professional is providing financial planning or material elements of financial planning; Define the elements of the fiduciary standard; Determine when the fiduciary standard applies in a variety of financial planning contexts and scenarios; Explain CFP Boards compensation disclosure requirements to clients and prospective clients recommendations to the client /prospective client; Define the CFP Boards Disciplinary Rules and Procedures and the Fitness Standards for Candidates and Professionals Eligible for Reinstatement ; and Determine the CFP Board s Appeal Rules and Procedures (the Rules) As a certificant or registrant it is very important to understand that the conduct of each individual financial planner can be reflected on all CFP professionals. Because of this it is very important to be knowledgeable of the responsibilities towards clients, employers and partners, and abide by the Code of Ethics in all professional situations. CFP professionals are encouraged to obtain a full copy of CFP Board s Standard of Professional Conduct, which may be downloaded from CFP Board of Standard s Web site at: 11

12 This course will be made up of an Introduction and five Chapters and Appendices covering the following: Chapter 1: Chapter 2: Chapter 3: Chapter 4: Chapter 5: Appendix A Appendix B Appendix C Appendix D Code of Ethics and Professional Responsibility Rules of Conduct Financial Planning Practice Standards Disciplinary Rules and Procedures Appeals Rules and Procedures Sample Disclosure Forms Anonymous Case Histories Notices to CFP Professionals Client Engagement Letter To receive credit for this course, the CFP Board requires that all self-study programs approved for its ethics requirement include a final exam with at least 40 questions per credit hour. Accordingly, this course includes a 40-question final exam. Terminology This terminology applies only for purposes of interpreting and/or enforcing CFP Board s Code of Ethics, Rules of Conduct, Practice Standards and Disciplinary Rules. CFP Board denotes Certified Financial Planner Board of Standards, Inc. Candidate for CFP certification denotes a person who has applied to CFP Board to take the CFP Certification Examination, but who has not yet met all of CFP Board s certification requirements. Certificant denotes individuals who are currently certified by the CFP Board. Certificant s Employer denotes any person or entity that employs a certificant or registrant to provide services to a third party on behalf of the employer, including certificants and registrants who are retained as independent contractors or agents. Client denotes a person, persons, or entity who engages a certificant and for whom professional services are rendered. Where the services of the certificant are provided to an entity (corporation, trust, partnership, estate, etc.), the client is the entity acting through its legally authorized representative. Commission denotes the compensation generated from a transaction involving a product or service and received by an agent or broker, usually calculated as a percentage on the amount of his or her sales or purchase transactions. This includes 12 (b) 1 fees, trailing commissions, surrender charges and contingent deferred sales charges. 12

13 Compensation is any non-trivial economic benefit, whether monetary or nonmonetary, that a certificant or related party receives or is entitled to receive for providing professional activities. A conflict of interest exists when a certificant s financial, business, property and/or personal interests, relationships or circumstances reasonably may impair his/her ability to offer objective advice, recommendations or services. Fee-only. A certificant may describe his or her practice as fee-only if, and only if, all of the certificant s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees. Fiduciary. One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client. Financial planning engagement exists when a certificant performs any type of mutually agreed upon financial planning service for a client. Financial planning practitioner is a person who provides financial services to clients. Personal financial planning or financial planning denotes the process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial planning integrates the financial planning process with the financial planning subject areas. In determining whether the certificant is providing financial planning or material elements of financial planning factors, issues that may be considered include but are not limited to: The client s understanding and intent in engaging the certificant. The degree to which multiple financial planning subject areas are involved. The comprehensiveness of data gathering. The breadth and depth of recommendations. Financial planning may occur even if the material elements are not provided to a client simultaneously, are delivered over a period of time, or are delivered as distinct subject areas. It is not necessary to provide a written financial plan to engage in financial planning. Personal financial planning process or financial planning process denotes the process which typically includes, but is not limited to, some or all of these six steps: Establishing and defining the client-planner relationship, Gathering client data including goals, Analyzing and evaluating the client s current financial status, Developing and presenting recommendations and/or alternatives, Implementing the recommendations, and Monitoring the recommendations. 13

14 Personal financial planning subject areas or financial planning subject areas denotes the basic subject fields covered in the financial planning process which typically include, but are not limited to: Financial statement preparation and analysis (including cash flow analysis/planning and budgeting), Insurance planning and risk management, Employee benefits planning, Investment planning, Income tax planning, Retirement planning, Estate planning. Registrant denotes individuals who are not currently certified but have been certified by CFP Board in the past and have an entitlement, direct or indirect, to use the CFP marks. This includes individuals who have relinquished their certification and who are eligible for reinstatement without being required to pass the current CFP Certification Examination. The Standards of Professional Conduct apply to registrants when the conduct at issue occurred at a time when the registrant was certified; CFP Board has jurisdiction to investigate such conduct. Disclaimer: While the materials for this course have been approved by CFP Board as meeting the established standards for continuing education, CFP Board does not review the method or means of presentation and, therefore, makes no representation concerning the delivery of this information to the CFP Certificant. CFP Board s Code of Ethics and Professional Responsibility, Financial Planning Practice Standards, Anonymous Case History and Advisory Opinions are the property of CFP Board and may not be resold, republished, or copied without the prior consent of CFP Board. CFP, CERTIFIED FINANCIAL PLANNER TM, and CFP (with the flame logo) are certification marks owned by Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete CFP Board s initial and ongoing certification requirements. Copyright 2014 Certified Financial Planner Board of Standards, Inc. All rights reserved. Reproduced with permission. Questions concerning the Code of Ethics and Professional Responsibility can be directed to the: Certified Financial Planner Board of Standards, Inc K Street, NW, Suite 800 Washington, DC Telephone: (800) mail@cfpboard.org Web site: 14

15 CHAPTER 1 CODE OF ETHICS AND PROFESSIONAL RESPONSIBILITY Overview As part of the CFP certification process and the terms and conditions imposed upon certificants and registrants, CFP Board maintains professional standards necessary for competency and ethics in the financial planning profession. Through its Code of Ethics and Professional Responsibility (Code of Ethics), CFP Board identifies the ethical principles certificants and registrants should meet in all of their professional activities. Every certificant and registrant when he or she accepts the certification implicitly accepts the responsibility to act ethically and in a professional manner in all areas by accepting the CFP certification. The certificant and registrant also agrees to follow the Code of Ethics and Professional Responsibility adopted by Certified Financial Planner Board of Standards, Inc. (CFP Board). In this chapter, we will review the Seven Principles that makeup the CFP Board s Code of Ethics and Professional Responsibility. The Seven Principles The Code of Ethics and Professional Responsibility ( Code of Ethics ) is made up of Seven Principles. These Principles are general statements expressing the ethical and professional ideals certificants and registrants are expected to display in their professional activities. As such, the Principles are aspirational in character and provide a source of guidance for certificants and registrants. These Principles form the basis of CFP Board s Rules of Conduct, Practice Standards and Disciplinary Rules and these documents together reflect CFP Board s recognition of certificants and registrants responsibilities to the public, clients, colleagues and employers. The several Principles are: Integrity Objectivity Competence Fairness Confidentiality Professionalism Diligence 15

16 Let s review each of these Seven Principles in greater detail. Principle 1: Integrity The first Principle is Integrity, which refers to candor, honesty, and trust. The Code of Ethics states: Integrity demands honesty and candor which must not be subordinated to personal gain and advantage. Certificants are placed in positions of trust by clients and the ultimate source of that trust is the certificant s personal integrity. Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one s principle. Integrity, as the famous saying goes, is what you do when no one is looking. In terms of actions that violate the principle of integrity, the allegations of misrepresentation are the most common client complaint heard by the CFP Board. For Example, promised a better return than actually received; did not make sure they understood the risks of a recommendation; failed to explain the tax consequences of a recommendation ; did not disclose the fees associated with a recommendation. To avoid these allegations certificants and registrants should take the necessary steps to ensure that clients fully understand all aspects of a recommendation. Principle 2: Objectivity The second Principle is Objectivity, which refers to intellectual honesty and impartiality. The Code of Ethics states: Regardless of the particular service rendered or the capacity in which a certificant functions, certificants should protect the integrity of their work, maintain objectivity and avoid subordination of their judgment. Objectivity also means exercising reasonable and prudent professional judgment and acting in the best interests of clients. For Example: The most common client complaint the CFP Board receives related to the Principle of Objectivity is that the certificant did not provide the care and attention the client expected. Putting together adequate procedures to communicate with clients on a regular basis can go a long way to avoiding this complaint. 16

17 Principle 3: Competence The third Principle is Competence. This Principle describes the need to maintain the knowledge and skill necessary to provide professional services competently. The Code of Ethics states: Competence means attaining and maintaining an adequate level of knowledge and skill, and application of that knowledge and skill in providing services to clients. Competence also includes the wisdom to recognize the limitations of that knowledge and when consultation with other professionals is appropriate or referral to other professionals necessary. Certificants make a continuing commitment to learning and professional improvement. It s important for certificants to recognize their limitations and have procedures in place for referring clients to other competent professions when appropriate (importance of building a Financial Planning Team). For Example: The most common client complaint the CFP Board has received relating to the Principle of Competence is when the certificant tries to do too much. Principle 4: Fairness The fourth Principle is Fairness. This Principle directs certificants to perform services that are fair and reasonable to clients, principals, partners, and employers. It also discusses disclosing any possible conflict(s) of interest. The Code of Ethics states: Fairness requires impartiality, intellectual honesty and disclosure of material conflicts of interest. It involves a subordination of one s own feelings, prejudices and desires so as to achieve a proper balance of conflicting interests. Fairness is treating others in the same fashion that you would want to be treated. CFP certificants are required to conduct themselves in a way that is consistent with the principles of reasonableness and equity in all of their professional relationships. This requires adopting an even-handed and objective approach to one s professional practice and to one s professional relationships, in both appearance and fact. The moral teaching of the Golden Rule: Do unto others as you would have them do to you and the ethical reciprocity it implies support the certificant s duty to be fair and impartial. The rule implies that an ethical person is concerned not only with themselves but, also with the well-being of others. Principle 5: Confidentiality The fifth Principle is Confidentiality, which covers the confidentiality of all client information. The Code of Ethics states: 17

18 Confidentiality means ensuring that information is accessible only to those authorized to have access. A relationship of trust and confidence with the client can only be built upon the understanding that the client s information will remain confidential. A certificant must also be aware of the rules on confidentiality mandated by the Gramm- Leach-Bliley Act. Principle 6: Professionalism The sixth Principle is Professionalism. This Principle explains how our professional conduct reflects upon our profession. The Code of Ethics states: Professionalism requires behaving with dignity and courtesy to clients, fellow professionals, and others in business-related activities. Certificants cooperate with fellow certificants to enhance and maintain the profession s public image and improve the quality of services. Under the Principle of Professionalism, the certificant must abide by all applicable laws, rules and regulations of governmental agencies and or authorities. Certain actions, such as criminal conviction or professional suspension, must be reported to CFP Board within thirty (30) calendar days (see Article 13.2, Chapter 4). Often actions, for example, a client arbitration or NASD investigation must be disclosed during the certification application or renewal process, although the certificant has the option of reporting earlier. Also under the Principle of Professionalism, certificant must report any violations of the Code by another certificant to both CFP Board and other appropriate regulatory agencies. Principle 7: Diligence The seventh and final Principle is Diligence which informs us that we must provide services diligently. The Code of Ethics states: Diligence is the provision of services in a reasonably prompt and thorough manner, including the proper planning for, and supervision of, the rendering of professional services. An example of a case that may be brought before CFP Board is when a certificant may recommend an annuity to a client who lacks sufficient liquidity. This is surely an unsuitable sale. The requirement of diligence extends to supervisory activities as well. In our example above, a certificant supervisor would be held responsible for overseeing other subordinate certificants. 18

19 Chapter 1 Review Questions 1. Which of the following Principles refers to candor, honesty and trust? ( ) A. Diligence ( ) B. Competence ( ) C. Fairness ( ) D. Integrity 2. Under the Principle of Professionalism, this Principle explains how a certificant s professional conduct reflects upon our profession. ( ) A. True ( ) B. False 3. Which Principle describes the need for the certificant and registrant to maintain an adequate level of knowledge and skill in providing services to clients? ( ) A. Integrity ( ) B. Objectivity ( ) C. Competence ( ) D. Confidentiality Chapter 1 Answers to Review Questions 1. (D) Integrity, refers to candor, honesty, and trust (page 10). 2. (A) True. Professionalism (page 12). 3. (C) Competence, describes the need to maintain the knowledge and skill necessary to provide professional services competently (page 11). 19

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21 CHAPTER 2 RULES OF CONDUCT Overview The Rules of Conduct establish the high standards expected of certificants and describe the level of professionalism required of certificants. The Rules of Conduct are binding on all certificants, regardless of their title, position, type of employment or method of compensation, and they govern all those who have the right to use the CFP marks, whether or not those marks are actually used. The universe of activities engaged in by a certificant is diverse, and a certificant may perform all, some or none of the typical services provided by financial planning professional. Some Rules may not be applicable to a certificant s specific activity. As a result, when considering the Rules of Conduct, the certificant must determine whether a specific Rule is applicable to those services. A certificant will be deemed to be in compliance with these Rules if that certificant can demonstrate that his or her employer completed the required action. Violations of the Rules of Conduct may subject a certificant or registrant to discipline. Because CFP Board is a certifying and standards-setting body for those individuals who have met and continue to meet CFP Board s initial and ongoing certification requirements, discipline extends to the rights of registrants and certificants to use the CFP marks. Thus, the rules are not designed to be a basis for legal liability to any third party. In this chapter, we will review the Rules of Conduct that are part of the Code of Ethics and Professional Responsibility. Rules of Conduct In 2007, CFP Board adopted revisions to its Rules of Conduct, which became effective July 1, The current Rules of Conduct center on six core areas that set forth requirements as to how certificants must conduct themselves, as well as their relationships with clients and prospective clients. The six core conduct of rules and their subparts focus on the following: Defining the relationship with prospective clients or client; Information to be disclosed to prospective clients or client; Handling prospective client or client information and property; Obligations to prospective clients and clients; Obligations to employers; and 21

22 Obligations to CFP Board. Prior to the revisions, each of the Rules was tied to a specific ethical principle; the revised Rules are not. However, certificants should understand that the spirit and intent of their ethical duties and responsibilities, as a body of principle, underscore all manner of their conduct, creating the foundation upon which their actions are based and their services delivered. Among other measures, the current Rules set forth: An elevated duty of care to the client, from reasonable and prudent professional judgment to that of a CFP certificant at all times [placing] the interest of the client ahead of his or her own: A heightened duty of care for certificants providing financial planning or material elements of financial planning to duty of care of a fiduciary; Enhanced requirements for documenting the relationship with clients; Disclosure requirements that apply to clients as well as prospective clients; and a standard of suitability that applies to any recommendations that a certificant makes or implements. Below is a review of the current Rules of Conduct. Included are several related points, many of which derive from a series of Focus on Ethics articles as they appeared in CFP Board s monthly newsletter, CFP Board Report. Significantly, the revised rules set forth distinct duties required when a certificant engages in activities that are deemed financial planning or material elements of financial planning. These distinctions and their requirements will be discussed in greater detail in Chapter 3. Rule 1. Defining the Relationship with the Prospective Client or Client 1.1 The certificant and the prospective client or client shall mutually agree upon the services to be provided by the certificant. 1.2 If the certificant s services include financial planning or material elements of financial planning, prior to entering into an agreement, the certificant shall provide written information or discuss with the prospective client or client the following: a. The obligations and responsibilities of each party under the agreement with respect to: i. Defining goals, needs, and priorities, ii. Gathering and providing appropriate data, iii. Examining the result of the current course of action without changes, iv. The formulation of any recommended actions, v. Implementation responsibilities, and vi. Monitoring responsibilities. 22

23 b. Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement, and factors or terms that determine costs, how decisions benefit the certificant and the relative benefit to the certificant. c. Terms under which the agreement permits the certificant to offer proprietary products. d. Terms under which the certificant will use other entities to meet any of the agreement s obligations. If the certificant provides the above information in writing, the certificant shall encourage the prospective client or client to review the information and offer to answer any questions that the prospective client or client may have. 1.3 If the services include financial planning or material elements of the financial planning process, the certificant or the certificant s employer shall enter into a written agreement governing the financial planning services ( Agreement ). The Agreement shall specify: a. The parties to the Agreement, b. The date of the Agreement and its duration, c. How and on what terms each party can terminate the Agreement, and d. The services to be provided as part of the Agreement. The Agreement may consist of multiple written documents. Written documentation that includes the items above and is used by a certificant or certificant s employer in compliance with state and/or federal law, or the rules or regulations of any applicable self-regulatory organization, such as the Securities and Exchange Commission s Form ADV or other disclosure documents, shall satisfy the requirements of this Rule. 1.4 A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board. Rule 2. Information Disclosed To Prospective Clients and Clients 2.1 A certificant shall not communicate, directly or indirectly, to clients or prospective clients any false or misleading information directly or indirectly related to the certificant s professional qualifications or services. A certificant shall not mislead any parties about the potential benefits of the certificant s service. A certificant shall not fail to disclose or otherwise omit facts where that disclosure is necessary to avoid misleading clients A certificant shall disclose to a prospective client or client the following information: 23

24 1. An accurate and understandable description of the compensation arrangements being offered. This description must include: i. Information related to costs and compensation to the certificant and/or the certificant s employer, and ii. Terms under which the certificant and/or the certificant s employer may receive any other sources of compensation, and if so, what the sources of these payments are and on what they are based. b. A general summary of likely conflicts of interest between the client and the certificant, the certificant s employer or any affiliates or third parties, including, but not limited to, information about any familial, contractual or agency relationship of the certificant or the certificant s employer that has a potential to materially affect the relationship. c. Any information about the certificant or the certificant s employer that could reasonably be expected to materially affect the client s decision to engage the certificant that the client might reasonably want to know in establishing the scope and nature of the relationship, including but not limited to information about the certificant s area of expertise. d. Contact information for the certificant and if applicable, the certificant s employer. e. If the services include financial planning or material elements of financial planning, these disclosures must be in writing. The written disclosures may consist of multiple written documents. Written disclosures used by a certificant or certificant s employer that includes the elements listed above, and are used in compliance with state or federal laws, or the rules or requirements of any applicable self-regulatory organization, such as the Securities and Exchange Commission s Form ADV or other disclosure documents, shall satisfy the requirements of the Rule. The certificant shall timely disclose to the client any material changes to the above information. Rule 3. Prospective Client and Client Information and Property 3.1 A certificant shall treat information as confidential except as required in response to proper legal process; as necessitated by obligations to a certificant s employer or partners; as required to defend against charges of wrongdoing; in connection with a civil dispute; or as needed to perform the services. 3.2 A certificant shall take prudent steps to protect the security of information and property, including the security of stored information, whether physically or electronically, that is within the certificant s control. 3.3 A certificant shall obtain the information necessary to fulfill his or her obligation. If a certificant cannot obtain the necessary information, the certificant shall inform the prospective client or client of any and all material deficiencies. 3.4 A certificant shall clearly identify the assets, if any, over which the certificant will 24

25 take custody, exercise investment discretion, or exercise supervision. 3.5 A certificant shall identify and keep complete records of all funds or other property of a client in the custody, or under the discretionary authority, of the certificant. 3.6 A certificant shall not borrow money from a client. Exceptions to this Rule include: a. The client is a member of the certificant s immediate family, or b. The client is an institution in the business of lending money and the borrowing is unrelated to the profession services performed by the certificant. 3.7 A certificant shall not lend money to a client. Exceptions to this Rule include: a. The client is a member of the certificant s immediate family, or b. The certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant. 3.8 A certificant shall not commingle a client s property with the property of the certificant or the certificant s employer, unless the commingling is permitted by law or is explicitly authorized and defined in a written agreement between the parties. 3.9 A certificant shall not commingle a client s property with other client s property unless the commingling is permitted by law or the certificant has both explicit written authorization to do so from each client involved and sufficient recordkeeping to track each client s assets accurately A certificant shall return a client s property to the client upon request as soon as practicable or consistent with a time frame specified in an agreement with the client. Rule 4. Obligations to Prospective Clients and Clients 4.1 A certificant shall treat prospective clients and clients fairly and provide professional services with integrity and objectivity. 4.2 A certificant shall offer advice only in those areas in which he or she is competent to do and shall maintain competence in all areas in which he or she is engaged to provide professional services. 4.3 A certificant shall be in compliance with applicable regulatory requirements governing professional services provided to the client. 4.4 A certificant shall exercise reasonable and prudent professional judgment in providing professional services to clients. 25

26 4.5 In addition to the requirements of Rule 1.4, a certificant shall make and/or implement only recommendations that are suitable for the client. 4.6 A certificant shall provide reasonable and prudent professional supervision or direction to any subordinate or third party to whom the certificant assigns responsibility for any client service. 4.7 A certificant shall advise his or her current clients of any certification suspension or revocation he or she receives from CFP Board. Rule 5. Obligations To Employers 5.1 A certificant who is an employee/agent shall perform professional services with dedication to the lawful objectives of the employer/principal and in accordance with CFP Board s Code of Ethics. 5.2 A certificant who is an employee/agent shall advise his or her current employer/principal of any certification suspension or revocation he or she receives from CFP Board. Rule 6. Obligations to CFP Board 6.1 A certificant shall abide by the terms of all agreements with CFP Board, including, but not limited to, using the CFP marks properly and cooperating fully with CFP Board s trademark and professional review operations and requirements. 6.2 A certificant shall meet all CFP Board requirements, including continuing education requirements, to retain the right to use the CFP marks. 6.3 A certificant shall notify CFP Board of changes to contact information, including, but not limited to, address, telephone number(s) and physical address, within forty-five (45) days. 6.4 A certificant shall notify CFP Board in writing of any conviction of a crime, except misdemeanor traffic offenses or traffic ordinance violations unless such offense involves the use of alcohol or drugs, or of any professional suspension or bar within ten (10) calendar days after the date on which the certificant is notified of the conviction, suspension or bar. 26

27 Chapter 2 Review Questions 1. Which Rule of Conduct relates to a certificant meeting all CFP Board requirements, including continuing education requirements, to retain the right to use the CFP marks? ( ) A. Rule 6.2 ( ) B. Rule 3.1 ( ) C. Rule 2.1 ( ) D. Rule A certificant shall notify CFP Board in writing of any conviction of a crime, except misdemeanor traffic offenses or traffic ordinance violations unless such offense involves the use of alcohol or drugs, or of any professional suspension or bar within how many calendar days after the date on which the certificant is notified of the conviction, suspension or bar. ( ) A. Three calendar days ( ) B. Seven calendar days ( ) C. Ten calendar days ( ) D. Thirty calendar days 3. Under Rule 1.4, what is the duty of care owed by a certificant at all times to a client? ( ) A. To serve as a fiduciary ( ) B. To place the interest of the client ahead of his or her own ( ) C. To document in writing all conversations and mutual agreements ( ) D. To use prudence Chapter 2 Answers to Review Questions 1. (A) Rule 6.2 a certificant shall meet all CFP Board requirements, including continuing education requirements, to retain the right to use the CFP marks. 2. (C) Rule 6.4 a certificant shall notify CFP Board in writing within 10 calendar days. 3. (B) Rule 1.4 a certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board. 27

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29 CHAPTER 3 FINANCIAL PLANNING PRACTICE STANDARDS Overview A Practice Standard establishes the level of professional practice that is expected of certificants engaged in financial planning. The Practice Standards apply to certificants in performing the tasks of financial planning regardless of the person s title, job position, and type of employment or method of compensation. Compliance with the Practice Standards is mandatory for certificants whose services include financial planning or material elements of financial planning, but all financial planning professionals are encouraged to use the Practice Standards when performing financial planning tasks or activities addressed by a Practice Standard. Practice Standards are designed to provide certificants with a framework for the professional practice of financial planning. Similar to the Rules of Conduct, Practice Standards are not designed to be a basis for legal liability to any third party. In this chapter, we will review the CFP Board s definition of financial planning, when it is deemed to occur, and the specific Rules of Conduct that apply when a CFP certificant engages in financial planning or material elements of financial planning. What Is Financial Planning? As it has been defined by CFP Board and as it applies to CFP certificants, financial planning is: The process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial Planning integrates the financial planning process with defined financial planning subject areas. Through financial planning, certificants help their clients define their life goals and formulate financial plans and decisions that point to those goals. The process creates a unique relationship between planner and client one that goes beyond mere transactionbased activity and instead, relies on mutual understanding, collaboration, trust, and counsel. As practiced by CFP certificants, financial planning involves the application of advanced knowledge, skills, and decision-making in service to their clients. 29

30 Format of Practice Standards Each Practice Standard is a statement regarding one of the steps of the financial planning process. It is followed by an explanation of the Standard, its relationship to the Code of Ethics and Rules of Conduct, and its expected impact on the public, the profession and the practitioner. The Explanation accompanying each Practice Standard explains and illustrates the meaning and purpose of the Practice Standard. The text of each Practice Standard is authoritative and directive. The related Experience is a guide to interpretation and application of the Practice Standard based, where indicated, on a standard of reasonableness, a recurring theme throughout the Practice Standards. The Explanation is not intended to establish a professional standard or duty beyond what is contained in the Practice Standard itself. The Six Elements of the Personal Financial Planning Process The numbering format for Practice Standards coordinates the Six Elements of the Personal Financial Planning Process: 100 Series Establishing and Defining the Relationship with the Client 200 Series - Gathering Client Data 300 Series - Analyzing and Evaluating the Client s Financial Status 400 Series - Developing and Presenting the Financial Planning Recommendations 500 Series - Implementing the Financial Planning Recommendations 600 Series Monitoring 100 Series: Establishing and Defining the Relationship with the Client: 100-1: Defining the Scope of the Engagement The financial planning practitioner and the client shall mutually define the scope of the engagement before any financial planning service is provided. Explanation of this Practice Standard Prior to providing any financial planning service, the financial planning practitioner and the client shall mutually define the scope of the engagement. The process of mutuallydefining is essential in determining what activities may be necessary to proceed with the engagement. 30