Kitces: The CFP Board needs a stronger ethics panel

It’s no secret that the CFP Board has been trying to make planning a more recognized, reputable profession. One of the strongest tools it wields in that fight is a strengthened code of ethics that would require CFP certificants to formally adopt a fiduciary standard for all financial advice.

On the face of it, that’s a worthy effort. Yet the CFP Board has also put forth a rather controversial proposal: Allow CFP certificants to expunge their one-time public disciplinary sanctions — e.g., a public letter of admonition or a temporary suspension of the CFP marks — after five years. This would effectively mean forgiving all infractions cited in 2020 by 2025, regardless of their actual severity or degree of client harm.

Fortunately, the proposed changes are just that, proposed, and CFP certificants still have an opportunity to submit their own public comment letter expressing support or concern for the proposals to the board.

Unlike state-granted licenses to practice medicine or accounting, the CFP certification is technically just a private trademark owned by the CFP Board and licensed to CFP certificants for use. To have the rights to use the marks, CFP certificants must pay the CFP Board’s certification licensing fee and meet the so-called Four E’s of the CFP Board’s Education, Exam, Experience and Ethics requirements.

From the trademark perspective, having a disciplinary enforcement mechanism for violating the CFP Ethics requirement — either through a temporary suspension or permanent revocation — is how the CFP Board ensures that professionals who use its trademark represent it in a responsible manner.

But from a broader professional perspective, when planning itself is not regulated — only its component parts of insurance product sales, investment product sales and investment advice — the CFP Board’s approach of offering a voluntary designation that has voluntarily higher ethics standards is how the CFP Board can lift the standards for the overall planning profession.

Accordingly, the CFP Board not only can revoke the marks or suspend them, but also issue a private censure on the CFP certificant’s record with the CFP Board, or even lodge a public letter of admonition.

Yet given the very public consequences of a formal admonition, it’s crucial that the board have not only clear ethics standards but also clear and reasonable disciplinary processes for enforcing those standards — especially since the CFP Board’s new, more stringent standards of conduct are set to take effect in October 2019.

That looming date makes it especially important to have strong disciplinary processes in place for what could be an uptick of infractions, including a potential wave of new offenses by CFP certificants who fail to get up to speed on the new standards in time.

RULES AND PROCEDURES
Enforcement of the CFP Board’s Code of Ethics and Standards of Conduct is the responsibility of its Disciplinary and Ethics Commission (DEC), which is comprised almost entirely of CFP certificants themselves, appointed by CFP Board CEO Kevin Keller as a means of providing a peer review–like form of disciplinary enforcement. In other words, fellow practitioners determine what is within and outside the normal practices of CFP professionals, as opposed to attorneys or non-practicing CFP Board staff members.

The core of the board’s disciplinary process is the formation of a three-person hearing panel, which includes two members of the DEC and one outside volunteer to ensure the public is represented alongside peer CFP practitioners in the adjudication process. The panel ultimately makes a recommendation to the full DEC for a disciplinary action.

Notably however, the starting point for the board’s disciplinary actions is with CFP staff —specifically a CFP Board Counsel — i.e., staff attorney — whose role is to receive alleged complaints when they come in, notify CFP certificants about the allegation and allow them to respond, and then decide if there is probable cause for a hearing to occur.

From there, the prospective defendant has 20 days to respond with an answer to the complaint that provides any defense or explains any relevant mitigating circumstances, at which point the counsel can decide whether to proceed to a formal hearing, dismiss the complaint or potentially accept a settlement for a defendant who wishes to accept guilt, expedite the process and save on the cost of a hearing.

If the complaint is recommended for a hearing, a process of discovery, gathering documents and identifying witnesses occurs as well as selection of an attorney or other counsel to aid the CFP certificant’s defense. A hearing date is then set and in extreme situations, an Interim suspension may be issued. Then the defendant and accuser make their case in front of the hearing panel. This body can decide whether the complaint is not sufficiently proven or that discipline is not warranted, or make a recommendation for a disciplinary action to the full DEC for approval, which the DEC can then accept or remand back to the hearing panel for further consideration.

It’s worth noting that any conviction or finding of guilt that has already occurred in a criminal court or with another regulatory entity — e.g., the SEC or FINRA — will automatically establish conclusive evidence of the CFP professional’s wrongdoing for CFP Board disciplinary purposes as well.

If CFP certificants do not comply with the disciplinary process in a timely manner, they can be found in default and automatically subjected to an administrative order of revocation of the CFP marks.

Certificants who believe there were relevant factors or issues not fully considered in the hearing process then have the option to request an appeal within 30 days of the decision, which goes to a separate appeals panel to decide whether any of the findings of fact, determined rule violations and/or disposition of the disciplinary proceeds were “clearly erroneous.”

Notably, under the CFP Board’s fitness standards to become a CFP certificant, the board also historically has required candidates to not have filed for bankruptcy at any time in the past five years, with the implication that those who are struggling to handle their own financial situation shouldn’t be advising others on theirs. The requirement also presumes that those facing or recently emerging from bankruptcy may still be under a level of duress that could compromise the objectivity of their advice.

In 2012 the CFP Board adjusted the bankruptcy process. Rather than barring CFP professionals with one recent bankruptcy, the board stipulated that single bankruptcies simply be disclosed on the CFP Board’s website, as long as the CFP candidate has no other pending investigations. Having two or more bankruptcies would either bar the CFP candidate or require coming before the DEC with a request to consider granting an exception.

THE UPDATE
In November, the CFP Board issued proposed changes to its Disciplinary Procedural Rules. This was not altogether surprising, as the board’s expanded fiduciary standards of conduct will take effect in October, and may potentially place a greater burden and volume of allegations on the board to investigate and potentially enforce in the first place.

Accordingly, the proposed disciplinary changes in part just simplify and consolidate the process and its various supporting rules. For example, the disciplinary rules and procedures and the appeals rules and procedures were technically separate documents, and now would be consolidated into one. That said, the rules also seek to clarify and either expedite or deepen the CFP Board’s investigative capabilities.

Case in point, the CFP Board’s proposal would put certificants “on the record” — even and including during the preliminary Investigation process — and the resulting oral examinations can and would be recorded and transcribed for future uses, such as if the investigation were to result in a formal complaint and a DEC hearing panel.

The board in November also expanded its ability to adopt rulings from other courts and regulators in its own disciplinary process. Thus, while in the past the board already granted itself latitude to adopt findings of guilt from another regulator such as FINRA, the SEC or a criminal court proceeding, any civil court finding that a CFP professional violated a law, rule or regulation governing professional services; or engaged in fraud, theft, misrepresentation or other dishonest conduct would be deemed conclusive proof against the CFP certificant for CFP Board purposes as well, and could not be challenged.

The new rules also clarify that the board’s Investigation process would now more formally culminate in one of three outcomes: a letter of dismissal, a settlement offer or a formal complaint that would then lead to a hearing panel or paper review.

In turn, the potential settlement process is refined under the CFP Board’s proposed disciplinary rules, formally establishing a new settlement review panel — i.e., separate from a hearing panel, but also comprised of at least three people, a majority of whom would have to be CFP professionals and DEC members — which as the name implies, evaluates settlement offers and then submits a final recommendation on the offer to the DEC for final approval or counter offer.

Notably though, the new rules would require board staff counsel to agree to the settlement offer before being presented to the settlement review panel or the DEC. Previously, if a CFP professional faced a complaint and board counsel was at an impasse, the respondent had the option to take a settlement offer directly to the DEC.

To further limit any “slippage” in its disciplinary process, the proposed rules also stipulate that CFP certificants who attempt to drop their CFP marks in response to an investigation to avoid public disciplinary action — or in the extreme, terminate their financial licenses or registrations in response to an investigation — can still be subject to an interim suspension of their CFP marks, and ultimately be found in default, triggering a full revocation of their marks.

In addition, the board expands its ability to discipline not just CFP certificants but also CFP candidates who have not yet earned marks by giving the DEC the latitude to apply a temporary or even permanent bar against a non-CFP to prevent them from using the marks, temporarily or permanently, in the future.

Another notable development is that CFP professionals will have an elevated duty of cooperation to comply with requests from the CFP Board regarding an investigation, even if it’s not the CFP professional themselves being Investigated — e.g., if the CFP certificant were merely a witness or an otherwise involved party.

THE EXPUNGEMENT OPTION
In addition to various refinements of its investigative and other disciplinary rules, perhaps the most notable addition in CFP Board’s proposed revisions to its disciplinary process is the new Sections 11.5 and 16.7, which would allow CFP certificants to file a new petition to remove publication, i.e., to have a prior disciplinary infraction expunged from their public record on the Board’s website.

The petition to remove would have to be filed at least five and no more than 10 years after the initial date the infraction is first published on the board’s website, and would be available in any situations where the disciplinary action was a public letter of admonition; a suspension of one year or less; or a temporary bar of one year or less in the case of a CFP candidate who was found guilty of wrongdoing before earning his/her CFP certification.

Notably, the petition to remove publication would only be available if it was the CFP certificant’s sole publicly sanctioned infraction. That means if another public sanction occurred or the certificant was under a new/second complaint or investigation, the original public sanction couldn’t be removed.

The petition would apply both to typical public sanctions for misdeeds — including a public letter of admonition or a temporary suspension or bar — and also to bankruptcy disclosures, which are reported on the CFP Board’s website as well.

With the internet making background research of professionals more viable, public disciplinary actions have arguably become much more consequential than in the past. Simply put, it’s more likely than ever that a public disciplinary action would be discovered by a consumer, whether via the CFP Board’s public records, regulatory systems like the SEC’s Investment Adviser Public Disclosure (IAPD) website, FINRA’s BrokerCheck or third-party systems like BrightScope. Accordingly, interest in expunging disciplinary records has gained greater focus as well — and not always in a good way.

In 2014, FINRA had to tighten its expungement processes under Rule 12805 after a study by the Public Investors Arbitration Bar Association showed that nearly 90% of expungement requests were being granted even in situations that resulted in financial settlements or monetary awards to consumers — i.e., in material grievance situations where consumers were financially damaged and remedied. And FINRA recently announced changes to further tighten its expungement processes after a follow-up study showed that 93% of expungement requests were still being granted in recent years.

The whole point of having public disciplinary records is to make consumers aware if a broker or advisor has a history of problematic behavior, especially in situations where client harm occurred. While some who engage in bad behavior may reform themselves, just one public disciplinary event can hint at the capacity for more problematic behavior. In fact, one recent study found that brokers who have a single material misconduct event on their FINRA BrokerCheck record were a whopping five times more likely to engage in misconduct again in the future.

Furthermore, another recent study found that those who sought expungement within the current FINRA process were actually more likely to repeatedly offend, while ironically, successful expungements didn’t actually appear to improve the individual’s subsequent career prospects. That’s because firms sometimes ask about prior expunged infractions, and in practice — given how often regulatory news information and even court documents are accessible or cached on multiple websites — public disciplinary actions often remain searchable online.

That’s why it’s especially concerning that the CFP Board would not only grant the opportunity for expungement, but treat such expungements as automatic in all situations that didn’t result in long-term (i.e., greater than one year) suspensions or permanent revocations, where the individual is no longer a CFP certificant — which makes their expungement on the CFP Board’s website a moot point anyway.

Even FINRA has an expungement process that, per the latest updates in Regulatory Notice 17-42, considers each situation on a case by case basis to determine the appropriateness of expungement. And that applies under FINRA Rule 2080(b)(1), which grants expungement in situations where the allegation was factually impossible or clearly erroneous; the person was not actually involved in the alleged incident; or the allegation itself was false. Meanwhile, the CFP Board’s proposal would openly grant expungement in all situations, regardless of whether or to what extent actual client harm occurred — as long as it wasn’t significant enough to result in a long-term suspension or revocation of the CFP marks.

POTENTIAL REMEDIES
So where should the CFP Board and concerned certificants go from here?

The existing data and research suggest that allowing CFP certificants to expunge their records — notwithstanding the concern that some might genuinely be reformed from their prior misdeeds — is likely to cause more consumer harm than good.

As again, prior broker misconduct research has found that those with even just a single disciplinary event were five times more likely to engage in misconduct again in the future, and those who seek FINRA expungement are similarly more likely to repeatedly offend than the average individual with misconduct.

And in the case of FINRA, that’s a higher rate of misconduct for those requesting expungement even though FINRA expungements are only supposed to occur in situations where the allegations were false, factually impossible or the accused was not actually involved in the incident. Meanwhile, the CFP Board’s expungement process would apply for those who unequivocally did engage in wrongdoing, for which the DEC had already determined guilt and issued a disciplinary ruling in response.

In addition, the CFP Board’s current petition-to-remove-publication framework considers only other public sanctions and not private ones. This means a certificant with an established history of wrongdoing and with just one incident elevated to the point of a public sanction can effectively have all such sanctions removed from public view. Similarly, a future private censure after a public sanction is expunged — which implicitly corroborates the consumer risk of the first incident — will remain hidden from the public.

On the other hand, it’s fair to recognize that bankruptcies — particularly in the case of a single bankruptcy event — are not necessarily a sign of wrongdoing, and once an individual is past the point of personal financial distress should not be prevented from being a CFP professional and working with the public. This is why the fitness standards only require a public disclosure of a bankruptcy that occurred within the past five years.

Accordingly, to the extent that the CFP Board decides to proceed with an expungement process — encapsulating both a petition to remove publication of bankruptcy incidents and public disciplinary sanction — the CFP Board should consider:

• Separating removal of bankruptcies from expunging public sanctions. While functionally a bankruptcy can be handled with the same petition to remove publication as expunging a public disciplinary action, the standards by which expungement occurs — or whether it occurs at all — should be separated for bankruptcy-only cases, versus those where actual wrongdoing occurred.

• Private censures as an aggravating factor. To the extent that expungement is considered with a petition to remove publication, private censures should be considered an aggravating factor that limits the ability for an expungement to occur —not just other public sanctions.

• Altering the expungement time period based on the gravity of client harm. Not all complaints are the same, even if they have the same public disciplinary action. Accordingly, consider separating out public sanctions that were associated with actual client harm — e.g., financial damages to a client, or situations where a material arbitration award or settlement occurred — from those infractions that were more administrative in nature, such as the improper use of the fee-only label.

• Attaching a 10-year probationary period to expungement. In situations where a petition to remove publication is approved, affirm that any subsequent complaint that results in a disciplinary sanction — whether another public sanction or even just a private censure — will cause the previously removed public sanction to re-appear on the CFP certificant’s record as a probationary failure. Given the available data on recidivism rates of those who have even just one public disciplinary event — and especially on the higher recidivism rate of those who seek expungement in the first place — the CFP Board should consider not allowing for the removal of public disciplinary actions at all, and instead:

• Create a system where CFP certificants can attach notes to explain a prior sanction. Similar to FINRA, CFP certificants could be granted the opportunity to attach a note to their record that provided their own perspective and explanation of a public disciplinary action, allowing consumers to both see the historical event itself and hear the certificant’s perspective.

• Label and categorize the CFP certificant’s infraction associated with the sanction. To the extent that CFP certificants are concerned that a public sanction disclosed on the CFP Board’s website may unfairly bias a client against them beyond the level merited by the infraction itself, the CFP Board could disclose not only the public sanction but also the nature of the infraction, even providing a basic categorization of the type of infraction — e.g., administrative vs. client harmed.

With such a system, CFP certificants could better explain their public disciplinary records and provide important context about the depth and materiality of the prior infraction without granting a pathway that automatically expunges disciplinary actions based solely the passage of time.

And to the extent that the CFP Board is concerned about a potential uptick in violations of the new standards of conduct as they take effect later in 2019, consider a pathway similar to the Department of Labor’s own fiduciary rule rollout — where it was announced that the regulator would take a more lenient and conciliatory approach toward enforcement for the first year, in addition to granting a transitionary period as the full scope of the rules took effect — to help CFP certificants get up to speed on the new rules as opposed to making examples of the first-reported wrong-doers.

Ultimately, as previously noted, the board’s proposed changes to its disciplinary rules and procedures are just that — proposed. A full copy of the proposed rules themselves can be found here, along with a summary of key changes from the Board here.

For those with concerns who want to share feedback — whether about allowing the expungement of prior public disciplinary sanctions or any of the other proposed changes — you can submit a public comment or simply email comments@cfpboard.org. Comments are due by Jan. 29.