CFP Board must not go soft on bankruptcy

GIVEN THAT IT PURPORTS in its mission statement to “benefit the public by granting the CFP certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning,” we are confounded — and

frankly, dismayed — by changes that the CFP Board is considering in the way it handles bankruptcy filings by some CFPs.

The Certified Financial Planner Board of Standards Inc. two weeks ago proposed a rule change that would end disciplinary proceedings over bankruptcy investigations and replace them with more rigorous disclosure requirements. Under the proposed rule, the CFP Board no longer would investigate one-time, stand-alone bankruptcies, nor would its ethics body rule on whether the bankruptcy were due to an ethical lapse.

PUBLIC DISCLOSURE

Although the organization should be commended for taking steps to improve public disclosure about CFPs who are unable to manage their own finances, we reject the proposal's premise, which is that better disclosure is a suitable replacement for a vigorous enforcement and disciplinary process. Given the CFP Board's determination to position its designation as the “gold standard” for advice, its attempt to shrug off responsibility for determining whether mark holders who have filed for bankruptcy are worthy of promoting themselves as CFPs seems almost nonsensical.

Of course, the CFP Board doesn't see it that way.

Switching from a “disciplinary” to a “nondisciplinary, disclosure-oriented approach” would fulfill the group's mandate to benefit the public, the organization said in its request for comment on the proposal, and it would benefit CFPs and candidates for CFP certification “because they will no longer be subjected to potential discipline in bankruptcy-only cases.”

“We're putting the information into the hands of the consumer and leaving it up to the consumer to take into account that information and make an informed decision,” Michael P. Shaw, the CFP Board's managing director of professional standards and legal, told the InvestmentNews editorial committee last week. “We think it's more aligned with our mission to the public by disclosing the bankruptcy rather than having it run through our disciplinary process.”

Being relieved of the responsibility to investigate bankruptcies also would free the CFP Board to allocate more of its financial resources to investigate more-egregious cases, Mr. Shaw said.

Last year, the CFP Board launched 1,569 investigations into conduct by its mark holders, up 6.5% from 1,472 in 2010.

Through early December, bankruptcy cases accounted for 49 of the CFP Board's 134 disciplinary hearings for the year, up from 20 of 103 cases in 2010.

Even so, before diminishing its authority over bankrupt CFPs, we urge the board to conduct — and make public — a thorough cost- benefit analysis of the rule change. In that analysis, it should look at ways it might lower the costs of bankruptcy investigations and how it might raise, or divert, funds to strengthen its enforcement group.

As it stands, if a mark holder seeks bankruptcy protection, he or she can face a range of sanctions, including revocation of the credential.

Under the current system, the CFP Board investigates all bankruptcies involving its members. Those that are found to have “mitigating circumstances” — such as being the result of a catastrophic illness or a divorce — are dismissed with a “private censure,” which isn't made public.

In addition, a bankruptcy in the previous five years can prohibit an applicant from being awarded the CFP mark.

UPHOLDING STANDARDS

If the CFP Board is serious about fulfilling its mission to benefit the public — not to mention upholding the ethical standards of all its mark holders — it will continue to investigate all bankruptcy filings involving CFPs and take disciplinary action in cases involving gross negligence or other misconduct.

It also would approve that part of the proposed rule change that would lead to public disclosure on its website of all bankruptcies involving mark holders, regardless of the circumstances surrounding those filings.

In a perfect world, investors would take responsibility for doing their own due diligence on financial advisers. Before putting their hard-earned savings into the hands of an adviser, they would take the time to sift through filings with the Financial Industry Regulatory Authority Inc. and the Securities and Exchange Commission to determine whether that adviser had been found guilty of misrepresenting himself or herself, or the features of the products they sold.

But this isn't a perfect world. And most clients find their way to an adviser by way of a referral from a trusted friend or family member, with nary a simple Google search on that adviser's name.

Although most bankruptcies among CFPs are not the result of misconduct or ethical lapses, some are. The proposed rule change would hurt, not benefit, the public. Moreover, it would diminish the status and reputation of the CFP designation, which is, in fact, widely considered the industry's top standard.

A final proposal is expected to go before the board at its March meeting. The CFP Board is accepting comment on the proposed rule through Feb. 17.

We urge all CFPs to voice their objections to the proposal within that time period.

Related Topics: Certified Financial Planner Board Of Standards Inc. (CFP Board)