Advisory firms that employ investment adviser and broker dealers hoping to become certified financial planners, or those wanting to renew their certificates, now can disclose details about customer complaints to the CFP Board of Standards without violating the customers' privacy rights -- a change that will give the organzation's enforcement arm more muscle.
Last week, the Certified Planner Board of Standards Inc. re-leased a letter from the Securities and Exchange Commission giving it permission to obtain background information about complaints filed against brokers and advisers. Until now, such requests could be refused on the grounds that fulfilling them might violate an SEC regulation designed to protect customer privacy.
But in the letter, Joseph Furey, acting co-chief counsel of the SEC's Division of Trading and Markets, said the agency will not take action against advisers who provide the complaint information, giving the CFP Board an exception to so-called Regulation S-P.
The move will make background checks of CFP candidates more efficient and reduce the number of misconduct investigations that are dismissed due to insufficient evidence, according to the organization.
In 2010, the CFP Board conducted 1,472 investigations of alleged misconduct by CFP professionals and applicants for certification. Of the 1,171 cases that were dismissed, 253 were due to the CFP Board's inability to obtain background material.
“It is very, very frustrating to feel that you've got allegations that are serious in nature but you simply can't gather the evidence to substantiate those allegations,” said Michael Shaw, who oversees compliance, enforcement and legal functions at the CFP Board. “My hope is that with this no-action letter, we will have cooperative relationships with firms and be able to get to the bottom line of the allegations.”
Indeed, one day after the announcement of the SEC's decision, three advisory firms provided the CFP Board with information about customer complaints, Mr. Shaw said.
“We're definitely seeing some positive effects,” he added. “We have anecdotal evidence that it is working already.”
The CFP Board's increased latitude to police the 62,600 advisers who hold the CFP mark will help make the advice sector safer, said Pat Huddleston, chief executive of Investor's Watchdog LLC and author of the forthcoming book “The Vigilant Investor.”
“It's going to make the CFP designation more valuable, more meaningful,” said Mr. Huddleston, who is a former enforcement chief in the SEC's Atlanta office. “The designation itself is not enough [for investors] to rely on. But it sounds like that step is going to make the designation stronger.”
Even though the CFP Board now will have sharper disciplinary teeth, it will take only a moderately larger bite out of market malfeasance, said James Meyers, a partner at Orrick Herrington & Sutcliffe LLP.
“This will add some modicum of additional protection,” said Mr. Meyers, a former assistant chief litigation staff member in the SEC's Division of Enforcement. “I don't believe it will result in a tremendous amount of [additional] enforcement.”
But it may provide more deterrence.
The CFP Board awards the CFP certificate to individuals who pass an initial exam, undergo a background check and fulfill follow-up requirements. The renewal process includes disclosing any investigations or legal proceedings that occurred in the previous two years.
Mr. Shaw is trying to reassure broker-dealers and advisory firms that the CFP Board will not become overbearing with its new power by requesting complaint information on every CFP or by reopening past investigations. The board will pursue only specific investigations that are already under way, he said.
“The CFP Board does not intend to use the no-action letter to go on a fishing expedition,” Mr. Shaw said. “We're doing as much as we can to communicate this no-action letter and to get it into the hands of compliance and legal personnel at firms.”
The CFP Board had to make a similar outreach effort to the SEC. Over the course of a 14-month dialogue, the organization persuaded the agency that it required access to the complaints in order to help protect investors by bolstering the integrity of the CFP mark.
“It took several phone calls; it took several drafts of my letter to get to a place acceptable to the SEC,” Mr. Shaw said.
An effort to establish a universal fiduciary duty for retail investment advice, which is under way at the SEC thanks to the Dodd-Frank financial reform law, may put the CFP Board in a position to vet more advisers, Mr. Huddleston said.
If everyone is forced to uphold a fiduciary duty — which is already required of certified planners — advisers are going to try to distinguish themselves from their competitors.
“One of the ways you do that is through designations,” Mr. Huddleston said. “I wouldn't be surprised to see a giant uptick in the number of CFP applicants.”
E-mail Mark Schoeff Jr. at [email protected].
