The CFP Board of Standards says part of its mission is to serve the public by upholding high standards of conduct. But some planners are questioning the group's motives after it recently gained access to many Americans' private financial information. Skeptics wonder whose best interest the organization has at heart.
The board had asked the SEC in March to allow RIAs and broker-dealers to share customer information - such as brokerage and bank account statements - without violating Regulation S-P. This regulation governs how institutions should handle customers' private financial data.
The SEC granted the request 14 months after initial discussions, seemingly empowering the board to be the de facto authority to enforce planner standards. The board investigates customer complaints when it certifies new CFPs or renews designations, as well as for disciplinary action.
The board has often been stymied when it is investigating complaints, says Michael Shaw, the board's managing director for professional standards and legal matters. When it opens a case, it sends a letter to the CFP asking for related information in an effort to hear the advisor's side of the story.
If the advisor is a registered representative at a broker-dealer or large investment advisory firm, he or she would forward the letter to the firm's compliance department. In the past, a compliance department would typically decline, saying it did not want to violate Regulation S-P.
"In these cases, the only way to proceed was to get that customer to sign a waiver of confidentiality, which we have done in some instances," Shaw says. The board has been trying to get firms to cooperate, mainly so advisors can defend themselves before its disciplinary and ethics commission.
The SEC has granted exceptions to Regulation S-P rules to entities assessing broker-dealer and registered advisory firms' compliance with industry standards. In his March letter to the SEC, Shaw argued that certain industry standards are used to assess planners individually. The CFP standard has become a de facto professional standard, Shaw added, so the SEC should extend the exception on the same principle.
Shaw believes the CFP Board will be able to complete more investigations with the new exception in place. Last year, the board opened 1,472 investigations of alleged misconduct by CFP designees and candidates, dismissing the vast majority: 1,171 cases. Of that group, 253, or 22%, were dismissed due to insufficient evidence.
"The CFP Board was unable to obtain documentation or reliable information to substantiate [those] allegations," Shaw said in a statement. The board executive added that he expected the SEC ruling will drive down the number of cases dismissed for lack of evidence.
Some industry professionals have decried the SEC's decision, saying the agency chose to break with procedure on a sensitive matter. Had the SEC tried to amend Regulation S-P, it would have had to open the issue for public comment before taking it to the full commission.
"I'm a great believer in process values," says Barry Kohler, a CFP and principal of BerryDunn Wealth Management in Portland, Me. "This process should have been one that allowed for public comment and sunlight, and for people to speak their piece, then the CFP Board could have decided what action to take."
Now, says Kohler, it's unlikely any CFP could resist the board's request for client information. "That will count against him or her when [the board does] the last analysis," Kohler says. "That is why certificants who are registered representatives were happy to have the broker-dealer take the heat for that," he adds.
Kohler served on the board's disciplinary and ethics commission and became chairman-elect in 2008. But he resigned from the commission later that year, along with four other members, because he said the staff enacted procedural changes without the commission's consent.
The SEC ruling "raises lots of questions about whom they are accountable to, and checks and balances," Kohler says. "I have had and continue to have lots of concerns about that."
Had the SEC sought public comment, the outcome might have been different, says Brian Hamburger, founder and managing director of MarketCounsel, a business and regulatory compliance consulting firm in Englewood, N.J. The SEC might have established specific parameters on how the board would maintain and disclose the records.
"Where do you draw the line for client privacy?" Hamburger asks. "The SEC has put financial advisors in a precarious situation by stepping on the privacy rights of clients. The CFP Board has been appointed king overnight." Kohler concurs, saying the board obtained a privilege without taking steps to assume necessary accountability.
Aside from granting the CFP designation, the board is a lobbying group whose mission is to promote the CFP certification as the industry's standard of excellence, says John Robinson, principal of Financial Planning Hawaii in Honolulu, an affiliate of Financial Advisers of America. "It is not clear to me that [the SEC ruling] is in the best interest of financial advisors, or that the CFP Board is being consistent with Regulation S-P," he says.
"I have no doubt they believe what they are saying, but I'm not sure the investing public believes in that," he adds. Robinson does not have a CFP designation, saying he never felt the need to get it, although he has written several highly regarded reports, including Reality Check: The Implications of Applying Sustainable Withdrawal Rate Analysis to Real World Portfolios, which received the Outstanding Financial Paper Award from the CFP Board in 2008.
The SEC declined to comment on its ruling, in which Joseph M. Furey, co-acting chief counsel, emphasized that the decision was based on the CFP Board's representations. Pat Burns, a compliance lawyer and consultant in Beverly Hills, Calif., noted that agencies in several states, including California, require banks and financial institutions to get client consent before sharing confidential information.
"What is the plan for those states?" Burns asks. "There will be state privacy issues that have not been resolved just by going and getting a letter from the SEC." If a firm's compliance department received guidance from its state regulator that upheld the requirement to get a client consent waiver, then the company would have to make a choice between that decision and the SEC ruling, Shaw says.
Daniel Moisand, a principal at Melbourne, Fla.-based financial planning and wealth management firm Moisand Fitzgerald Tamayo, agrees that state privacy regulations are a factor that will have to be addressed. Nonetheless, says Moisand, who is also a former chairman of the CFP Board's disciplinary and ethics commission, "I have yet to run into a client whose advisor has been accused of something and that advisor refuse to [cooperate to] find out what is going on. I don't think they would have problems giving permission."