The right to use the CFP marks entails signing an agreement with the CFP Board, which commits the CFP certificant to abide by the board’s terms and conditions of certification. These terms cover essential details, from the CFP Board’s rights over the CFP marks, to the certificant’s use of them and the ability of the CFP Board to discipline the certificant or revoke the marks entirely in cases of misconduct.
In late March, for the first time in nearly eight years, the CFP Board announced major updates to the terms and conditions of certification. And while several of the changes are simple clarifications to the legal language, the CFP Board did introduce a significant new provision that would require all disputes between CFP certificants and the organization to be taken to mandatory arbitration rather than a court of law.
Arguably, arbitration will be a less expensive and more expedient path in many, or even most, cases. But the CFP Board’s arbitration requirement that keeps the outcome confidential — even in rulings that go against the CFP Board — coupled with a separate and already existing rule that limits any CFP Board liability to no more than $1,000 plus legal fees, effectively means the CFP Board has very little accountability or transparency whatsoever in any dispute (or worse, a series of disputes) with CFP certificants.
Perhaps most disconcerting is the fact that the CFP Board is unilaterally changing its terms and conditions. This is technically the organization’s right, as it controls the CFP marks and CFP certificants, and would-be certificants always reserve the right not to sign and simply walk away. Yet the growth of the CFP marks in public prominence — saying nothing of the CFP Board’s success in outdistancing virtually all other designations for financial advisors — means that even if CFP certificants prefer arbitration simply as an option rather than a mandatory course, they have very little choice but to accept the unilateral changes being handed to them, or risk being disparaged when the CFP Board’s “Certified = Qualified” public awareness campaign questions their competency.
Given the FPA’s inability to effectively advocate on behalf of CFP certificants, will the CFP Board consider some means to allow CFP certificants to consider the proposed decision before we are forced to waive our legal rights? At minimum, will the CFP Board’s directors modify their mandatory arbitration proposal to limit its scope to its publicly stated purpose, and provide some information regarding arbitration outcomes to at least be as transparent as FINRA?
UNDERSTANDING THE CFP BOARD’S T&Cs
As a part of applying for CFP certification — initially or upon renewal — every CFP certificant must agree to abide by the CFP Board’s terms and conditions of certification. The current CFP Board terms form the basis for the legal contract between the CFP Board and those who apply, and cover everything from the actual authorization of when and how CFP certificants can use the CFP marks, to the CFP Board’s retained intellectual property ownership of the marks themselves, and the rules regarding a CFP certificant’s right to relinquish the use of the marks, have them revoked, or be publicly disciplined by the CFP Board for improper use of them.
As with any contractual agreement between two parties, there may be the occasional dispute regarding the terms of the agreement — a potentiality brought into sharp relief nearly three years ago when Jeff and Kim Camarda, in a dispute over whether they should be publicly disciplined for an alleged violation of the CFP Board’s practice standards regarding compensation disclosure, sued the CFP Board. In essence, when the CFP Board’s Disciplinary and Ethics Commission (DEC) ruled against the Camardas, and the ruling was upheld in the CFP Board’s appeals process, the Camardas turned to the courts to act as final arbiter of whether the CFP Board properly followed its process in adjudicating the result.
On the plus side, the fact that CFP certificants have some final path of recourse beyond the CFP Board’s own DEC and appeals committees is a very good thing, as it helps ensure the CFP Board’s accountability for its disciplinary process. The bad news, though, is that court disputes can be very expensive for all parties involved, with estimates that the CFP Board may have racked up more than $600,000 in legal bills just in the discovery phase of the Camarda case. And that’s saying nothing of the bill for the Camardas in their effort to combat what they felt was an inappropriate disciplinary outcome.
The alternative for those who want some legal recourse, but wish to avoid the costs (and slow pace) of the traditional court system, is to pursue arbitration. And now, with its latest update to its terms and conditions of certification, the CFP Board will soon requirejust that.
RAMIFICATIONS OF MANDATORY ARBITRATION
In its announcement in March, the CFP Board declared that it was revising and updating its terms and conditions of certification for all certificants, effective May 2. And while many of the changes were simply clarifications of some legalese from the existing agreement, a significant new provision is the introduction of a new Section (r) pertaining to disputes between CFP certificants and the CFP Board, which would for the first time mandatearbitration for those seeking a resolution.
The arbitration process itself would be handled through the American Arbitration Association, and would entail the selection of three arbitrators who were all former federal or state court judges with at least five years of experience on the bench. These would be chosen from an initial list of 15 potential judges, where each party could strike three names and then rank the rest according to preference.
The chosen arbitration panel can then meet with the parties or any witnesses they call, and review documents that were presented in the original CFP Board disciplinary proceedings and any additional discovery documents the arbitrators might request. The arbitration decision, not to mention any award for damages, would be made within nine months unless extended by mutual agreement of the parties, and if the CFP Board were to lose, it would be obligated to pay both the CFP certificant’s legal fees up to $30,000, plus the costs of the arbitration itself. Conversely, if the CFP Board wins, the arbitration costs are split, and each party pays its own legal fees.
Notably, the mandatory arbitration provision also requires that the occurrence of the arbitration itself, along with any claims raised, issues addressed, the substance of the proceedings and any final award, be kept strictly confidential.
EXPEDIENCY VS. TRANSPARENCY?
Given the costs and hassles of the legal system, arbitration as a means of resolution for legal disputes has been on the rise for many years, and the CFP Board is hardly the first body to implement a mandatory arbitration clause. In fact, most advisors are — or should be — familiar with the idea of mandatory arbitration, because it’s standard in virtually every brokerage account agreement we sign with our clients (and is estimated to be included in 46 percent of RIA client agreements as well).
On the other hand, the inclusion of mandatory arbitration agreements in the securities industry has come under increasing criticism in recent years. While billed as a means of expediting a dispute’s resolution, the FINRA arbitration process in particular has been criticized for being biased against consumer complaints that the process may not always be fair. Further, critics contend that the always-private proceedings obscure a critical aspect of consumer transparency and broker accountability. The momentum against mandatory arbitration in the securities industry has increased so much that last year, there was even a legislative proposal in Congress that would seek a ban of pre-dispute mandatory arbitration clauses altogether.
Granted, as a mandatory arbitration process goes, the CFP Board’s new approach in its revised Terms and Conditions agreement seems a particularly fair and reasonable one. It relies on multiple judges rather than industry participants who might favor the CFP Board, and it allows nine months, a healthy period of time, for resolution. And within the context of the CFP Board — at least where a dispute regarding a disciplinary matter is concerned — it’s significant that the arbitration panel will effectively be the fourth stage of review on the same information (after CFP Board staff determines probable cause; the DEC hears the matter; and the CFP Board Appeals Committee reviews it). Consequently, the facts of the case should — should — be well established at that point. And even with four levels of review, the process ought to still be more expedient than a court case, preventing the CFP Board from being distracted by lawsuits — which has clearly been an issue with Camarda, and is not fruitful for the organization or CFP certificants in the long run.
The one major challenge of the CFP Board’s new mandatory arbitration process is its confidentiality clause. The CFP Board notes that confidentiality ensures that if a certificant wants to dispute a disciplinary matter, the dispute itself won’t become public. That is important, as it means that if an advisor thinks he or she has been wrongly accused or disciplined, a public dispute aboutthe disciplinary action would be almost as damaging as an outright finding of guilt. The reputational risk to the advisor of a public court case disputing a disciplinary action — even if the advisor is vindicated — is still high. So, confidentiality of the proceedings, for the sake of the CFP certificant, is a good thing. And of course, if the CFP certificant really is guilty of some client infraction, it would ostensibly still be revealed when the CFP Board first issues the public disciplinary action.
But the mandatory arbitration agreement with the CFP Board goes both ways. It also protects the body’s privacy. Consequently, if there are significant problems with the Board, and multiple certificants are disputing disciplinary issues, neither the public nor CFP stakeholders would ever know. If cases are being disputed, and precedents are being set based on the outcomes, no future certificants would ever have the opportunity to rely on those prior precedents. In fact, throughout the Camarda case, up to and including its resolution, the CFP Board fought persistently to have all details of the case sealed in court, raising questions of whether the CFP Board had something to hide. In a world of mandatory arbitration, transparency is lost, and there will be no way to ever find out.
THE LIMITATIONS OF LIABILITY
Beyond the issues of a mandatory arbitration’s transparency, it’s also crucial to recognize that if the CFP Board loses a ruling — whether in arbitration or in court — in virtually all cases, the maximum penalty under the new terms and conditions it would pay a CFP certificant would be a whopping $1,000 (plus legal fees up to $30,000).
In fact, this significant limitation on liability is not new. A limitation on liability for the CFP Board already exists in the current terms and conditions of certification, where the liability is limited to no more than any application fees that were paid (i.e., the $325 the party pays in application fees to become or renew as a CFP certificant). Arguably, the CFP Board never really had much at risk in the Camarda lawsuit, beyond perhaps paying the Camardas’ legal fees, if the CFP Board was able to bring its Limitation of Liability clause to bear. And arguably, the CFP Board may have never been liable for damages to the Camardas’ reputation anyway, given it was actually the Camardas themselves, and not the CFP Board, who revealed the dispute to the media.
Nonetheless, in the new version of the terms and conditions, the updated language is even more crystal clear that the CFP Board’s liability would be limited to no more than $1,000 in a case where the CFP certificant disputed a public disciplinary matter (such as the Camarda scenario).
In other words, when a party signs the application to become or renew as a CFP certificant, that party waives a significant number of rights in any future dispute with the CFP Board. He or she waives any claims against CFP Board staff, directors or officers; any right to legal compensation for CFP Board wrongdoing above a paltry $1,000; and now, any right to have the matter heard in court or even see the light of day.
Similarly, all parties who sign the CFP Board’s terms and conditions also agree to indemnify the CFP Board in any lawsuits where the Board is named alongside the CFP certificant. In other words, if the Board is ever named in a lawsuit alongside a CFP certificant (e.g., questioning the credibility of CFP marks for a CFP professional who caused client harm), the CFP certificant would be on the hook to cover the CFP Board’s legal fees in the matter, and would also be barred from settling the case unless the CFP Board agreed to the resolution and/or was entirely cleared of wrongdoing.
ARE THE TERMS FAIR?
While the CFP Board’s terms and conditions may seem somewhat lopsided in favor of the organization, they’re arguably still reasonable for an organization of the CFP Board’s size and position. And most of their provisions are not unique; other large organizations often impose similar terms and conditions to protect themselves.
After all, in a world where there’s one CFP Board entity and 73,000-plus CFP certificants underneath it, the organization needs a path to ensure it is not dragged into every random lawsuit against a misbehaving CFP certificant. In most cases, the indemnification clause will be a moot point because the CFP certificant’s attorney will simply defend both anyway, because it’s the same legal matter (and still primarily about the CFP certificant). The indemnification clause also really pertains just to situations where it was the CFP certificant who engaged in wrongdoing (e.g., by failing to follow applicable laws, misrepresenting themselves, misusing the CFP marks in a way that caused consumer harm, etc.).
Similarly, the CFP Board’s Waiver and Release clause (Section (o) of the new terms), which requires certificants to release CFP Board staff, directors and volunteers from any liability — except in cases of willful misconduct or gross negligence — is arguably a necessary prudence, as it’s not productive for staff and especially volunteers to fear lawsuits from random CFP certificants unhappy with a disciplinary outcome (even or especially one that was deserved for CFP misconduct). At minimum, it seems reasonable to shift liability exposure from the staff and volunteers to the organization as a whole.
The CFP Board’s limitation on liability also pertains specifically to liability that would arise out of the CFP Board’s application of discipline to a CFP certificant, and/or a dispute about the CFP certificant’s inappropriate use of the marks, the CFP Board’s right to announce a disciplinary enforcement action, etc. Given a CFP certificant would prefer not to be publicly disciplined, even if he or she is in the wrong, the CFP Board needs to take reasonable action to avoid a legal backlash by engaging in a disciplinary action in situations where it really is merited. In other words, the fact that the CFP Board is willing to step up and actually enforce its practice standards is admirable, and it’s hard to fault the organization for wanting some limitations on its legal exposure.
Still, if arbitration is so expedient, perhaps it’s more appropriate to give CFP certificants the option for arbitration, or even an incentive for it — for example, the CFP Board guaranteeing to cover arbitration costs if it loses — but not require it. And while putting somelimit to the CFP Board’s liability may be a practical necessity, is it really appropriate to do it in such a manner that CFP certificants have no real recourse even in cases of legitimate harm?
In theory, this would be a moot point, because a disciplinary decision against a CFP certificant wouldn’t go public until after the arbitration was over, and if the arbitration panel found in favor of the certificant, information that might cause financial harm to the CFP certificant would never be disseminated. Still, it’s concerning that even if the arbitration panel found in favor of the CFP certificant, and affirmed that the CFP Board really was in the wrong, and there was some financial harm that had occurred (e.g., if a staff member inappropriately leaked private case information to the public or media), the CFP certificant still would have no substantive financial recourse.
And beyond the issue of liability, does our profession benefit if the CFP Board has an unlimited right to prevent anytransparency regarding disputes between CFP certificants and the organization? After all, there is a reason why the proceedings of our court system are generally publicaffairs: It’s essential for a foundation of trust between the executors of the law and those who operate within it.
CFP BOARD T&Cs: TOO UNILATERAL?
Of course, the CFP certificant who doesn’t like the CFP Board’s terms and conditions always has the same choice as anyone who doesn’t like the terms of a business contract: You can walk away.
Yet with the CFP Board’s growing market share of CFP certificants, its massive and growing lead over all other financial advisor designations in terms of consumer trust and recognition, and a Consumer Public Awareness Campaign that states “Certified = Qualified,” walking away just isn’tan option anymore. If you decided you didn’t like the CFP Board’s new terms and conditions and chose to walk away from CFP certification altogether, the CFP Board’s public awareness campaign would effectively bash you after the fact by suggesting to your clients and prospects that you weren’t qualified to serve them… which makes any choice feel like one made under duress.
The CFP Board’s latest changes to the terms and conditions of certification raises the question of whether the CFP marks have become so prominent that financial advisors no longer have a fair choice about whether to follow the new terms or walk away. Instead, the CFP Board’s two-way agreement has become a unilateral contract that CFP certificants are stuck with, bound to and powerless to abandon, given the lack of any viable alternative designation — let alone the years of studying and exam efforts already poured into getting the designation in the first place.
Perhaps, then, it’s time for the CFP Board to consider a process to engage CFP certificants in conversations about the terms and conditions, rather than potentially undermining trust with the CFP stakeholder community by unilaterally applying the changes to everyone with barely a month’s notice (as the new rules will be effective May 2). After all, in the act of limiting the Board’s own liability and exposure, it’s difficult to envision how the staff and Board of Directors would possibly give equal weight to CFP stakeholders. I would expect the Board of Directors, in its role of protecting the organization, to encourage staff to make the contract as favorable as possible to the CFP Board, but when the contract is so unilateral, there’s no one to represent the CFP stakeholders themselves.
Advocacy for CFP certificants would ideally come from the organizations that represent us, such as the Financial Planning Association. Yet the drastic decline in the FPA’s power in the financial planning profession has rendered it completely silent on substantive advocacy issues for CFP certificants, from the CFP Board’s decision to cut the CFP experience requirement (for which the FPA failed to utter a single public word in defense of the standards), to the launch of the CFP Board’s Center for Financial Planning that competes directly with many of the FPA’s own services.
This leaves us once again in a situation whereby the only organization that can engage CFP stakeholders about the Terms and conditions of certification is the CFP Board itself, the very body whose primary incentive is not to engage stakeholders, and instead impose a unilateral contract upon them that protects only itself, and in full knowledge that it will be extremely difficult for stakeholders to walk away.
HOW TO FIX THE T&Cs
So what should the CFP Board do from here? I would suggest several steps, for the sake of maintaining a healthy relationship with CFP stakeholders and to better legitimize what otherwise feels like an awkward, unilateral imposition of new Terms and Conditions:
1.) Consider a Public Comment Period Regarding the New Mandatory Arbitration Clause
There’s no requirement to do so, but leaders have long recognized that seeking buy-in from stakeholders is essential to legitimize potentially controversial decisions, especially when it involves changing terms that are unilaterally imposed. If mandatory arbitration is so clearly better for the organization and its stakeholders, then make the case, and give us a chance to affirmatively agree that we want to waive our right to sue in court, rather than imposing it upon us in a situation of borderline duress.
2) Provide a Public Reporting Mechanism for Arbitration Panel Outcomes
Even FINRA, often lambasted for its lopsided arbitration panels, provides transparency regarding their outcomes, appropriately anonymized to protect client privacy and innocent parties. If the CFP Board’s disciplinary rulings are persistently upheld in arbitration, that only provides further validation to the disciplinary process. And if the CFP Board’s disciplinary rulings are routinely being overturned in arbitration, the public and CFP certificants have a right as stakeholders to know. When the CFP Board fights tooth and nail to hide the Camarda proceedings from the public, and then unilaterally requires all future disputes with certificants to be hidden from the public as well, it gives the impression there’s something rotten being hidden. Providing basic information about arbitration outcomes, including which party was the victor and the facts of the case, such that other CFP certificants are made aware of important precedents, is a modest and reasonable compromise.
3) Limit the Scope of Mandatory Arbitration
Public statements from the CFP Board have characterized mandatory arbitration as a prudent fourth layer of review in disciplinary disputes with CFP certificants. To this extent, it seems reasonable (with the caveats enumerated above). However, the actual language of the terms and conditions eliminates the CFP certificants’ right to sue the CFP Board for any legal dispute whatsoever, in addition to eliminating the right of CFP certificants to join up in legal action (as certificants are required to arbitrate individually, and are barred from class actions). The mandatory arbitration clause is so broad, it also relegates disputes about the terms themselves to mandatory arbitration. In fact, it would appear that if the Board of Directors itself is failing to properly exercise its duties, CFP certificants are barred from taking legal action to rectify the situation. This creates a serious gap in basic organizational accountability, and again feeds the impression that the CFP Board is hiding something.
The bottom line is that while the new mandatory arbitration agreement may be reasonable, its imposition without stakeholder input, in a manner that lacks transparency of outcomes, while forcing CFP certificants to surrender key mechanisms of organizational accountability, creates a concerning precedent for an organization that already has trust issues with its stakeholders. If the primary goal of the mandatory arbitration clause is to avoid future court battles over the CFP Board enforcing its disciplinary process — which I think is reasonable — then so be it, but limit the scope of mandatory arbitration to be specifically for that purpose, and adjust the rules to allow for a public reporting process of arbitration outcomes in a manner that protects client privacy and innocent parties but provides appropriate organizational accountability and transparency.
So what do you think? Is the CFP Board’s shift to mandatory arbitration simply a prudent step for an organization growing its enforcement of the practice standards? Should the CFP Board have further engaged CFP certificants themselves? Do you think CFP certificants still have the option to “vote with their feet” and leave if they’re unhappy with the terms? Please share your thoughts in the comments below.
Michael Kitces, CFP, is a Financial Planning contributing writer and a partner and director of research at Pinnacle Advisory Group in Columbia, Md. He’s also publisher of the planning industry blog Nerd’s Eye View. Follow him on Twitter at @MichaelKitces.
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