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CFP Board Lawsuit Points to Systemic Abuse by Nonprofits, Experts Say

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The CFP Board's inconsistent disciplinary record proved irrelevant to a federal judge – a development that, experts say, illustrates a systemic problem in the abuse-prone world of nonprofits.

Longstanding precedent in state and federal laws prevent courts from interfering in nonprofits' internal matters – unless they involve crimes such as theft. As a result, many nonprofits routinely abuse their power without fear of repercussions, says Tom Hazen, a law professor and an expert in nonprofit governance at the University of North Carolina.

"One of the dilemmas of the whole nonprofit world is that there is very little accountability," Hazen says.

Other experts in nonprofit governance share that view.

"It's very unchecked," Miranda Perry Fleischer, a professor at the University of San Diego law school, says of nonprofit power. "It can be very hard for courts to intervene."

"We always want boards to take the high road," Vernetta Walker of BoardSource said in a wide-ranging interview two years ago about the CFP Board's differential treatment of CFPs in cases of fee-only conflicts. "You can't make them," added Walker, vice president of the Washington-based group that promotes good governance practices among nonprofit boards.

Earlier this month, Judge Richard Leon of U.S. District Court in Washington, dismissed a case two planners filed against the CFP Board. He explained his reasoning in an opinion unsealed Tuesday.


"Courts ordinarily will not interfere with the management and internal affairs of a voluntary association," Leon wrote. "Comparing how other applicants were treated by [the CFP Board] would take this court 'beyond the proper scope of review,'" he added, quoting a case precedent.

Kimberly and Jeffrey Camarda of Fleming Island, Fla., sued the board two years ago to stop it from publicly punishing them for calling their practice fee-only. Yet, soon afterward the board granted an amnesty to hundreds of other planners for doing the same thing.

Lack of accountability among nonprofits makes it difficult for individuals like the Camardas to obtain legal redress for alleged harm, Hazen says. They must prove a nonprofit violated its main purpose or demonstrated negligence, he says, which is a high bar to clear.

"There are a lot of nonprofits where there really is an abuse of power," Hazen says. "As long as they stay on the right side of the line -- even though either you or I would say what they are doing is wrong -- it's still protected by 'judgment,' " which is regarded as a synonym for a board's discretion.

The board did not immediately respond to questions regarding issues raised by Hazen and other academics.


Citing a case involving a sorority to support his decision, Leon said the Camardas' failed to prove their breach of contract claim.

The board "followed its own rules throughout the disciplinary proceedings against plaintiffs," Leon wrote. (He also found the Camardas failed to prove antitrust and unfair competition claims, although they had dropped their antitrust claims last year.)

He added that the Camardas "point to no evidence that defendant was motivated by bad faith or ill will toward them."

"I imagine," Hazen says, that "the judge felt that, 'Well, they are alleging a bad decision and general unfairness -- and that's not enough.'"


CFP Board Chairman Richard Rojeck hailed Leon's decision as "a significant victory for CFP certification, for CFP Board and for CFP professionals.

"It affirms the integrity of the CFP certification," he continued in a joint statement with the board's staff, as well as the board’s “role as the standard-setting body for personal financial planners. CFP Board’s peer-review disciplinary process is both fair and equitable, and allows CFP professionals to determine when one of their peers has violated CFP Board’s rules of conduct. As a result of the court’s decision, the public will be protected because CFP professionals will continue to be held accountable when their peers have found that they deserve to be sanctioned for their conduct.” 

The Camardas counter that the judge's decision neither addresses the fairness of the board's rules nor the merits of their case, and that CFPs should be very concerned that courts won't hear their grievances against the board.

Rojeck also praised the board CEO Kevin Keller for "his strong direction and prudent and thoughtful oversight of the litigation."

Keller's former second-in-command, Michael Shaw, who headed up the board's fee-only disciplinary operations for nearly eight years, resigned in the middle of the pretrial phase of the lawsuit. Both faced withering criticism for their handling of fee-only issues from some in the industry, including one of the board's former disciplinary officials who called for Keller's resignation along with Shaw's.


Lawmakers have long failed to strengthen laws governing nonprofits, experts say, partly out of fear of angering a powerful constituency and also from concerns that such laws could kill great nonprofits through over-regulation.

"It's either a policy determination or a successful lobbying effort by the nonprofit world that has kept the statutes as weak as they are," Hazen says.

Absent stronger laws, some contend the IRS stands as a check, given that it can revoke a nonprofit's tax-free status. But it rarely happens.

The IRS "will only catch the really, really bad situations," Hazen says, adding that, like states' attorneys general, the commission will go after theft but is "not interested in good governance.” As a result, many troubled nonprofits, some with highly paid executives who appear to rule by fiat, continue to grow in power and influence, he says, adding that the majority of volunteer directors on nonprofit boards, although charged with a fiduciary duty to manage the organization's staff, including the hiring and firing of CEOs, typically fail to do this time-consuming and difficult work effectively.

Hazen, who has served on many boards himself, says he has watched this phenomenon firsthand. Directors "are just sitting there to rubber stamp," he says. "Sometimes scandals do get uncovered, but usually they don't."


"It can be really hard for board members to say to people who they know and are friendly with, 'Hey, this doesn’t feel right,' " Fleischer says.

This problem persists whether the nonprofit claims to serve the public under IRS code 501(c)3 (such as the CFP Board), or whether its serves a membership body, under IRS code 501(c)6, Hazen says. The CFP Board has no members; instead, planners who pass certification requirements and pay annual licensing fees get to call themselves CFPs.

Past CFP Board leaders appeared more active in their oversight of the board, in part because they spoke for themselves.

By contrast, since the board's former chairman, Alan Goldfarb, resigned under pressure three years ago, neither of the board's two subsequent chairmen have spoken to Financial Planning without Keller or one of his staff members present for the discussion.

"That isn't how governance works," Patricia Houlihan, the board's chairwoman from 2000 to 2001, said in an interview last year. "I was always out there speaking. You couldn't pat me on the head and put me in the corner."

During her tenure, Houlihan says she opened the board's meetings to the public during the infamous "CFP Lite" controversy when she and other directors came close to creating a watered-down version of the CFP certification.


"We had our heads handed to us. The CFP community was up in arms. It was mutiny," Houlihan recalled. "I wanted the world to see the decision-making process and how we were setting policy. I didn’t want to get it wrong. … The thing I prided our board on was being transparent, being the standards-setting body, but not doing it behind closed doors."

After the outcry from CFPs, the board killed the plan for the lesser designation. 


Only the best nonprofit boards police themselves according to rigorous good governance standards, Hazen says.

"In this climate where scandals reign supreme, when you consider that there are almost 1.6 million nonprofit organizations," nonprofits need to realize that they "have the potential to wreak havoc and ruin reputations," Walker says. "It behooves us as a sector to think about our behavior," she says. "People do expect that nonprofits behave in a way that shows that they are deserving of the public trust."

Now that a judge has rendered a decision in the Camardas' case, Goldfarb renewed his call for the board to grant him and others the same amnesty it extended to others.

"I can understand not wanting” to reverse the sanctions amid the legal action, Goldfarb says, "but now that it's been resolved, why not do the right thing?"

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