Ethics and Disciplinary Rules Chapter 7 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company1 What are Ethics? Ethics

Ethics and Disciplinary Rules Chapter 7Tools & Techniques of

Financial Planning

Copyright 2009, The National Underwriter Company 1

What are Ethics?

• Ethics (as the term is used in this course) are standards of an aspirational and inspirational nature reflecting commitment to model standards of exemplary behavior.

• Ethics as internal standards drive everyday actions, not just “big” decisions. See “Little Things Mean a Lot”

• (http://ethics.georgesmay.com/little_things.htm)

for a discussion of everyday ethics in business.


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Ethics and the Professional

• According to sociologists, a Code of Ethics is one of five major attributes that distinguish an occupation from a profession.*

• There are a number of organizations of persons practicing financial planning have promulgated Codes of Ethics. The largest are:– Society of Financial Service Professionals (formerly called the

Society of CLU and ChFC)

– CFP Board of Standards, Inc.

*Greenwood, Ernest, (July 1957), “Attributes of a Profession,” Social Work, pp. 44-52.


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Premise for Practical Ethics

“Power must be exercised in the interest of those for whose benefit it was entrusted rather than abused for the self-aggrandizement of the planner. The limitations and restrictions of the planner must not, however, be so great and to be so unenforceable, unrealistic, and impractical as to be counter productive. Practical ethics, therefore, must strike a balance.”*

*Tools & Techniques of Financial Planning, p.45.


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Organization of Codes of Ethics

• Typically, a Code of Ethics will list a number of Principles or Canons that are abstract concepts.

• With each Canon or Principle, there will be Rules that concern the application of the Canon or Principle.

• Rules may be very specific.• Applications or examples of application are sometimes

included for clarity.In the slides that follow, the Principles or Canons are listed first to enhance understanding of the purpose of the Codes, then the Rules associated with each Principle or Code are listed.


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The CFP Board of Standards, Inc.

• Mission Statement– The mission of the Certified Financial Planner Board of

Standards, Inc. (CFP Board) is to benefit the public by granting the CFP certification and upholding it as the recognized standard of excellence for personal financial planning.

• What it does– As a professional regulatory organization acting in the public

interest by fostering professional standards in personal financial planning, the CFP Board establishes and enforces education, examination, experience and ethics requirements for CFP®

certificants and registrants.– Registers financial planning educational programs, sets up

continuing education requirements, and sets standards for experience, education, examination and ethics.


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• Note that the mission of the CFP Board of Standards is to serve the public.

• Code of Ethics provides principles and rules to all certified to use the CFP®, CERTIFIED FINANCIAL PLANNER™, and the Flame logo.

• In the Code of Ethics these people are called certificants.• Adherence to the Code is required of ALL CFP board

certificants and the Board will institute disciplinary procedures for certificants and registrants who fail to comply.


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Principles of the CFP Board Code of Ethics

Principle 1 – IntegrityPrinciple 2 – ObjectivityPrinciple 3 – CompetencePrinciple 4 – FairnessPrinciple 5 – ConfidentialityPrinciple 6 – ProfessionalismPrinciple 7 – DiligenceThe main ethics page of the CFP Board (http://www.cfp.net/Downloads/2008Standards.pdf) contains a document that includes the full text of the principles, rules, and disciplinary procedures.


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Principle 1 - Integrity Provide professional services with integrity.

Integrity demands honesty and candor, which must not be subordinated to personal gain and advantage. Certificants are placed in positions of trust by clients, and the ultimate source of that trust is the certifican’ts personal integrity. Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceipt or subordination of one’s principles.

Love all, trust a few, do wrong to none. ~William Shakespeare


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Principle 2 - Objectivity

Provide professional services to clients.

Objectivity requires intellectual honesty and impartiality. Regardless of the particular service rendered or the capacity in which a certificant functions, certificants should protect the integrity of their work, maintain objectivity, and avoid subordination of their judgment.


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Principle 3 – CompetenceMaintain the necessary knowledge and skill to provide

professional services competently.

– Attainment, application and maintenance of an adequate level of knowledge and skill that is applied effectively.

– Wisdom to recognize the limitations of one’s knowledge and when consultation or client referral is appropriate.

– Continuing commitment to learning and professional improvement.


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Principle 4 – FairnessBe fair and reasonable in all professional

relationships. Disclose conflicts of interest.

– Fairness requires impartiality, intellectual honesty and disclosure of conflicts of interest.

– Fairness involves a subordination of one’s own feelings, prejudices and desires so as to achieve a proper balance of conflicting interests.

– Fairness is treating others in the same fashion that you would want to be treated, and is an essential trait of any professional.


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Principle 5 – ConfidentialityProtect the confidentiality of all client information.

– Confidentiality means ensuring that information is accessible only to those authorized to have access. A relationship of trust and confidence with the client can only be built upon the understanding that the client’s information will remain confidential.


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Principle 6 - Professionalism

Act in a manner that demonstrates exemplary professional conduct.

– Professionalism requires behaving with dignity and courtesy to clients, fellow professionals, and others in business-related activities.

– Certificants cooperate with fellow certificants to enhance and maintain the profession’s public image and improve the quality of services.

See “Are you a professional?” at http://www.tipsforsuccess.org/professionalism.htm


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Principle 7 - Diligence

Provide professional services diligently.– Diligence is the provision of services in a reasonably

prompt and thorough manner.– Diligence also includes proper planning for, and

supervision of, the rendering of professional services.

“We are what we repeatedly do. Excellence then is not an act, but a habit.” -- Aristotle


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How Diligent Are YOU?

To help you assess yourself, consider these statements about diligent persons and ask yourself how well they describe you.

a. I always do my best; I strive for excellence. b. I am willing to risk failure to accomplish a higher goal.c. I am self-disciplined.d. I learn from my mistakes and failures. e. I look at the big picture; I think long-term.f. I set goals and stay focused. g. I don’t give up just because things seem difficult.h. I don’t leave things unfinished. i. I don’t procrastinate.j. I learn from people who have made habits of these traits.


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Roadmap to CFP Board Rules

• CFP Board PRINCIPLES apply to all CFP Board designees.

• RULES may or may not apply to a particular designee based on his or her activities.

• The Standards of Professional Practice provide definitions of terminology that will clarify rules.

• The first digit of a rule number identifies the Principle with which it is primarily associated.


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(1) Defining the Relationship with the Prospective Client or Client

• Rule 1.1 - The certificant and the prospective client or client shall mutually agree upon the services to be provided by the certificant.


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(1) Defining the Relationship with the Prospective Client or Client (cont’d)

• Rule 1.2 - If the certificant's services include financial planning or material elements of the financial planning process, prior to entering into an agreement, the certificant shall provide written information and/or discuss with the prospective client or client the following:

(continued on next slide)


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• Continuation of Rule 1.2 a. The obligations and responsibilities of each party under the

agreement with respect to:i. Defining goals, needs and objectives,

ii. Gathering and providing appropriate data,

iii. Examining the result of the current course of action without changes,

iv. The formulation of any recommended actions,

v. Implementation responsibilities, and

vi. Monitoring responsibilities.


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Continuation of Rule 1.2 –

b. Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement; and factors or terms that determine costs, how decisions benefit the certificant and the relative benefit to the certificant.


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Continuation of Rule 1.2 –

• c. Terms under which the agreement permits the certificant to offer proprietary products.

• d. Terms under which the certificant will use other entities to meet any of the agreement's obligations. If the certificant provides the above information in writing, the certificant shall encourage the prospective client or client to review the information and offer to answer any questions that the prospective client or client may have.


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• Rule 1.3 – If the services include financial planning or material elements of the financial planning process, the certificant or the certificant's employer shall enter into a written agreement governing the financial planning services (“Agreement”). The Agreement shall specify:



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• Continuation of Rule 1.3 –

a. the parties to the Agreement;

b. the date of the Agreement and its duration;

c. how and on what terms each party can terminate the Agreement; and

d. the services to be provided as part of the Agreement.


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• Continuation of Rule 1.3 – The Agreement may consist of multiple written documents. Written documentation that includes the elements above and is used by a certificant or certificant's employer in compliance with state and/or federal law, or the rules or regulations of any applicable self-regulatory organization, such as a Form ADV or other disclosure, shall satisfy the requirements of this Rule.


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• Rule 1.4 – A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of the financial planning process, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.


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(2) Information Disclosed to Prospective Clients and Clients

• Rule 2.1 – A certificant shall not communicate, directly or indirectly, to clients or prospective clients any false or misleading information directly or indirectly related to the certificant's professional qualifications or services. A certificant shall not mislead any parties about the potential benefits of the certificant's service. A certificant shall not fail to disclose or otherwise omit facts where that disclosure is necessary to avoid misleading clients.


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(2) Information Disclosed to Prospective Clients and Clients (cont’d)• Rule 2.2 – A certificant shall disclose to a prospective

client or client the following information:• a. An accurate and understandable description of the

compensation arrangements being offered. This description must include:

i. Information related to costs and compensation to the certificant and/or the certificant’s employer, and

ii. Terms under which the certificant and/or the certificant’s employer may receive any other sources of compensation, and if so, what the sources of these payments are and on what they are based;


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(2) Information Disclosed to Prospective Clients and Clients (cont’d)

• Continuation of Rule 2.2 – • b. a general summary of likely conflicts of interest between

the client and the certificant, the certificant’s employer, or any affiliates or third parties including, but not limited to, information about any familial, contractual or agency relationship of the certificant or the certificant's employer that has a potential to materially affect the relationship;


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(2) Information Disclosed to Prospective Clients and Clients (cont.)

• Continuation of Rule 2.2 – • c. any information about the certificant or the certificant's employer

that could reasonably be expected to materially affect the client's decision to engage the certificant that the client might reasonably want to know in establishing the scope and nature of the relationship, including but not limited to information about the certificant’s areas of expertise;


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• Continuation of Rule 2.2 – • d. Contact information for the certificant, and if applicable, the

certificant’s employer.


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• Continuation of Rule 2.2 – • e. if the services include financial planning or material elements of the

financial planning process, these disclosures must be in writing. The written disclosures may consist of multiple written documents. Written disclosures used by a certificant or cetificant's employer that includes the elements listed above, and are used in compliance with state or federal laws, or the rules or requirements of any applicable self-regulatory organization, such as a Form ADV or other disclosure documents, shall satisfy the requirements of this Rule. The certificant shall timely disclose to the client any material changes to the above information.


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(3) Prospective Client and Client Information and Property

• Rule 3.1 – A certificant shall treat information as confidential except as required in response to proper legal process; as necessitated by obligations to a certificant's employer or partners; to defend against charges of wrongdoing; in connection with a civil dispute; or as needed to perform the services.


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(3) Prospective Client and Client Information and Property (cont’d)

• Rule 3.2 – A certificant shall take prudent steps to protect the security of information and property, including the security of stored information, whether physically or electronically, that is within the certificant's control.


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• Rule 3.3 – A certificant shall obtain the information necessary to fulfill his or her obligations. If a certificant cannot obtain the necessary information, the certificant shall inform the prospective client or client of any and all material deficiencies.


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• Rule 3.4 – A certificant shall clearly identify the assets, if any, over which the certificant will take custody, exercise investment discretion, or exercise supervision.


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• Rule 3.5 – A certificant shall identify and keep complete records of all funds or other property of a client in the custody, or under the discretionary authority, of the certificant.


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• Rule 3.6 – A certificant shall not borrow money from a client. Exceptions to this Rule include:

a. The client is a member of the certificant's immediate family, or

b. The client is an institution in the business of lending money and the borrowing is unrelated to the professional services performed by the certificant.


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• Rule 3.7 – A certificant shall not lend money to a client. Exceptions to this Rule include:

a. The client is a member of the certificant's immediate family, or

b. The certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant.


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• Rule 3.8 – A certificant shall not commingle a client's property with the property of the certificant or the certificant's employer, unless the commingling is permitted by law or is explicitly authorized and defined in a written agreement between the parties.


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• Rule 3.9 – A certificant shall not commingle a client's property with other clients' property unless the commingling is permitted by law or the certificant has both explicit written authorization to do so from each client involved and sufficient record-keeping to track each client's assets accurately.


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• Rule 3.10 – A certificant shall return a client's property to the client upon request as soon as practicable or consistent with a time frame specified in an agreement with the client.


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(4) Obligations to Prospective Clients and Clients

• Rule 4.1 – A certificant shall shall treat prospective clients and clients fairly and provide professional services with integrity and objectivity.


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(4) Obligations to Prospective Clients and Clients (cont’d)

• Rule 4.2 – A certificant shall offer advice only in those areas in which he or she is competent to do so and shall maintain competence in all areas in which he or she is engaged to provide professional services.


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• Rule 4.3 – A certificant shall be in compliance with applicable regulatory requirements governing professional services provided to the client.


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• Rule 4.4 – A certificant shall exercise reasonable and prudent professional judgment in providing professional services to clients.


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• Rule 4.5 – In addition to the requirements of Rule 1.4, a certificant shall make and/or implement only recommendations that are suitable for the client.


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• Rule 4.6 – A certificant shall provide reasonable and prudent professional supervision or direction to any subordinate or third party to whom the certificant assigns responsibility for any client services.


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• Rule 4.7 – A certificant shall advise his or her current clients of any certification suspension or revocation he or she receives from the CFP Board.


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(5) Obligations to Employers

• Rule 5.1 – A certificant who is an employee/agent shall perform professional services with dedication to the lawful objectives of the employer/principal and in accordance with the CFP Board's Code of Ethics.


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(5) Obligations to Employers (cont’d)

• Rule 5.2 – A certificant who is an employee/agent shall advise his or her current employer/principal of any certification suspension or revocation he or she receives from the CFP Board.


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(6) Obligations to the CFP Board

• Rule 6.1 – A certificant shall abide by the terms of all agreements with the CFP Board, including, but not limited to, using the CFP® marks properly and cooperating fully with the CFP Board’s trademark and professional review operations and requirements.


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(6) Obligations to the CFP Board (cont’d)

• Rule 6.2 – A certificant shall meet all CFP Board requirements, including continuing education requirements, to retain the right to use the CFP® marks.


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• Rule 6.3 – A certificant shall notify the CFP Board of changes to contact information, including, but not limited to, e-mail address, telephone number(s) and physical address, within forty-five (45) days.


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• Rule 6.4 – A certificant shall notify the CFP Board in writing of any conviction of a crime, except misdemeanor traffic offenses or traffic ordinance violations unless such offense involves the use of alcohol or drugs, or of any professional suspension or bar within ten (10) calendar days after the date on which the certificant is notified of the conviction, suspension or bar.


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• Rule 6.5 – A certificant shall not engage in conduct which reflects adversely on his or her integrity or fitness as a certificant, upon the CFP® marks, or upon the profession.


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Disciplinary Procedures – First to Last

• Request for Investigation

• Investigation

• Probable Cause Determination

• Hearing Panel

• Disciplinary and Ethics Commission Review

• Appeals Committee


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Forms of Discipline

If grounds for discipline have been established, the Disciplinary and Ethics Commission may impose any of the forms of discipline below. All disciplinary actions, except private written censure, may be publicly disseminated.

– a private written censure– a public letter of admonition– suspension of the right to use the CFP® marks for a specified

period of time, not to exceed five years– permanent revocation of the right to use the CFP® marks


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Grounds for Discipline

Misconduct by a certificant or registrant, including the following acts or omissions, constitutes grounds for discipline, whether or not the misconduct occurred in the course of a client relationship:

– Any act or omission which violates the provisions of the Rules of Conduct

– Any act or omission which violates the criminal laws of any state or of the U.S.



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Grounds for Discipline (cont.)

– Any act which is the proper basis for suspension of a professional license. Any act or omission which violates the CFP Board's Disciplinary Rules and Procedures.

– Failure to respond to a request by the Disciplinary and Ethics Commission without good cause.

– Obstruction of the Disciplinary and Ethics Commission's performance of its duties.

– Any false or misleading statement made to the CFP Board.

This list is not exclusive, and there may be other acts or omissions amounting to unprofessional conduct, which may also constitute grounds for discipline.


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Society of Financial Service Professionals• The mission of the Society of

Financial Service Professionals is to advance the professionalism of credentialed members in diverse disciplines so that they may better serve their clients' financial needs.

• To that end, we are committed to:– Continuing education that is comprehensive, current, and

practical and which extends the wisdom within our membership– Members who abide by our Code of Professional Responsibility– Networks that create a professional home identified by a set of

core values, beliefs, and the opportunity for learning and growth


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Society of Financial Service Professionals

• Founded in 1928, the Society has more than 22,000 members in 200 chapters in the United States, Puerto Rico, Canada and Singapore.

• Originally for graduates of the American College programs (CLU, ChFC, etc), now Society members are credentialed financial service professionals who provide financial planning, estate planning, retirement counseling, asset management, and other services and products to their clients.


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• The Society is the only professional organization in the industry that requires its members to be credentialed or actively pursuing one of these widely-recognized financial service designations or degrees: CEBS®,CFA®, CFP®, ChFC®, CLF®, CLU®, CPA, CTFA, JD (licensed), MSFS, MSM, REBC® & RHU®.

Society of Financial Service Professionals


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Code of Professional Responsibility

• Divided into five components:

– Preamble

– Canons

– Rules

– Applications

– Disciplinary Procedures


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Preamble

• Service to the public through fostering professionalism in financial services

• According to Samuel S. Huebner, a profession has four essential traits:– Knowledge or expertise– Service to others– Working with other professionals to enhance the

practice and reputation of one who is a member– Self-regulation

For the full text of the Preamble, Canons, Rules, Applications and Disciplinary Procedures, go to http://www.financialpro.org/About/CodeOfProfResp.cfm.


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Organization of the Code of Professional Responsibility

• The Rules and Applications are listed below the Canon to which they have most pertinence.

http://www.financialpro.org/About/CodeOfProfResp.cfm.

• The Disciplinary Procedures are a separate document.

http://www.financialpro.org/Market/ethics/Disciplinary.cfm


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Canons of the Code of Professional Responsibility

• Fairness • Diligence• Competence • Professionalism• Confidentiality • Self-Regulation• Integrity

Note that the only difference of the basic principles of the Canons of the SFSP and the Principles of the CFP Board is that Objectivity is replaced with Self-Regulation, and the order is different.


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Rules Concerning Canon 1 – Fairness

• Rule 1.1 – No concealment or misrepresentation of material facts.

• Rule 1.2 – Respect for the rights of others.• Rule 1.3 – All information pertinent to the

professional engagement including but not limited to conflicts of interest.

• Rule 1.4 – Respect to the companies that the member represents.

• Rule 1.5 – Make and implement only recommendations appropriate to the client and consistent with client goals.

• Rule 1.6 – Maintain independence consistent with professionalism and in the public interest.


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Rules Concerning Canon 2 – Competence

• Rule 2.1 – Maintain and advance knowledge in all areas of financial service inwhich engaged and participate in continuing education.

• Rule 2.2 – Refrain from giving advice beyond the member’s expertise.


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Rules Concerning Canon 3 – Confidentiality

• Rule 3.1 – Respect and maintain confidentiality of client information except as required by court order.

• Rule 3.2 – Respect and maintain confidentiality of company information unless with consent or disclosure is required to discharge professional duties.

• Rule 3.3 – Set up procedures for staff members so that confidentiality is maintained.


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Rules Concerning Canon 4 – Integrity

• Rule 4.1 – A member will avoid any activity that will cause unnecessary harm to others.

• Rule 4.2 – Establish and maintain honorable and dignified relationships with those served, fellow professionals and practitioners.

• Rule 4.3 – A member shall embrace and adhere to the spirit and letter of the laws and regulations governing his/her business and professional activities.

• Rule 4.4 – Truthfulness and candor with existing and prospective clients and the general public.

• Rule 4.5 – Avoid using designations or credentials in a misleading manner.


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Rules Concerning Canon 5 – Diligence

• Rule 5.1 -- Competency and consistency in discharging duties.

• Rule 5.2 – Recommendations will be fully researched and evaluated and will be consistent with client goals.

• Rule 5.3 – Supervision of subordinates to ensure proper conduct.


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Rules Concerning Canon 6 – Professionalism

• Rule 6.1 – Know and abide by all applicablelaws and rules of conduct.

• Rule 6.2 – Support the development, improvement and enforcement of laws, regulations and codes of ethics that foster respect for the financial service professional and benefit the public.

• Rule 6.3 – Respect for other financial service professionals and related occupational groups by engaging in fair and honorable competitive practices; however, collegiality among members shall not impede enforcement of this Code.

• Rule 6.4 – Cooperation with regulatory authorities.


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Rules Concerning Canon 7 – Professionalism

• Rule 7.1 – Member has duty to know and abide by the rules of the Code.

• Rule 7.2 – The member will not sponsor for the Society anyone known to engage in practices that violate the Code.

• Rule 7.3 – Member shall not directly or indirectly condone any act by another in violation of the Code.

• Rule 7.4 – Must immediately report any violation with details to the Society.


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Rules Concerning Canon 7 – Professionalism (cont.)

• Rule 7.5 – Must immediately notify the Society of any revocation or suspension of license.

• Rule 7.6 – Any unprivileged information concerning an alleged violation of the Code shall be reported to the Society.

• Rule 7.7 – Any information concerning the unauthorized use of an approved Society designation, degree or credential must be reported.


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Other Organizations and Compensation

• There are many other organizations that pertain to financial professionals. The Codes of Ethics of these organizations are quite similar. Most come down to following the Golden Rule and acting professionally and with integrity.

• One organization claims that only those who restrict their compensation to fees can be ethical, a claim that is disputed by the 90% plus of the professions that are compensated by commission or a combination of commission and fees.


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Other Organizations and Compensation (cont.)

• It is the position of both the CFP Board of Standards, Inc.. The Financial Planning Association and the Society of Financial Service Professionals that the type of compensation does not affect ethics or professionalism.


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Ethics & Professional Life

• The principles in these Codes of Ethics should permeate every hour of every day of your professional life.

• Although this is a litigious society, and ethical conduct protects one from litigation, your primary motivation should be to take care of your clients in the same manner as you would want to be treated by a professional.

Documents

Ethics and Disciplinary Rules Chapter 7 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company1 What are Ethics? Ethics