As the difficult economic environment continues, bankruptcy filings in the United States continue to occur at an elevated rate. And it appears that financial planners are having their share of bankruptcies as well… requiring the CFP Board via their disciplinary process to adjudicate whether a CFP certificant should receive a public letter of admonition, or has his/her marks suspended or revoked.
With a rising number of financial planner bankruptcies putting pressure on their disciplinary resources, the CFP Board has proposed a change to how it treats such bankruptcy situations.
The upshot: a bankruptcy by a financial planner will no longer bar him/her from getting or keeping the CFP marks. However, going forward, any bankruptcy by a financial planner will be publicly disclosed for the following 10 years on the CFP Board’s website.
The inspiration for today’s blog post was a recent announcement that came out from the CFP Board, proposing changes to the way the CFP Board addresses bankruptcy filing for CFP certificants and opening up a comment period for the community to respond.
New CFP Board Bankruptcy Disclosure Requirements
For some context, in the past the CFP Board has required individuals to disclose whether they have had a personal or business bankruptcy in the past 5 years at the time of initial application for CFP certification. According to the Fitness Standards for Candidates and Registrants, an individual who has had a bankruptcy is presumed to be barred from becoming a CFP certificant unless the individual petitions the CFP Board’s Disciplinary and Ethics Committee (DEC) for relief; if there are two or more bankruptcies, the individual would always be barred from certification.
In addition, existing CFP certificants are required to disclose any new/recent bankruptcies that may have occurred at the time the CFP certification is renewed; such a bankruptcy notification can similarly result in either a public letter of admonition, a suspension, or a revocation of the CFP certification, at the discretion of the DEC after reviewing the facts and circumstances of the situation (and of course, lying to the CFP Board on a new or renewal application to conceal any bankruptcy history would itself be grounds for revocation of the marks, if discovered). The CFP Board’s position on bankruptcy was established “to ensure that an individual’s prior conduct would not reflect adversely upon the profession or the CFP certification marks.”
So what’s changing? Under the newly proposed rules, a financial planner’s bankruptcy would no longer be a disciplinary event; it would not result in a potential suspension or revocation of the CFP marks, nor would it be a matter for consideration before the DEC. Instead, the CFP Board proposes a disclosure-oriented approach to the issue of financial planner bankruptcies, where the CFP Board would still require new and renewing CFP certificants to disclose any bankruptcies, which in turn would be disclosed to the public on the CFP Board’s website through the Find a CFP Professional or Verify an Individual’s CFP Certification features. (However, if there were other improprieties tying in to the bankruptcy, the situation may be investigated; the proposed rule changes are for “bankruptcy-only” situations, and only if there has been one single bankruptcy incidence. On the other hand, a single bankruptcy would now only be treated as a mitigating or aggravating circumstances as it pertains to other rule violations, not a matter for discipline itself.)
The notification of a financial planner’s bankruptcy would remain in his/her CFP Board public record for 10 years from the date of notification. If/when the CFP Board becomes aware of a bankruptcy, the CFP certificant would have 30 days to dispute the placement of the bankruptcy public disclosure (e.g., if the financial planner had not actually filed for bankruptcy and/or the bankruptcy had been dismissed). Those who have previously had their CFP marks suspended or revoked due to bankruptcy could request under the proposed rules to have their prior discipline retracted and instead submit themselves to the new public disclosure process.
Implications Of The New CFP Board Bankruptcy Rules
So what does all this mean? On the one hand, in the CFP Board’s own words, it means more disciplinary resources available to focus on other (arguably more concerning) matters, such as allegations of fraud, misrepresentation, or misappropriation of funds. At the same time, the public can become aware of financial planners that have a troubled financial past of their own through the new public disclosure process, information that was never previously available through the CFP Board’s resources to the public.
On the other hand, if one accepts the CFP Board’s long-standing principle that an individual with a history of bankruptcy may reflect adversely upon the profession or the CFP marks in particular, this new path appears to be directly contrary to their prior goal. Ironically, now the CFP Board will not only allow those with recent/current bankruptcies to become/remain CFP certificants and hold themselves out as financial planners to the public, but the CFP Board will make sure the public knows that there are many financial planners who failed to manage their own financial affairs through the public disclosure requirement! And given the explosion of discussion around financial planner Carl Richard’s story in last year’s New York Times regarding losing his home in a short sale, the financial planning community clearly has some strong feelings about maintaining a credible public image.
Arguably, the CFP Board’s existing policy regarding bankruptcy (that can result in public admonition, suspension, or revocation of the marks) was also a matter of public protection, too. The unfortunate reality is that those under financial duress do represent an elevated risk of conducting other improprieties with clients, from inappropriate recommendations in an effort to earn a little more income, to the outright misappropriation of client funds in some extreme situations. From this perspective, the CFP Board’s change arguably represents a step down in public protection, as public disclosure of questionable conduct (assuming the public even seeks to verify their financial planner’s CFP certification on a regular basis, which is doubtful) is clearly a lesser standard than simply barring that individual from the marks in the first place. On the other hand, barring an individual from CFP certification doesn’t prevent them from still engaging clients in the financial services industry, and the reality is that neither FINRA nor the SEC bars an individual for bankruptcy, either.
I suspect some people will object to the CFP Board’s proposed rules simply on the basis of the public disclosure itself. Is it “fair” that the CFP Board will announce an individual’s prior financial difficulties for the world to see, for up to a decade after the event has happened? Especially in a world where a bankruptcy can affect everything from your credit to your ability to get a job? On the other hand, presumably if a hiring firm cared that much about an individual’s prior bankruptcy, they could just ask anyway, or run a background or credit check, and find out the same answer. And the reality is that a prior bankruptcy must already be disclosed by FINRA registered representatives on their U-4, and by RIAs on their Form ADV Part II, so the new CFP Board disclosure doesn’t necessary put forth information that wouldn’t already have been public.
At the other extreme, though, I suspect a few will ask “why ‘just’ bankruptcies” – if the CFP Board wants to be a central resource to disclose the improprieties of a CFP certificant, why doesn’t the CFP Board post all such matters of concern on a certificant’s public profile, such as SEC or FINRA regulatory filings as well? In addition, if FINRA and the SEC – as bona fide regulators – already publicly announce bankruptcies, and already investigate improprieties like fraud, misrepresentation, and misappropriation of funds, why does the CFP Board need to allocate additional resources to such investigations. Is the CFP Board really implying that they intend to engage in redundant investigations that overlap regulators? Does the CFP Board intend to become the primary investigator on matters and actually report wrongdoing by its certificants to the regulators, instead of the other way around? Is this a step for the CFP Board towards beefing up its enforcement resources to become a future regulator of financial planners?
The plus side to the rules change, likely to be cheered by many financial planners who have faced bankruptcy or may in the near future, is that at least the individual can continue to use the CFP marks while attempting to rebuild their own personal financial situation. Many I have spoken to privately in such situations have suggested that it is unduly cruel for someone who is already in the midst of financial difficulties to also lose their CFP marks, making it even more difficult to recover (even though, again, the CFP marks are still “just” a certification at this point, and losing them does not prevent an individual from continuing to operate a financial services practice). In addition, some planners actually came to the planning profession due to a bankruptcy itself… and in righting their own financial ship, chose to help others as well. Perhaps in the future the CFP Board should make a distinction between those who had a bankruptcy before obtaining the marks, versus those who went through a bankruptcy after already obtaining their marks holding themselves out to the public?
At this point, the CFP Board’s proposal is just that… a proposal. In their ongoing effort to improve transparency and connection with its stakeholders, the CFP Board has put the new rules out for public comment, so now’s your chance to respond if you wish.
So what do you think? Is the CFP Board lessening the fitness standards of the CFP marks by allowing those with a personal bankruptcy to continue holding themselves out to the public and on behalf of the profession as a CFP certificant? Does the public deserve to know about the prior bankruptcy of a financial planner through public disclosure? Is disclosure on the CFP Board’s website an effective means to protect the public? Do you think your fellow financial planners who went through a personal bankruptcy should lose their marks so they will not be “representing” CFP certificants or the profession at large? Does it matter whether the bankruptcy occurred before or after they got their CFP marks?
And will you be submitting a comment to the CFP Board (comment deadline February 17th)?