Last week, the CFP Board announced major updates to the Terms and Conditions of Certification, for the first time in nearly eight years. And, while several of the changes are simple clarifications to the legal language, the CFP Board did introduce a 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 if ruled 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 remarkably little accountability or transparency whatsoever in any dispute (or worse, a series of disputes) with CFP certificants.
And perhaps most concerning is simply the fact that the CFP Board is changing its Terms and Conditions unilaterally. Technically, this is the organization’s right, as it controls the CFP marks and CFP certificants always have the right to not sign and choose to walk away. Yet the growth of the CFP marks in public prominence, and the CFP Board’s success in outdistancing virtually all other designations for financial advisors, means that even if CFP certificants would prefer that arbitration simply be an option rather than mandatory, 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 for having walked away from the marks?
So with the FPA unable to effectively advocate on behalf of CFP certificants, will the CFP Board consider some means to allow CFP certificants as stakeholders to weigh in on the decision before we are forced to waive our legal rights… or at least, will the CFP Board’s Board of Directors modify its mandatory arbitration proposal to limit its scope to its publicly stated purpose, and provide some public information regarding arbitration outcomes to at least step up to being as “transparent” as FINRA?!
Understanding The CFP Board’s Terms And Conditions
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 and Conditions agreement forms the basis for the legal contract between the CFP Board and those who apply, and covers 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 failing to use them properly.
As with any contractual agreement between two parties, from time to time there may be a dispute regarding the terms of the agreement – a potentiality that was brought into sharp relief nearly 3 years ago when Jeff and Kim Camarda sued the CFP Board in a dispute over whether they should be publicly disciplined for an alleged violation of the CFP Board’s Practice Standards regarding compensation disclosure. In essence, when the Camardas were found “guilty” by the CFP Board’s Disciplinary and Ethics Commission (DEC), and the ruling was upheld in the CFP Board’s Appeals Process, the Camardas sought out the court system to be the 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 arguably a very good thing, as it helps to ensure the CFP Board is accountable 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 a who-knows-how-expensive bill for the Camardas in their efforts to defend themselves from what they claim was an inappropriate CFP Board disciplinary outcome in the first place.
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 instead. And now, with its latest update to the CFP Board Terms and Conditions of Certification, the CFP Board will soon require it.
CFP Board Introduces Mandatory Arbitration Requirement
In a change announced late last week, the CFP Board declared that it was revising and updating the Terms and Conditions of Certification for all certificants, effective at the beginning of May. And although many of the changes in the revised Terms and Conditions of Certification 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 mandate arbitration 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 are all former Federal or state court judges with at least 5 years of experience on the bench (chosen from an initial list of 15 potential judges, where each party can strike three names and then rank order the rest according to preference).
The chosen arbitration panel can then meet with the parties, any witnesses they call, review the documents that were presented in the original CFP Board Disciplinary proceedings (and any additional discovery documents the arbitrators request). The arbitration decision (and any award for damages) is to be made within 9 months (unless extended by mutual agreement of the parties), and if the CFP Board loses it is obligated to pay both the CFP certificant’s legal fees (up to $30,000) plus the costs of the arbitration itself (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, will all be kept strictly confidential.
CFP Board Mandatory Arbitration – 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 now, and the CFP Board is hardly the first 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 that we sign with our clients (and is estimated to be included in 46% 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 as well. While billed as a means to expedite the dispute resolution process, the FINRA arbitration process in particular has come under increasing criticism that it is biased against consumer complaints, that the process may not always be fair (or at least isn’t perceived that way), and 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 built up so far, that last year there was even a legislative proposal in Congress that would ban pre-dispute mandatory arbitration clauses altogether.
Now to be fair, as a mandatory arbitration process goes, the CFP Board’s new approach in its revised Terms and Conditions agreement is arguably a particularly fair and reasonable one. It relies on judges (rather than industry participants that might favor the CFP Board), it uses multiple judges (which might even get better results than just relying on a single judge in court), and it allows a healthy period of time (9 months) for resolution. In addition, it’s important to note that in the context of the CFP Board – at least when it comes to a dispute regarding a disciplinary matter – 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), so the facts of the case should (hopefully!?) be well established at that point anyway. Yet even as a fourth level of review, the process should 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).
Yet the one major challenge of the CFP Board’s new mandatory arbitration process is its confidentiality. The CFP Board points out that confidentiality ensures that if a certificant wants to dispute a disciplinary matter, the dispute itself won’t become public… which is important, as if an advisor thinks they’ve been wrongly accused or disciplined, a public dispute about their disciplinary action is almost as damaging as outright being found guilty. The reputational risk to the advisor of a public court case disputing a disciplinary action – even if ultimately found innocent – is still significant. 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 come out when the CFP Board issues the public discipline that lead to the arbitration dispute in the first place.
But the mandatory arbitration agreement with the CFP Board goes both ways. It also “protects” the privacy of the CFP Board. So if there are significant problems with the CFP Board, and multiple certificants are disputing disciplinary issues, neither the public nor CFP stakeholders will ever know. If cases are being disputed, and precedents are being set based on the outcomes, no future certificants will ever have the opportunity to rely on those prior precedents. In fact, throughout with the Camarda case, and including with its final 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 from the public and the broader community. In a world of mandatory arbitration, transparency is lost, and there will be no way to ever find out.
Even When CFP Board Is Wrong, Its Liability Is Limited?
Beyond the issues of whether a mandatory arbitration is transparent or not, it’s also crucial to recognize that whether CFP Board is found ‘guilty’ of an infraction – in arbitration or in court – that in virtually all cases, the maximum penalty under the new Terms and Conditions that CFP Board would possibly have to pay a CFP certificant for its own wrongdoing is a whopping $1,000 (plus attorney’s fees).
In point of 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 as well, where the liability is limited to no more than any “application fees” that were paid (i.e., the $325 the CFP certificant pays in application fees to become or renew as a CFP certificant). In fact, arguably the CFP Board never really had much at risk in the Camarda lawsuit and their allegations of business damages, beyond perhaps paying the Camardas legal fees, if the CFP Board was able to bring its Limitation of Liability to clause to bear. And arguably the CFP Board may have never been liable for damages to the Camardas’ reputation anyway, given that 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 CFP certificants sign their application to become (or renew as) a CFP certificant, they waive a significant number of rights in any future dispute with the CFP Board. They waive 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 they waive any right to have the matter heard in court or even see the light of day (in lieu of a mandatory arbitration process that may be expedient but also lacks transparency).
Similarly, all CFP certificants who sign the CFP Board’s Terms and Conditions also agree to indemnify the CFP Board in any lawsuits where the CFP Board is named alongside the CFP certificant. In other words, if the CFP 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 CFP Board’s Terms And Conditions Really Fair?
While from the perspective of the CFP certificant, 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 (i.e., other large organizations often impose similar business Terms and Conditions to protect themselves).
After all, in a world where there’s one (big) CFP Board entity and 73,000+ CFP certificants underneath it, the organization needs a path to ensure that it is not dragged into any/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 end out defending both anyway, because it’s the same legal matter (and still primarily about the CFP certificant). And the indemnification clause really only pertains to situations where it was the CFP certificant themselves 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 have to live in fear of lawsuits from random CFP certificants unhappy with a disciplinary outcome (even or especially one that was deserved for CFP misconduct). At the least, it seems reasonable to shift liability exposure from the staff and volunteers to the organization as a whole instead.
And the CFP Board’s limitation on liability pertains specifically to liability that would arise out of the CFP Board’s application of discipline to a CFP certificant, and/or a scenario where there was otherwise a dispute about the CFP certificants (inappropriate) use of the marks, the CFP Board’s right to announce a disciplinary enforcement action, etc. Given that no CFP certificant “likes” to be publicly discplined – even if he/she is in the wrong – the CFP Board does need 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 in the first place, and it’s hard to fault the organization for wanting some limitations on its legal exposure in the process of doing so.
Still, if arbitration is so expedient, perhaps it’s more appropriate give CFP certificants the option for arbitration, or even an incentive for it (CFP Board is guaranteed to cover arbitration costs if it loses?), but don’t require it. And while putting some limit to the CFP Board’s liability may be a practical necessity, is it really appropriate to do it in a manner so limiting 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, there would never be “inappropriate public information” that caused financial harm to the CFP certificant in the first place. Still, it’s concerning that even if the arbitration panel finds in favor of the CFP certificant, and affirms that the CFP Board really was in the wrong, and there was some financial harm that had occurred (e.g., if a staff member did inappropriately leak private case information to the public or media), the CFP certificant still would have no substantive financial recourse.
And beyond the issue of liability, is it really good for the profession in the long run if the CFP Board has an unlimited right to prevent any transparency regarding disputes between CFP certificants and the organization? After all, there is a reason why the proceedings of our court system are generally public affairs in the first place – because it’s essential for a foundation of trust between the ‘overseers’ and those being overseen and disciplined.
Are CFP Board’s Terms And Conditions 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 placed before them: you have the right to walk away from (i.e., to voluntarily relinquish) the CFP marks.
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”, the organization is becoming so successful with the CFP marks that arguably walking away just isn’t actually an option anymore. In fact, 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’re not qualified to serve them (because you’re no longer certified)… which makes the decision to “agree to the CFP Board’s Terms or walk away” suddenly feel like a decision being made under duress!
In other words, 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 unable to walk away due to the lack of any viable alternative designation and given the years of studying and exam efforts they already poured into getting the designation in the first place.
Which suggests that perhaps 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 2nd). After all, when it comes to making decisions about what’s a “fair” line to limit the CFP Board’s own liability and exposure, it’s hard to envision how the staff and Board of Directors can possibly give equal weight to CFP stakeholders. I would expect the CFP Board’s Board of Directors, in their role of protecting the organization, to encourage staff to make the contract as favorable as possible to the CFP Board, in their role as protectors of the organization. But when the contract is unilateral, there’s no one left to represent the CFP stakeholders themselves.
Of course, ideally advocacy for CFP certificants would come from the organizations that represent us, like 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.
Which leaves us once again in the position that the only organization that can engage CFP stakeholders about the Terms and Conditions of Certification is the CFP Board itself, the very organization whose primary incentive is NOT to engage stakeholders, and instead just impose a unilateral contract upon them that protects only itself, knowing that it will be extremely difficult for them to walk away (because of the CFP Board’s own success).
Changes For CFP Board To Consider To Its New Terms And Conditions
So what should the CFP Board be expected to do from here? Ultimately, I would suggest there are several steps worth considering, 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. As the Board of Directors there’s no requirement to do so, but leaders have long recognized that buy-in from stakeholders is essential to legitimize potentially controversial decisions, especially when it involves changing Terms that are unilaterally imposed on the stakeholders. 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 to the public about the outcomes of arbitration panels, appropriately anonymized to protect client privacy and innocent parties. If the CFP Board’s disciplinary rulings are being 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 at least basic information about arbitration outcomes, including whether party was the victor, and the basic facts of the case so other CFP certificants can be aware of important precedents that may have been set, 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 #1 and #2 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 come together 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 to mandatory arbitration, in fact, it would appear that if the Board of Directors itself is failing to properly exercise its duties for some reason, CFP certificants are barred from taking legal action to rectify the situation! This creates a serious gap in basic organizational accountability, and again makes it feel as though the CFP Board has something to hide and an unwillingness to be transparent and accountable.
The bottom line is that while the 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 precendent for an organization that already has “trust issues” with its stakeholders. If the primary goal of the new mandatory arbitration clause is really just to avoid future court battles over the CFP Board enforcing its disciplinary process – which I personally think is reasonable – 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 we don’t always feel like the CFP Board has something it’s trying to hide.
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 has further engaged CFP certificants themselves in the process? 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!