Second Exposure Draft of Proposed Revisions to CFP Board's Ethical Standards

On March 9, 2007, the Board of Directors of Certified Financial Planner Board of Standards, Inc. (CFP Board) released a Second Exposure Draft of proposed revisions to CFP Board's Standards of Professional Conduct for a 45-day public comment period that ended April 25, 2007. The Second Exposure Draft was released at a meeting in Denver and broadcast live through an online Webcast.

The Second Exposure Draft and related materials are available below for download and review.

In 2005, the Board of Directors began a review of CFP Board's ethics-related functions. CFP Board released an initial Exposure Draft of proposed revisions to its ethical standards in July 2006 and received more than 300 responses to that draft. The Board of Directors has incorporated suggestions from many of those comments in the Second Exposure Draft.

Comments and survey responses are publicly available on CFP Board's Web site unless the commenter specifically requested that the comment be kept private. Read the comments received and survey responses provided.

The Board of Directors reviewed the comments at its meeting in May 2007 and voted to adopt an updated Standards of Professional Conduct with an effective date of July 1, 2008.

Second Exposure Draft and Related Documents:

Second Exposure Draft Overview (56 KB PDF file)

Second Exposure Draft (142 KB PDF file)

Current Code and Standards (446 KB PDF file)

Side-by-Side Comparison of Terminology (52 KB PDF file)

Side-by-Side Comparison of Principles (49 KB PDF file)

Side-by-Side Comparison of Rules (91 KB PDF file)

Side-by-Side Comparison of Financial Planning Practice Standards and Proposed Rules (49 KB PDF file)

Frequently Asked Questions

Q: Why is CFP Board's Board of Directors releasing a second Exposure Draft of proposed revisions to CFP Board's ethical standards?
A: The Board of Directors respects the opinions and experiences of CFP Board's stakeholders and feels that changes to documents as significant as CFP Board's Standards of Professional Conduct should be made with input from all interested parties.

The comments to the original Exposure Draft released in 2006 provided the Board with many perspectives and information that proved valuable in the Board's review of the proposed revisions. The Board took time for a careful review of those comments and has released a Second Exposure Draft of proposed revisions for public comment and discussion.

Q: Why is CFP Board proposing changes to the ethical standards for CFP® professionals?
A: CFP Board continually updates its standards and procedures, and the proposed revisions reflect the most recent of such projects.

When CFP Board's ethical standards were first introduced, the very concept of financial planning as a practice was newly formulated. The business and regulatory environment that existed then was very different than the current environment. CFP Board's governing Board has responsibility for ensuring that the ethical standards for CFP® certification remain strong and enforceable. The Board has periodically reviewed and updated the standards as the financial planning profession has matured, including the creation of the Financial Planning Practice Standards and the revisions to the "Fairness" rules in the current Code of Ethics and Professional Responsibility. When the Practice Standards were completed several years ago, it was clear that the Code of Ethics would need to be reviewed and updated for consistency with the Practice Standards and the changing regulatory and business environment.

The Board of Directors has released a Second Exposure Draft of proposed revisions that it believes maintains CFP Board's high ethical standards, strengthens them in several important ways, and presents the standards in a manner that will be easily understood by CFP® professionals and the public they serve.

Q: Are the standards in the Second Exposure Draft stronger than the current standards?
A: Yes. Key existing standards were strengthened, and no standard was weakened. For example, the Second Exposure Draft strengthens the baseline duty of care for those holding CFP® certification by raising the current "reasonable and prudent professional judgment" standard to a requirement that a CFP® professional "shall at all times place the interest of the client ahead of his or her own." For CFP® professionals providing financial planning services, the duty of care has been raised from the current duty to "act in the interest of the client" to the "duty of care of a fiduciary," which is partly defined as acting "in the best interest of the client." Requirements for disclosures to clients and documentation of the relationship with a client have also been strengthened. The Second Exposure Draft also clarifies that the disclosure requirements for CFP® professionals apply to prospective clients as well as clients.

Q: Why doesn't CFP Board just say that all CFP® certificants are fiduciaries?
A: The Second Exposure Draft does say that all CFP® certificants who provide financial planning services will be held to the duty of care of a fiduciary, as defined by CFP Board. The Second Exposure Draft also proposes that CFP® certificants "shall at all times place the interest of the client ahead of his or her own," regardless of whether financial planning services are provided to the client.

CFP® professionals may be engaged in a wide range of business activities unrelated to financial planning, and it would be inappropriate for CFP Board to impose a fiduciary standard in such situations. For example, CFP Board would not expect a CFP® professional seeking to sell his or her own home to put the buyer's interest ahead of his or her own. In such a situation, the buyer is typically not a client, and such a relationship would not invoke the fiduciary duty of care in the proposed ethical standards.

Q: What activities fall under the category of "material elements of the financial planning process" and how will CFP Board make determinations in situations where an activity may or may not be a "material element?"
A: CFP Board intentionally chose not to define "material elements" in the proposed revisions for several reasons. First, financial planning encompasses a diverse range of activities, and it would be impossible to describe all the scenarios in which a CFP® certificant would owe the fiduciary duty of care to clients. Additionally, not all CFP® certificants provide comprehensive financial planning services for all clients. The Ethics Task Force also believes that it is appropriate for CFP Board's Disciplinary and Ethics Commission to have discretion to review specific situations and determine whether the CFP® certificant's activities in particular situations rise to the level of "material elements of the financial planning process."

When CFP Board's Disciplinary and Ethics Commission reviews situations that may or may not be material elements of the financial planning process, the determination of materiality is made as part of CFP Board's peer review-based hearing process. First, a hearing panel reviews the details of the case and makes a determination. Second, the hearing panel's determination is presented to the Commission for discussion and ratification, and the Commission may agree with the hearing panel's determination or make a new determination.

Some of the primary criteria for determining "material elements" will be 1) the breadth and comprehensiveness of the services delivered to a client, 2) the amount and type of client data gathered in the process of delivering those services, 3) the number of steps of the financial planning process that were addressed in the process of delivering those services, and 4) what was communicated to the client in spoken and/or written form.

Activities that may be material elements of the financial planning process include:

• Conducting detailed data-gathering regarding multiple aspects of a client's financial situation.
• Analyzing a client's data and making wide-ranging recommendations.
• Providing investment advisory services as defined under the SEC's Rule 202.

Activities that may not be material elements of the financial planning process include:

• A broker completing paperwork to open an account.
• Acting as an order-taker for brokerage services.
• Engaging solely in sales activity related to insurance products.
• Acting as a mortgage broker without providing any other financial services.
• Completing tax returns without providing any other financial services.
• Teaching a financial class or continuing education program.

These are examples and not an all-inclusive list. The Ethics Task Force expects that over time, the Disciplinary and Ethics Commission will develop guidelines, advisory opinions and case law that set more specific criteria for "material elements."

Q: The definition of "Fee-Only" in the Second Exposure Draft is shorter than the previous proposal. What has changed?
A: The Second Exposure Draft defines "Fee-Only" in a straightforward manner that puts emphasis on the word "only" and matches the common usage of that term: "A certificant may describe his or her practice as 'fee-only' if, and only if, all of the certificant's compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees."

The Exposure Draft released last year included a definition of "Fee-Only" that attempted to distinguish between fee-only practices and individual client engagements that unintentionally expanded the traditional interpretation of the term. The Second Exposure Draft makes clear that the "Fee-Only" term is appropriate only when the entirety of a CFP® professional's compensation from clients is derived exclusively in the form of fees from clients.

While the definition of "Fee-Only" in the proposed revisions to the Standards of Professional Conduct is brief, a more detailed explanation of the term is contained in Advisory Opinion 2003-1, which will be retained in its current form.

Q: What additional written documentation does the Second Exposure Draft require?
A: Proposed Rule 1.3 requires that financial planning services be accompanied by a simple written agreement that identifies 1) the parties to the agreement, 2) the date of the agreement and its duration, 3) the procedure and terms for terminating the agreement, and 4) a description of the services to be provided as part of the agreement.

This written agreement requirement may be comprised of multiple documents, and it is CFP Board's belief that most CFP® professionals or their employers currently provide clients with written documents that cover the requirements of the proposed Rule.

The proposed written agreement requirement was designed to help ensure that CFP® certificants and their clients define clearly the services involved in a specific business relationship and help reduce disputes based on misunderstandings of those services.

Q: Why change the organization of the Rules?
A: The proposed organization of the Rules is designed to follow more closely the steps of a typical financial planning engagement with a client.

The current Code of Ethics organizes the Rules using the seven Principles - Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism and Diligence. However, many Rules relate to several Principles, despite their placement under the heading of one Principle.

The Second Exposure Draft retains the Principles in the Code of Ethics but organizes the Rules by the activities and relationships covered by those Rules, such as "Defining the Relationship with the Client," "Obligations to Clients and Prospective Clients" and "Obligations to CFP Board." Using the activities and relationships involved in the financial planning process provides a more logical organizational structure that the Board expects will help CFP® professionals and their clients identify more easily the obligations and expectations appropriate for their business relationship.

Q: What changes were made to the Financial Planning Practice Standards?
A: The Second Exposure Draft includes a proposed version of the Financial Planning Practice Standards that has been updated with references to the proposed Rules of Conduct. The updates affect only the introductory materials and the explanatory materials that follow each Practice Standard. CFP Board believes the Practice Standards provide best practices for CFP® professionals who provide financial planning services. CFP Board's Disciplinary and Ethics Commission and Appeals Committee will continue to use the Practice Standards in evaluating the actions of CFP® certificants to determine whether CFP Board's ethical standards have been violated.

Q: Why doesn't CFP Board wait until a permanent CEO is hired before releasing another round of proposed changes? Weren't the proposed changes driven by the former CEO?
A: Last year's Exposure Draft was the product of many individuals who reviewed CFP Board's ethical standards over a period of several years; no one individual is responsible for the proposed changes. The Board of Directors is the policy-setting body of CFP Board charged with acting in the best interest of CFP Board and CFP® certification. As such, the Board of Directors is responsible for ensuring that the ethical standards for CFP® certification remain strong and enforceable. CFP Board's new CEO, Kevin R. Keller, CAE, will begin service on May 1, 2007, but it is the role of the Board of Directors, not the CEO, to make policy decisions.

While parts of the Exposure Draft released last year caused concern and debate, the comments provided to CFP Board helped identify areas that needed further consideration. CFP Board is dedicated to maintaining the strength and vitality of the ethical standards for CFP® certification, and the Board is confident the Second Exposure Draft does maintain and strengthen those standards.