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FP511 General Financial Planning Principles, Professional Conduct, and Regulation > Module 6 > Flashcards

Flashcards in Module 6 Deck (28)
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1

The Code and Standards defines Financial Advice as:

A communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with respect to:

— the development or implementation of a Financial Plan;
— the value of or the adviaability of investing in, purchasing, holding, gifting, or selling Financial Assets;
— investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters; or
— the selection and retention of other persons to provide financial or Professional Services to the Client;

OR

the exercise of discretionary authority over the Financial Assets of a Client.

2

Items that are NOT Financial Advice include the following: „

A communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation
„
Responses to directed orders „

The following, if a reasonable CFP® professional would not view it as Financial Advice:

— Marketing materials
— General financial education
— General financial communications

3

Jessica has been working in the financial services profession for 11 years and has been a CFP® professional for over 5 years. During this time, she has developed into a highly sought-after investment professional who is well versed in retirement and estate planning. Although she has limited knowledge of insurance products, she nonetheless recommends specific products to help her clients reach their goals without consulting an insurance professional. Identify the Standard of Conduct that Jessica is violating.

A. Diligence
B. Professionalism
C. Competence
D. Sound and Objective Professional Judgement

C.

The answer is Competence. Jessica has violated Standard A.3, Competence, by offering recommendations on products outside her area of expertise and professional knowledge.

4

Sarah, a CFP® professional, completed a life insurance application for her client, Chase. When Chase called her two weeks later about the status of the application, Sarah realized she had not submitted it to the insurance company. Which of the following ethical principles has Sarah violated?

A. Standard A.4 (Diligence)
B. Standard A.2 (Integrity)
C. Standard A.6 (Sound and Objective Professional Judgement)
D. Standard A.7 (Professionalism)

A.

The answer is Standard A.4 (Diligence). Sarah violated Standard A.4 (Diligence) as she did not provide services in a reasonably prompt and thorough manner.

5

Rules-Based vs. Principle-Based Approach

The manner in which a fiduciary standard is defined is critical and there are two possible approaches: either rules-based or principle-based.

A rules-based approach to a fiduciary standard is just that, namely a series of rules and guidelines—essentially a checklist of dos and don’ts. There are several challenges with a rules-based approach, especially as the numbers of rules increase. Having numerous rules increases complexity, creates opportunities for possible loopholes, and leads to enforcement issues.

The principle-based approach is more aspirational in nature and is the current approach instituted by RIAs and CFP® professionals.

6

Three Different Standards

There are three types of standards related to investment and retirement advice, which vary depending upon the type of advisor involved:

1. Department of Labor (DOL) fiduciary standard

2. Registered investment advisor (RIA) fiduciary standard

3. Registered representatives (RRs) and agents suitability standard

7

Department of Labor (DOL) fiduciary standard

The highest standard, which is a fiduciary standard, was administered by the U.S. Department of Labor (DOL) and applied to advice given to qualified retirement accounts such as defined benefit and defined contribution plans.

8

Registered investment advisor (RIA) fiduciary standard

RIAs are also held to a fiduciary standard. Under this standard, RIAs must act in the best interests of their clients. Disclosure of compensation and conflicts of interest must be made in writing, and a contract is required. RIAs must abide by the brochure rule, which requires providing every client and potential client with a copy of the firm’s Form ADV Part 2.

9

Registered representatives (RRs) and agents suitability standard

The standard that registered representatives and insurance agents are held to, is the suitability standard. This is a more lenient standard in that an investment can be suitable but not necessarily in the best interests of the client. While the vast majority of advisors under the suitability standard always do their best to put the client’s best interests first, the standard itself allows the opportunity for advisors to offer a suitable product that may be more in the advisor’s best interests rather than the client’s. Additionally, verbal disclosure is often all that is needed under this standard, whereas fiduciaries have written disclosure and contract requirements.

10

To act in the best interests of the client, there are various duties that a fiduciary owes to their client regardless of their specialization within the financial services industry. Those duties are:

The duty of loyalty - look first to the client’s best interests. The client’s interests be put ahead of one’s own, and that all actions be made solely for the benefit of the client.

The duty of care - The duty of care requires the fiduciary to have the competency to give fiduciary advice. This requires a certain level of knowledge and skill to know what is in the best interests of someone setting up a retirement plan or in the best interests of a retirement plan participant.

The duty to disclose - disclose all material facts and all conflicts of interest

The duty to diagnose - The obligations to know your customer and to investigate the suitability of any
products recommended as investments are complementary. When an investment professional makes any recommendation—investment or otherwise—to a client, they do so in light of the current economic environment and the client’s risk tolerance, financial circumstances, existing portfolio of assets, and stated goals.

The duty to consult - consult with others who have specialized knowledge

The duty to keep current.

11

Which approach to implementing the fiduciary standard has been adopted by the CFP Board and RIAs?

A. Process-based approach
B. Rules-based approach
C. Standardized approach
D. Principle-based approach

D.

12

The CFP Board’s Fitness Standards—character and fitness standards for individuals seeking to obtain CFP® certification—became effective on January 1, 2007, and were updated in 2012.

The following conduct is unacceptable and WILL ALWAYS BAR an individual from becoming certified:

(1) Felony conviction for theft, embezzlement or other financially-based crimes. „

(2) Felony conviction for tax fraud or other tax-related crimes. „

(3) Revocation of a financial (e.g. registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) professional license, unless the revocation is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees.
„
(4) Felony conviction for any degree of murder or rape. „

(5) Felony conviction for any other violent crime within the last five years.

13

As part of the Fitness Standards, the CFP Board established a list of transgressions that will be PRESUMED to be unacceptable and thus bar certification, unless the Disciplinary and Ethics Commission (DEC) reconsiders and makes a different determination after a review. This list includes the following: „

***
If the candidate for CFP® certification has committed a transgression on the presumptive bar list, they must petition the DEC for reconsideration and a determination on whether the conduct will bar certification. If the professional revocation or suspension is vacated or the felony conviction is overturned, the candidate may submit a new petition.
***

(1) Two or more personal or business bankruptcies. „

(2) Revocation or suspension of a non-financial professional (e.g. real estate, attorney) license, unless the revocation is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees.
„
(3) Suspension of a financial professional (e.g. registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) license, unless the suspension is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees.
„
(4) Felony conviction for non-violent crimes (including perjury) within the last five years.
„
(5) Felony conviction for violent crimes other than murder or rape that occurred more than five years ago.

14

Following the DEC’s review of the petition, the DEC may do the following three things: „

(1) Grant the petition after determining the conduct does not reflect adversely on the individual’s fitness as either a registrant seeking reinstatement or as a candidate for CFP® certification, or upon the profession or the CFP® certification marks, and CFP® certification shall be issued to the individual.
„
(2) Deny the petition after determining the conduct reflects adversely on the individual’s fitness as a registrant seeking reinstatement or as a candidate for CFP® certification, or upon the profession or the CFP® certification marks, and the CFP® certification shall be permanently barred.
„
(3) Deny the petition but allow the individual to re-apply for CFP® certification after a period not to exceed five years. The individual shall be required to satisfy the education, examination, experience and ethics requirements of CFP® certification at the time of re-application.

15

Identify the transgressions that are presumed to be unacceptable according to the CFP Board’s Fitness Standards.

I. Felony conviction for tax fraud or other tax-related crimes
II. Felony conviction for nonviolent crimes (including perjury) within the last five years
III. Revocation of a financial professional license that is administrative in nature
IV. Two or more personal or business bankruptcies

The answer is II and IV.

Statement I and Statement III are incorrect. Fitness Standards are set in two categories: (1) conduct that is unacceptable and will always bar an individual from being certified, and (2) conduct that is presumed unacceptable and will bar the individual unless the individual petitions the Disciplinary and Ethics Commission for reconsideration.

Conduct that will always bar an individual includes felony convictions for theft, embezzlement, or tax fraud; revocation of a financial professional license (other than revocation for failure to pay fees); or felony conviction for murder, rape, or any violent crime within the last five years.

Conduct deemed to be a presumptive bar includes a felony conviction for nonviolent crimes within the past five years or two or more personal or business bankruptcies (regardless of the timeframe). Felony conviction for tax fraud or other tax-related crimes is considered unacceptable conduct and will always bar an individual from becoming certified. Revocation of a financial professional license that is administrative in nature does not impact an individual’s certification prospects.

16

Delivering and Filing Documents and Determining When a Document is Due

The Procedural Rules set deadlines for a Respondent and the CFP Board to deliver and file documents.

When the Procedural Rules state a time in calendar days:

a. exclude the day of the event that triggers the period;

b. count every day, including intervening Saturdays, Sundays, and federal legal holidays; and

c. include the last day of the period, but, if the last day is a Saturday, Sunday, or federal legal holiday, the period continues to run until the end of the next day that is not a Saturday, Sunday, or federal legal holiday.

17

Sanctions:

Define the following....

(1) Private Censure
(2) Public Censure
(3) Suspension

1. Private Censure. A private censure is an unpublished written reproach of Respondent that the DEC delivers to a censured Respondent.

2. Public Censure. A published written reproach of the certificant’s behavior.

3. Suspension. A suspension is a period of time in which Respondent remains subject to the Terms and Conditions of Certification and Trademark License but is not Certified or Licensed and is prohibited from using the CFP® certification marks, stating or suggesting that Respondent is a CFP® professional, or holding out to the public as being certified by CFP Board. The DEC may issue a suspension for a specified period, not less than 90 calendar days or greater than five years.

18

Sanctions:

Define the following....

(4) Revocation
(5) Temporary Bar
(6) Permanent Bar

4. Revocation. A permanent revocation of the right to use the CFP® marks—this is a permanent denial of all rights associated with use of the marks. Revocations normally are published.

5. Temporary Bar. A temporary bar is a period of time in which a Respondent who currently is not a CFP® professional is prohibited from applying for or obtaining CFP® certification.

6. Permanent Bar. A permanent bar is a permanent prohibition on the ability of a Respondent who currently is not a CFP® professional to apply for or obtain CFP® certification.

19

Respondent Petitions

In certain situations, petitions for reinstatement can be submitted by the Respondent following suspension of a certain term. A respondent’s petition must not proceed unless the Respondent has done these five things:

a. completed the suspension;

b. provided a properly-completed CFP Board Ethics Disclosure Questionnaire;

c. provided a written certification that Respondent has read, understands, and will comply with the Code and Standards;

d. paid the reinstatement fee and any outstanding costs owed to CFP Board; and

e. otherwise satisfied CFP Board’s certification requirements.

20

Identify the parties involved in the disciplinary and appeals process that have representation of at least one CFP® professional.

I. CFP Board Counsel
II. Hearing Panel
III. Disciplinary and Ethics Committee
IV. Appeals Committee

The answer is II, III, and IV.

At least two members of the Hearing Panel must be CFP® professionals. The DEC and Appeals Committee are composed primarily of CFP® professionals.

21

Following consideration of a Respondent’s petition, the Hearing Panel must include with of these recommendation?

I. Factual findings
II. Mitigating factors
III. Aggravating factors
IV. Relevant Anonymous Case Histories

The answer is I, II, III, and IV. The Hearing Panel’s recommendation must include factual findings, any mitigating or aggravating factors, and any Anonymous Case Histories that the Hearing Panel found relevant.

22

All of the following forms of sanctions can be issued to current CFP® professionals except

A. revocation.
B. suspension.
C. permanent bar.
D. private censure.

C.

The answer is Permanent Bar. A Temporary Bar and a Permanent Bar are two forms of sanctions that apply to individuals who are not currently CFP® professionals. Current CFP® professionals may be subject to Private Censure, Public Censure, Suspension, and Revocation.

23

The Code and Standards defines Financial Advice as "communication that would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with" based on its

I. content.
II. context.
III. concept.
IV. presentation.

The answer is I, II, and IV.

The Glossary of the Code and Standards defines Financial Advice as "communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with."

24

Identify the form(s) of unacceptable conduct that will always bar an individual from becoming certified, according to CFP Board's Fitness Standards.

I. Felony conviction for tax fraud or other tax-related crimes
II. Felony conviction for any violent crime within the last five years
III. Revocation of a financial professional license that is administrative in nature
IV. Two or more personal or business bankruptcies

The answer is I and II.

Felony conviction for tax fraud, tax-related crimes, or violent crime within the last five years is considered unacceptable conduct and will always bar an individual from becoming certified. Statement III is incorrect; revocation of a financial professional license that is administrative in nature does not impact an individual's certification prospects. Statement IV is incorrect; the conduct of CFP® candidates with two or more personal or business bankruptcies is presumed to be unacceptable, and thus bar certification, unless the Disciplinary and Ethics Commission (the Commission) reconsiders and makes a different determination after a review.

25

CFP Board's Fitness Standards apply to all of the following except

A) CFP® candidates.
B) practicing CFP® professionals.
C) individuals who are eligible to reinstate their certification without being required to pass the current CFP® Certification Examination.
D) individuals who are not currently certified but have been certified by CFP Board in the past.

B.)

The answer is practicing CFP® professionals. The Fitness Standards apply to CFP® candidates and Professionals Eligible for Reinstatement (PER). PER includes both individuals who are not currently certified but have been certified by CFP Board in the past and individuals who are eligible to reinstate their certification without being required to pass the current CFP® Certification Examination.

26

Identify the group responsible for reviewing petitions for consideration for a presumptive bar determination.

A) CFP Board Counsel
B) Disciplinary and Ethics Commission
C) Hearing Panel
D) Appeals Committee

B.)

The answer is Disciplinary and Ethics Commission. The Disciplinary and Ethics Commission is responsible for reviewing petitions for consideration submitted for individuals receiving a presumptive bar.

27

Per the Fitness Standards, identify the conduct under which an individual is eligible to submit a petition for consideration.

A) Revocation of a financial professional license
B) Two or more personal or business bankruptcies
C) Felony conviction for tax fraud or other tax-related crimes
D) Felony conviction for any other violent crime within the last five years

B.)

The answer is two or more personal or business bankruptcies. An individual with two or more personal or business bankruptcies would receive a presumptive bar, according to the guidelines of the Fitness Standards. Conduct leading to a presumptive bar is eligible for a petition for consideration.

28

According to the Procedural Rules, following the issue of an Interim Suspension Order, a Respondent must deliver to CFP Board Counsel evidence of compliance with the Interim Suspension Order. Identify the number of calendar days the Respondent has to complete delivery.

A) 60
B) 30
C) 45
D) 10

D.)

The answer is 10. From the Procedural Rules: "Within 10 calendar days of delivery of an Interim Suspension Order, Respondent must deliver to CFP Board Counsel evidence of compliance with the Interim Suspension Order."