Ethics Compliance for
the CFP Practitioner
2016
Disclaimer: “CFP Board’s Code of Ethics and Professional Responsibility,
Rules of Conduct, Financial Planning Practice Standards, Fitness
Standards for Candidates and Registrants and Anonymous Case
Histories are the property of CFP Board and may not be resold,
republished or copied without the prior consent of CFP Board.”
Copyright Notice: “Copyright © (current year) Certified Financial
Planner Board of Standards, Inc. All rights reserved. Reproduced with
permission.”
Program Handout
Upon successful completion of the program, the attendee should be able to:
1. Define and discuss a financial planning engagement, material elements of financial planning, and
the financial planning process.
2. Analyze specific fact patterns to determine if a financial planning relationship exists.
3. Differentiate between the standards of care set forth in Rules 1.4 and 4.5 of theRules of Conduct,
and apply each standard of care to specific factual situations.
4. Apply each Practice Standard set forth in
hypothetical financial planning engagement.
the Financial
Planning
Practice
Standards to
a
5. Identify the information that must be disclosed to the client in writing by a CFP® professional who
is engaged in a financial planning relationship or providing material elements of financial planning.
6. Define the required information that must be disclosed to clients and prospective clients, when that
information must be disclosed, and apply each disclosure requirement to specific factual situations.
(This includes but is not limited to the compensation and conflict-of-interest disclosure
requirements set forth in Rule 2.2 of the Rules of Conduct and Practice Standards 100-1, 400-3,
and 500-1.)
Ethics CE programs may go beyond the learning objectives to include additional information
specific to CFP Board’s ethical standards as outlined in the publication titled Standards of
Professional Conduct. However, all Ethics CE programs must, at a minimum, address the required
learning objectives.
Note: Live Programs must be a minimum of two hours, with 50 minutes as the minimum duration
of each CE hour; minimum duration for a live Ethics CE program is 100 minutes.
A list of CFP® professionals attending each Live Program will be maintained and made available to
CFP Board using CFP Board’s Attendance Reporting Form. Sponsor agrees to electronically report
continuing education hours earned by attendees to CFP Board within four weeks of completion of
the Live Program.
Sign In and Sign Out!
You must attend the entire session. Thank You.
Part I Definitions
1:00 PM – 2:00 PM (60 minutes)
2:00 PM – 2:15 PM (Break 15 minutes)
Learning Objectives
Define and discuss a financial planning engagement, material elements of financial
planning and the financial planning process. [LO1]



Demonstrate an understanding of, and be able to define financial planning,
the financial planning process, and financial planning subject area.
Define and outline elements of the fiduciary standard and know when it
applies.
Describe the material elements of financial planning
Define the required information that must be disclosed to clients and prospective
clients, when that information must be disclosed, and apply each disclosure
requirement to specific factual situations. [LO6]


Explain the CFP Board’s compensation and conflict of interest disclosure
requirements to clients and prospective clients as set forth in Rule 2.2 of the
Rules of Conduct and Practice Standards 100-1, 400-3 and 500-1.
Explain the two disclosure requirements (1) the beginning of the client
engagement providing a general description of how the client would pay for
all of the services of the CFP® professional; and (2) at the time the CFP®
Professional makes specific recommendations to the client/prospective client.
Identify the information that must be disclosed to the client in writing by a
CFP® professional who is engaged in a financial planning relationship or providing
material elements of financial planning. [LO5]
Part II Applications
2:15 PM – 3:05 PM (50 minutes)
Learning Objectives
Analyze specific fact patterns to determine if a financial planning relationship
exists.
[LO2]

Determine if a CFP® professional is providing financial planning or material
elements of financial planning.
Apply each disclosure requirement to specific factual situations. [LO6]
Differentiate between the standards of care set forth in Rules 1.4 and 4.5 of the
Rules of Conduct, and apply each standard of care to specific factual situations.
[LO3]
Apply each Practice Standard set forth in the Financial Planning Practice
Standards to a hypothetical financial planning engagement. [LO4]
C F P B OA R D D I S C L O S U R E G U I D E
The certification trademark above is owned by Certified Financial Planner Board of Standards, Inc. in the United States
and is awarded to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
As a CFP® professional, you are required to make certain oral and/or written disclosures at certain
times during client/prospect engagements. This document is designed to assist CFP® professionals
and their firms in determining when to make disclosures, what disclosures to make and which of
their existing documents can be used to meet the disclosure requirements.
This guide is organized into two sections. The first is for Financial Planning engagements and the
second is for all other engagements.
The organization of the guide focuses on five key areas:
„„ When?: This column indicates the timing of when the disclosure is required.
„„ How?: This column indicates the exact method of disclosure — oral or written. Please note
that there is no requirement to provide these disclosures in a single disclosure document. This
information can be provided in multiple documents or, in the case of non-financial planning
engagements or prior to engaging in a financial planning arrangement, orally. As a best
practice, we recommend that CFP® professionals make all disclosures in writing.
„„ Rule: This column refers to CFP Board’s Rules of Conduct; if you need further clarification,
please refer to the full booklet for CFP® professionals which can be accessed on the website
at www.cfp.net.
„„ What?: This column provides a detailed summary of the information that is required to be
disclosed. Use this section to ensure that the documents you are using contain all of this
required information.
„„ Documents used for compliance: You may need to supplement a firm’s disclosures with
additional disclosure documents. For example, while Form ADV may assist a CFP® professional
in making initial disclosures regarding the different types of compensation he or she may
receive, the CFP® professional is required to supplement this disclosure with more detailed
and specific disclosures regarding the compensation and costs a particular client may incur.
In instances where disclosures can be oral, the “What?” column notes the items that must
be discussed. CFP® professionals who do not use standardized disclosure documents such
as Form ADV may use other documents provided by their firm or the documents referenced
below. CFP Board has developed sample disclosure forms and a sample engagement letter,
which are referenced when applicable.
We hope this guide is helpful to you in maintaining compliance with CFP Board’s disclosure
requirements. Please share it with other CFP® professionals or individuals at your firm who oversee
or support financial planning, or work directly with clients or prospects.
Type of Engagement: Financial Planning
When?
How?
Rule
What?
Prior to Entering
into Financial
Planning
Agreement.
Oral or
Written.
1.2
a. The obligations and responsibilities of
each party under the agreement with
respect to:
These disclosures
are typically made
at the first or
second meeting
with the client.
As a best
practice,
CFP Board
recommends
that CFP®
professionals
make these
disclosures
in writing.
Documents Used for Compliance
i. Defining goals, needs and objectives,
• Form ADV Part 2(A): Item 4; and
ii. Gathering and providing
appropriate data,
• Scope of Engagement and/or
a Meeting Summary Letter.
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.
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.
• Form ADV Part 1(a): Item 5(e);
c. Terms under which the agreement
permits the certificant to offer
proprietary products.
• Form ADV Part 1(a): Item 8; and
d. Terms under which the certificant
will use other entities to meet any
of the agreement’s obligations
• Form ADV Part 1(a):
Items 8, 9, 10;
• Form ADV Part 2(a):
Items 5, 6, 10, 12, 14; and
• Scope of Engagement, Financial
Planning Agreement, Investment
Advisory Agreement and/or
CFP Board’s Form FPD and/or
Form FPDA.
• Form ADV Part 2(a): Items 11
and 14.
• Form ADV Part 2(a):
Items 10, 12 and 14; and
• Scope of Engagement, Financial
Planning Agreement, Investment
Advisory Agreement and/or CFP
Board’s Form FPD
In the Financial
Planning
Agreement.
A CFP® professional
should give the
financial planning
agreement to the
client prior to
providing any
services but
after the CFP®
professional and
the client have
mutually defined
the scope of the
engagement.
Written
1.3
The financial planning services
agreement shall specify:
a. The parties to the Agreement,
b. The date of the Agreement
and its duration,
• Scope of Engagement, Financial
Planning Agreement, Investment
Advisory Agreement and/or
CFP Board’s Form FPDA.
c. How and on what terms each party
can terminate the Agreement, and
d. The services to be provided
as part of the Agreement
• Form ADV Part 1(a): Item 5(g);
• Form ADV Part 2(a): Item 4; and
• Scope of Engagement, Financial
Planning Agreement, Investment
Advisory Agreement and/or
CFP Board’s Form FPDA.
Type of Engagement: All Engagements
When?
How?
Rule
What?
Documents Used for Compliance
Prior to Providing
Services and as
material changes
occur.
Non-Financial
Planning: Oral
2.2
a. An accurate and understandable
description of the compensation
arrangements being offered.
This description must include:
• Form ADV Part 1(a): Item 5(e);
A change is
material if it
could impact
a reasonable
client’s ability
to make an
informed
decision.
Financial
Planning:
Written
• Form ADV Part 2(a): Items
5, 6, 10, 12, 14; and
• Scope of Engagement, Financial
Planning Agreement, Investment
Advisory Agreement, CFP Board’s
Form FPD and/or Form OPS.
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.
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.
• Form ADV Part 1(a): Item, 6, 7, 8;
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.
• Scope of Engagement;
Investment Advisory Agreement
or CFP Board’s Form OPS and/or
Form FPD.
d. Contact information for the certificant and,
if applicable, the certificant’s employer
• Form ADV Part 1(a): Item 1;
and/or
• Form ADV Part 2(a): Items
5, 10, 11, 12 and 14; and
• Scope of Engagement, Financial
Planning Agreement, Investment
Advisory Agreement, CFP Board’s
Form FPD and/or Form OPS.
• Form ADV Part 2(b).
C E R T I F I E D F I N A N C I A L P L A N N E R B OA R D O F S TA N DA R D S , I N C .
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C F P. N E T
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Reference Guide to CFP Board’s Financial Planning Practice Standards
Practice
Standard series
100:
Establish and Define
the Relationship with
the Client
What is a CFP® professional
required to do?
• Mutually define the scope of the
engagement before any financial
planning service is provided.
How should a
CFP® professional do it?
• Identify the services you will provide.
• Identify what will be your responsibility and what
will be the client's responsibility.
Related rules,
resources and tips
Rules: Rules 1.1, 1.2, 1.3 and Rule 2.2 of the
Rules of Conduct
Webinars:
• Disclose your material conflict(s) of interest.
Defining the Scope of Engagement
• Disclose your compensation arrangement(s).
How to Identify, Avoid and Manage Conflicts of
Interest
• State how long the engagement will last.
• Disclose any other important information.
How to Avoid Misleading Compensation
Disclosures
Sample Documents: Form FPDA
Tips:
• Put it in Writing!
• Do you have multiple clients?
200:
Determine a Client's
Personal and
Financial Goals,
Needs and Priorities
• Mutually define the client's personal
and financial goals, needs and
priorities that are relevant to the
scope of the engagement before any
recommendation is made and/or
implemented.
• Obtain sufficient quantitative
information and documents about a
client relevant to the scope of the
engagement before any
recommendation is made and/or
implemented.
300:
Analyze and Evaluate
the Client's Financial
Situation
• Analyze the information to gain an
understanding of the client's
financial situation and evaluate to
what extent the client's goals, needs
and priorities can be met by the
client's resources and current
course of action.
• Learn the client's goals, needs and priorities.
• Explore the client's personal and financial values
and attitudes to better develop and prioritize the
client's goals and objectives.
• Discuss with the client any unrealistic goals and
objectives.
• Develop clear and measurable objectives.
Rules: Rule 3.3 and Rules 4.4 and 4.5 of the
Rules of Conduct
Webinar: Compliance Checklist for Documenting
Client Interactions
Tips:
• Take reasonable steps to obtain necessary
information or restrict the scope.
• Understand the client's time horizon for
achieving goals and objectives.
• Trust but verify information from your client.
• Assess the client's financial situation and
determine whether the client is able to reach the
stated objectives by continuing present activities.
Rules: Rule 1.4 and Rules 4.1, 4.4 and 4.5 of the
Rules of Conduct
• Consider both personal and economic
assumptions.
Webinar: Compliance Checklist for Documenting
Client Interactions
Tips:
• Determine the strengths and weaknesses of the
client's financial situation and current course of
action.
• Always ask: Is the client’s current course of
action achieving the client’s objectives?
• Amend the scope of engagement, if necessary.
• Change your analysis as the client’s situation
changes.
Reference Guide to CFP Board’s Financial Planning Practice Standards
Practice
Standard series
400:
Develop and Present
the Financial Planning
Recommendation
What is a CFP® professional
required to do?
• Consider "sufficient and relevant"
alternatives to the client's current
course of action to reasonably meet
client's goals, needs and priorities.
• Develop recommendations in an
effort to reasonably meet the client's
goals, needs and priorities.
• Communicate the recommendations
to the client to assist in making an
informed decision.
500:
Implement the
Financial Planning
Recommendations
• Mutually agree on the
implementation responsibilities
consistent with the scope of
engagement.
• Select appropriate products and
services that are consistent with the
client's goals, needs and priorities.
How should a
CFP® professional do it?
Related rules,
resources and tips
• Take into account your personal, legal and
regulatory limitations and level of competency.
Rules: Rule 1.4, Rule 2.1 and Rules 4.1, 4.4 and
4.5 of the Rules of Conduct
• Check to see if there is more than one path to
success, including continuing the current course
of action.
Webinar: Compliance Checklist for Documenting
Client Interactions
• Determine what will help the client best
understand the recommendation and its impact
on the client's goals, needs and priorities.
• Communicate to the client the personal and
economic assumptions, interdependence of
recommendations, advantages and
disadvantages, risks and/or time sensitivity that
factor into the recommendations.
Tips:
• Retain documents that support your
recommendations.
• Update your disclosures.
• Consult with the client to determine if the client
agrees with your recommendations.
Rules: Rule 1.2, Rule 2.2 and Rules 4.1 and 4.5 of
the Rules of Conduct
• Modify the scope of the engagement, if
necessary.
Webinar: Compliance Checklist for Documenting
Client Interactions
• Update disclosures of conflicts of interest,
sources of compensation, and material
relationships.
Tips:
• When recommending other professionals,
explain why you believe the person you
recommend may be qualified.
• Consider preparing a written implementation
plan.
• Under CFP Board’s rules, you may be a fiduciary
when implementing a plan.
• Select products that are suitable for the client's
financial situation and that are consistent with
the client's goals, needs and priorities.
600:
Monitor the
Recommendations
• Mutually define monitoring
responsibilities.
• Agree on your role in the monitoring process.
• Explain what, when and how you will monitor.
• Evaluate whether you should reinitiate the steps
of the financial planning process.
Rules: Rule 1.2, Rules 3.3 and 3.4 and Rule 4.1 of
the Rules of Conduct
Webinars: Compliance Checklist for Documenting
Client Interactions
Tips:
• Document your monitoring efforts.
• Be realistic and clear in setting monitoring
expectations.
C F P B OA R D S TA N D A R D S
OF PROFESSIONAL CONDUCT
COMPLIANCE CHECKLIST
Client Name:Date Completed:
Meeting Attendees:
The certification trademark above is owned by Certified Financial Planner Board of Standards, Inc. in the United States
and is awarded to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This checklist is designed to help CFP® professionals document an initial client
consultation in accordance with CFP Board’s Standards. The questions contained
in this checklist reflect both the requirements of the Standards and established
best practices for complying with the Standards.
Except for Section A(2), all boxes should be completed for compliance purposes.
This checklist should be periodically reviewed throughout the course of your
relationship with your client.
Section A: Determining the Scope of the Engagement
1.
❏❏ Define the Scope of the Engagement:
Rule 1.1, and Practice Standard 100-1
❏❏ Have I determined and documented the client’s
understanding and intent in working with me?
❏❏ Have I determined and documented the extent and
Note: After analyzing and evaluating the
client’s data in Step 2 of Sections B and C,
you may need to redefine the scope of
your engagement.
2.
❏❏ Entering into a Client Agreement:
Rules 1.2 and 1.3 and Practice
Standard 100-1
breadth of the services I am providing? (See the
Personal Financial Planning Subject Areas in the
Terminology Section of the Standards)
❏❏ Have I determined and documented the level of data
gathering I plan to do?
Based on Answers above, is this client a financial
planning client?
❏❏ Yes. Have I entered into a written agreement
(see sample Form FPDA on www.cfp.net) and
documented that I have made the required written
disclosures (see sample Form FPD on www.cfp.net)?
(See Rules 1.2, 1.3 and 2.2)
Proceed to Section B.
❏❏ No. Have I documented that I have orally-made
disclosures? (See Rule 2.2)
Proceed to Section C.
Section B: Financial Planning Engagement Checklist
Note: A CFP® professional shall act in utmost good faith, in a manner he or she reasonably believes to be in
the best interest of the client.
1.
❏❏ Gathering Client Data:
Rule 3.3 and Practice Standards
200-1 and 200-2
❏❏ Have I determined and documented the client’s
goals and objectives?
❏❏ Have I documented my discussion with the client
of any unrealistic goals and objectives?
❏❏ Have I documented the client data I gathered
and any gaps in the data?
2.
❏❏ Analyzing and evaluating
the client’s data:
Rules 2.1 and 4.5 and
Practice Standard 300-1
Note: After analyzing and evaluating the client’s
data, you may need to return to Step 1 in Section
A and redefine the scope of your engagement.
3.
❏❏ Developing and presenting
recommendations:
Rules 2.1 and 4.5 and Practice
Standards 400-1, 400-2 and 400-3
Note: You may need to update your
disclosures depending on the products
and services you are recommending.
❏❏ Have I documented my analysis and
evaluation of the client’s data?
❏❏ Have I documented the personal and
economic assumptions I used in developing
my recommendations?
❏❏ Have I considered maintaining the client’s current
course of action?
❏❏ Have I considered and documented appropriate
alternatives to the client’s current course of action?
❏❏ Have I documented a cost/benefit analysis of the
various products?
❏❏ Have I documented how the alternatives are
designed to meet the client’s goals and objectives?
❏❏ Have I documented how my proposed
recommendations are designed to meet
the client’s goals and objectives?
❏❏ Have I documented my discussion with the
client regarding the client’s current situation
and the rationale for my recommendations?
4.
❏❏ Implementing the Recommendations:
Rules 2.1 and 4.5 and Practice
Standards 500-1 and 500-2
❏❏ Have I documented the client’s acceptance
or rejection of my recommendations?
❏❏ Have I determined and documented my
responsibility regarding implementation?
❏❏ Have I disclosed and documented conflicts
of interest, sources of compensation and
material relationships that have not been
previously disclosed?
❏❏ Have I selected appropriate products designed
to meet the client’s goals and objectives?
5.
❏❏ Monitoring: Practice Standard 600-1
❏❏ Have I discussed and documented my
role in monitoring the performance
of my recommendations?
Section C: Non-Financial Planning Engagement Checklist
Note: This section represents the minimum standards required of CFP® professionals in all financial
engagements. As a best practice, CFP® professionals are encouraged to use the Financial Planning
Engagement checklist in Section B in all client engagements.
1.
❏❏ Gathering Client Data:
Rule 3.3
❏❏ Have I obtained all the information necessary to fulfill
my obligation to client? If not, have I informed the
client of any and all material deficiencies?
Note: Depending on the comprehensiveness
of your data gathering, you may need to return
to Section A to reevaluate whether you are
providing financial planning services or material
elements of financial planning services.
2.
❏❏ Developing and presenting
recommendations:
Rules 1.4, 2.2 and 4.5
Note: Depending on the depth and breadth
of your recommendations, you may need to
return to Section A to reevaluate whether
you are providing financial planning services
or material elements of financial planning
services.
3.
❏❏ Implementing the Recommendations:
Rules 1.4, 2.2 and 4.5
❏❏ Do my recommendations place the interests of
my client ahead of my own?
❏❏ Have I disclosed conflicts of interest, sources
of compensation and information that may be
material to the client regarding our relationship
that have not been previously disclosed?
❏❏ Have I only made recommendations that are
suitable for the client?
❏❏ Does the recommendation that I am implementing
on behalf of the client place the interests of my client
ahead of my own?
❏❏ Have I disclosed conflicts of interest, sources of
compensation and information that may be material
to the client regarding our relationship that have not
been previously disclosed?
❏❏ Have I implemented only recommendations that
are suitable for the client?
Printed on recycled paper.
Case # 24137 Q 13
I. Issues Presented
Whether a CFP® professional (“Respondent”) violated CFP Board’s Standards of Professional
Conduct when he: 1) obtained approval for a commission increase on a 401K plan from a
company executive who did not normally approve such changes; and 2) recommended that
officers of the company transfer management of their personal assets to Respondent’s new firm
without disclosing that they would incur surrender charges.
II. Findings of Fact
In December 2011, CFP Board received a grievance against Respondent filed by Mr. A, CFO of
“Company”. The grievance alleged that Respondent, through misrepresentations and material
omissions, induced an unsuspecting the CEO of the company to approve an increase in
Respondent’s commission from 0.50% to 1.00%. The grievant also alleged that Respondent failed
to disclose to executives of the company that they would incur surrender charges if they had
followed his recommendation to transfer certain personal investments to a new investment
company that Respondent was going to be joining. Mr. and Ms. B are the owners of Company.
Mr. A serves as the company’s CFO. Mr. B, Ms. B, Mr. A, and Ms. A serves as the company’s
officers.
Mr. A alleged in his grievance against Respondent that when Respondent left his firm in 2009,
Respondent arranged to meet with the Company’s officers in order to have them move all of their
personal investments to Respondent’s new firm. Mr. A alleged that Respondent expected all of
the officers to sign the documents without reviewing them and without an explanation. Mr. A
alleged that at that time, he informed Respondent that a decision regarding the matter would be
made only after the officers had an opportunity to review the proposed transfer. Mr. A stated
that, after review, he determined that the officers would have incurred approximately a 10%
surrender charge that Respondent did not disclosed to him or the other officers. Mr. A later
informed Respondent that the assets would not be transferred. Company established its 401(k)
plan with Bank in 2001. At the time it was established, the plan had a commission structure of
0.500% and a basic asset charge that would decrease as the total plan balance increased.
Respondent became the plan agent in or about 2006. Mr. A alleged that Respondent, without his
client’s knowledge or approval, called Bank and stated that Company was contemplating moving
its 401(k) plan from Bank due to the asset charges that were being assessed. Bank subsequently
agreed to reduce total asset charges from 0.874% to 0.500%, subject to ratification (in the form
of a signed letter amendment) by the Company 401(k) plan Trustee, Mr. B. Mr. A alleges that
none of the company’s officers were aware that Respondent had contacted Bank regarding this
matter. Mr. A alleged that Respondent contacted Bank in May 2011 requesting guidance
regarding whether to have a letter notarized or signature guaranteed that increased the “sales
and service charge” of the Company 401(k) plan. The letter stated that the fee that Respondent
was receiving from the Company 401(k) plan would increase from 0.50% to 1.00% on all of the
plan’s assets. Mr. A alleges that Company was unaware that Respondent had made this request
to increase his fee on the plan’s assets. Mr. A alleges that the letter was not prepared by
Company and was not discussed with the company’s officers as of May 2011.
In June 2011, Respondent visited Company offices to enroll employees that were eligible to
participate in the company’s 401(k) plan. After the meeting, Respondent approached Mr. B, the
owner of the company, to sign off on two letters. One of the letters pertained to the reduction of
the asset management fee from 0.875% to 0.500% and a corresponding newly imposed
discontinuance charge from 0.00% to 0.550% if the contract was terminated during years 10, 11
or 12 of the plan’s life and then 0.00% thereafter. The other letter pertained to the increased
commission, from 0.500% to 1.00%, effective June 2011. Mr. A alleged that Respondent,
through misrepresentations and material omissions, induced Mr. B, the company’s owner, to sign
both of the letters. Mr. A alleged that Respondent was aware that Mr. A, not Mr. B, was
responsible for administration of the company’s 401(k) plan and that Respondent did not explain
the documents or give copies of the documents to Mr. B. Mr. A alleges that after he became
aware of the documents, he explained their terms (including that the increased commission
would cost plan participants likely over $5,000 more in 2011 and likely over $10,000 more in
2012) to Mr. B, who became upset at the “fraudulent trickery” that Respondent engaged in to
induce Mr. B to sign the documents.
Mr. A submitted an affidavit of Mr. B in support of the allegations contained in the grievance
regarding Respondent inducing Mr. B to sign the letters at issue. Mr. A also submitted
correspondence with Respondent that he believes shows that Respondent was aware that he, not
Mr. B, was responsible for administration of the 401(k) plan.
Case # 27406 Q 14
I.
Issues Presented
Whether a CFP® professional (“Respondent”) violated CFP Board’s Standards of Professional
Conduct when he: 1) relied on a non-guaranteed 12% gross rate of return in a Variable Universal
Life (“VUL”) Insurance policy illustration to determine how long the product would remain in
force; 2) recommended that his client purchase a VUL with a limited no lapse period when the
client’s goal was life insurance paid up for life; and 3) told a client that a VUL would almost triple
her money.
II. Findings of Fact Relevant to the Commission’s Decision
On October 15, 2009, Respondent met with LE, a 77-year-old widow who had questions
regarding an existing approximately $27,000 insurance policy. According to Respondent’s
meeting notes, LE wanted a life insurance policy that would last until she turned 100, if possible.
An account statement from October 2009, indicated that Respondent managed approximately
$200,000 of LE’s assets. The assets were in IRA’s and trusts and allocated in equities including
Putnam Emerging Equities, American Funds (“AF”) New Perspective Fund, and AF New World
Fund. At the bottom of the statement, Respondent indicated that LE had assets at other
companies. Respondent did not indicate the value or investment type of LE’s other assets.
Respondent recommended that LE purchase a VUL policy from WRL. In November 2009, LE
completed a VUL New Account Application. LE indicated that she had both a net worth excluding
her primary residence and investable/liquid assets between approximately $100,001 and
$500,000. LE’s stated objectives were capital appreciation and speculation with a moderate risk
tolerance and a long-term time horizon. The application also indicated that 100% of LE’s assets
were in mutual funds. In November
2009, LE also completed a WRL Individual Life Insurance Application. LE indicated that she had
an approximately $450,000 net worth and a $40,000 annual gross income. The application
indicated that LE was going to fund the new policy through a 1035 exchange of the
approximately $27,000 in her existing insurance policy and the addition of $9,000.
In March 2010, WRL issued the VUL policy to LE with an approximately $28,000 initial premium
and a planned additional premium of $9,000. In March 2010, LE sent a check to WRL to add
approximately $5,000 to the VUL. Respondent presented LE with an illustration of the VUL dated
March 2010. The illustration used a hypothetical gross rate of return of 12.00% and indicated
that an initial premium of approximately $33,000 and a premium of $3,500 in year two would
fund that policy through LE’s 100th birthday. The illustration also stated that, at a 0.00% gross
rate of return and guaranteed charges, the policy would lapse in year seven. The VUL annual
statement indicated that the no lapse date was March 2015, five years after LE purchased the
policy. In May 2011, LE filed a complaint with WRL. In the letter she stated that she received a
premium notice for $9,000 while she believed she had an insurance policy paid up for her
lifetime. LE stated that Respondent misled her into believing that she would not have to pay
future premiums for lifetime coverage.
In May 2011, Respondent sent a letter to LE in response to her complaint. Respondent attached a
copy of the illustration he previously provided to her. Respondent told LE that the premium notice
could be ignored and that to retain the policy Respondent and LE would have to take immediate
action to counteract her complaint letter. In support of the policy, Respondent stated: “There
isn’t anything that you could invest this amount of money in and almost triple the value.” In
June 2011, WRL sent a letter to LE in which it denied LE’s request to cancel the policy and refund
her initial premiums. In an August 2011 letter to the State Insurance Division, Respondent stated
that the WRL VUL looked like it would last LE until age 100. In September 2011, the State
Insurance Division sent a letter to WRL regarding LE’s complaint. The State Insurance Division
stated that while LE requested a “single pay policy,” Respondent recommended a VUL, which is
never “paid up.” The State Insurance Division concluded that Respondent did not provide
“information that would allow the client to understand the product being offered.” Additionally,
the State Insurance Division found that Respondent’s statement that LE could triple her money
was not factual, misleading, and a misrepresentation as supported by the Code of State. The
State Insurance Division questioned the suitability of selling a 78-year-old client a variable
product.
Finally, the State Insurance Division stated its belief that WRL should void the VUL and refund
LE’s premiums. In September 2011, WRL sent a letter to LE and the State Insurance Division
informing them of WRL’s decision to cancel the VUL and refund LE’s premium in the amount of
approximately $33,000. In November 2011, Respondent sent a letter to his broker-dealer
explaining the complaint. Respondent stated: “The illustration indicated that she could probably
put approximately $36,000 of premium into this policy and end up with an ultimate Death Value
of $100,000. This is just about triple the amount of premium she would have submitted to this
policy. It is shown clearly in the illustration.”
In October 2012, Respondent wrote an
unaddressed letter where he stated that LE’s objective was to provide the greatest benefit to her
beneficiaries at her death. In his January 2013 response to CFP Board, Respondent stated that
LE’s objective was to put a single premium in a policy that would be in existence until she died.
Respondent stated that he relied on the illustrations for guidance that the premium and 1035
exchange money would support the VUL without
additional premiums.
Financial Planning
In determining whether a CFP® professional is providing financial planning or material elements
of financial planning, factors that may be considered include, but are not limited to: the client’s
understanding and intent in engaging the CFP® professional, the degree to which multiple
financial planning subject areas are involved, the comprehensiveness of the data gathering, and
the depth and breadth of the recommendations. Respondent stated in his January 2013 letter to
CFP Board that LE was a client of his for over 30 years. Respondent advised LE on her
investment in mutual funds, health plans, and life insurance. Based on LE’s age, the length of the
relationship, and breadth of the relationship; LE had a reasonable belief that Respondent was
providing her with comprehensive financial planning services. Respondent involved investment
planning by managing LE’s IRA and trust accounts. Respondent involved retirement planning by
considering LE’s retirement income needs. Respondent involved estate planning by discussing
with, and ultimately selling, LE a VUL for its death benefit. According to meeting notes,
Respondent also helped LE with Medicare Part D. Therefore, Respondent involved multiple
financial planning subject areas in his relationship with the client. Respondent had LE complete
multiple applications and had data gathering from 30 years of working with LE. Therefore,
Respondent engaged in comprehensive data gathering. Respondent’s recommendations and
management covered approximately half of the client’s net worth.
Respondent’s
recommendation of the VUL was designed to last the duration of the client’s life. Therefore,
Respondent’s recommendations spanned the breadth and depth of the client’s financial life.
Based on these four factors, the client had a reasonable belief that Respondent was providing her
with financial planning services.
Case # 25999 Q 15
I. Issue Presented
Whether a CFP® professional (“Respondent”) violated CFP Board’s Standards of Professional
Conduct when he recommended that clients purchase a high-risk illiquid security without
researching the financial condition of the firm proving financial support of the investment.
II. Findings of Fact
From October 2008 to May 2010, Respondent served as a General Securities Representative and
Financial Consultant with an investment management firm (“Investment Firm”). A wealth
management firm (“Wealth Firm”) owned over 99% of Investment Firm from which it derived all
of its income. At the time Respondent joined the firm, Investment Firm had experienced annual
operating losses for several years. Wealth Firm created a private offering, 9% 3-year convertible
note (“Note”), in order to generate profit in an attempt to offset flagging revenue. A Confidential
Private Placement Memorandum (“PPM”) disclosed that Wealth Firm's only asset constituted its
99.8% ownership interest in Investment Firm. The PPM also stated that the Notes involved a high
degree of risk and that the Notes were suitable only for persons of substantial net worth who had
the ability to purchase a high-risk, illiquid investment and could "bear the risk of a complete loss
of their investment." Respondent claimed to have no knowledge of the firm’s financial instability.
Respondent relied on information provided by his superiors and never asked for documentary or
other confirmation corroborating the firm’s positive financial condition. The effort to save the firm
failed and on May 2010; the firm ceased conducting business and filed a Broker Dealer
Withdrawal form with the Financial Industry Regulatory Authority, Inc. (“FINRA”, formerly known
as the National Association of Securities Dealers, Inc. or “NASD”).
2010 Client Arbitration
In early 2010 Client 1, acting via power of attorney on behalf of her 81-year old cousin Client 2,
met with an Investment Firm broker (“Broker”) to develop a financial plan designed to generate
income to cover Client 2’s nursing home expenses. As part of the comprehensive financial plan,
Broker recommended that Client 2 use $50,000 of her net worth to invest in the Note issued by
Wealth Firm. Respondent met with Client 1 and assisted in explaining the specifics regarding the
financial plan and the Note. Client 2 was not an accredited investor and did not have substantial
net worth. In May 2010, when Client 1 became aware of fraud allegations against Wealth Firm,
he/she filed a complaint with FINRA that alleged unsuitability, misrepresentation and omissions.
The matter settled in April 2011 for approximately $9,000 with 100% contribution from
Respondent.
FINRA Disciplinary Proceeding
In 2007, Client 3, a widow and retired bookkeeper, opened an account with nvestment Firm. At
that time, Client 3’s account information form calculated her annual income at approximately
$51,000 and her total net worth at approximately $600,000 with no need for income from her
portfolio, and no expectation of making withdrawals. Client 3 was an unaccredited and
unsophisticated investor. Respondent became Client 3’s broker in 2009. Prior to meeting with
Respondent, Client 3 sold her home and added the approximately $166,000 in proceeds of the
sale to her portfolio. According to Client 3, her account information regarding need for income
and risk tolerance remained unchanged from 2007. By Respondent’s own assessment, Client 3
possessed a “conservative risk profile.” In February 2010, based on the recommendation of
Respondent, Client 3 invested approximately $50,000 into the Note. Respondent advised Client 3
of the risks associated with the Note but assured her that, should Wealth Firm go out of business,
she would likely recoup her investment plus 11% interest. In November 2011, FINRA issued a
Complaint against Respondent alleging unsuitable recommendations and failure to adequately
inform himself of the risks regarding Client 3 and the Note. In January 2013, FINRA concluded
that Respondent made an unsuitable recommendation in violation of NASD Conduct Rule 2310,
NASD IM-23 I0-2, and FINRA Conduct Rule 2010, and suspended him from associating in any
capacity with any FINRA member firm for two business days, and ordered him to pay restitution
in full to Client 3 in the amount of approximately $50,000, with interest. Respondent’s
suspension was effective for one week in March 2013.
Case # 29005 Q 16
I. Issue Presented
Whether a CFP® professional (“Respondent”) violated CFP Board’s Standards of Professional
Conduct when she sold “C” shares to her clients not because they were suitable, but as a method
of ensuring that she was paid for her advisory services, and failed to: 1) enter into written
advisory agreements with her “C” share advisory clients; 2) provide written disclosures required
by Part 2 of Form ADV to her “C” share advisory clients; and 3) provide a complete description of
the share class options and fees of mutual funds to her “C” share advisory clients and failed to:
1) ensure that salespersons were making suitable “C” share investment recommendations; 2)
enforce the RIA Manual requirement of a written advisory agreement for clients using “C” shares
as an advisory fee; and 3) enforce the requirement of delivery of the Disclosure Document.
Respondent also failed to reasonably supervise her salespersons by failing to ensure that
salespersons were making suitable “C” share investment recommendations. Respondent also
failed to report her suspension by State from acting in any principal or supervisory capacity for
twelve months to CFP Board within 30 calendar days, in violation of Article 13.2 of the
Disciplinary Rules and Procedures (“Disciplinary Rules”).
II. Findings of Fact
In her February 2014 Renewal Application, Respondent disclosed her involvement in a 2012 State
Department of Financial Institutions Securities Division Consent Order. In March 2014, CFP Board
sent a Notice of Investigation (“NOI”) to Respondent requesting information and documentation
relating to the Consent Order. Respondent responded to the NOI in April 2014.
RESPONDENT’S STATEMENT TO CFP BOARD
According to Respondent’s statement to CFP Board, she is currently the majority owner of her
firm, a broker dealer and SEC Registered Investment Adviser. Six years ago, in May 2009,
Respondent’s firm had a State examination that led to the firm’s first regulatory action. The issue
that caused the State’s concern was mostly associated with Respondent’s client accounts.
Respondent was using “C” shares in lieu of charging advisory fees to reduce costs for her smaller
personal clients. Respondent stated that she did not understand why the State examiner wanted
her to verbally disclose all share classes when she would not recommend an A or B share to an
advisory client. Respondent confirmed that she was the main person at her firm using “C” shares
in lieu of fees. The State deposed five of her representatives and three were named in the
Consent Order. Respondent believed that the
reason the State determined that she had violated a regulation was because her firm did not
require written advisory agreements on its smaller “C shares in lieu of fee accounts.” Without
those agreements in place, the State determined that the accounts were brokerage accounts and
subject to brokerage rules. Respondent stated that she had obtained a legal opinion from her
attorney that her firm did not need to have written agreements. The State did not agree with her
attorney’s interpretation. Respondent confirmed that she now has written agreements for all her
accounts. The State suspended Respondent from acting in a principal capacity for one year. She
pointed out that they did not suspend her from being a registered representative or investment
advisory representative. Respondent confirmed that she re-tested and passed the Series 24
Exam. Respondent also stated that her firm now ensures that all fee-in-lieu of accounts have
written agreements in place. Her firm’s internal database is now properly coded to recognize
those accounts. Any “C” shares purchased in brokerage accounts under a 5-year time horizon
now have written acknowledgements from clients that they understand they may pay more if
they hold the funds over five years.
2009-2012 STATE INVESTIGATION AND 2012 CONSENT ORDER
2009 State Deficiency Letter
In July 2009, a Senior Financial Examiner (“Examiner”) with the State issued a Deficiency Letter
to Respondent and her firm after completing an examination of her firm’s books and records and
the firm’s sales activity from May 2007, through May 2009. The Examiner brought five matters to
Respondent’s attention for response and corrective action. The first matter concerned the State’s
review of “C” share sales by Respondent, Respondent’s business partner and the firm’s Chief
Compliance Officer. The State reviewed 22 customer accounts and determined that 11 held
significant, if not 100% mutual fund “C” shares. The remaining accounts were fee-based and
were invested in no-load funds or had previously held “C” shares. All but one of the accounts had
a 5 to 10 year time horizon. The Examiner indicated that she discussed this issue with
Respondent. Respondent told the Examiner that she only sold “C” share mutual funds in
brokerage accounts and no-load funds in managed accounts. Respondent also stated that she did
this so that she could be paid for her services. Respondent’s clearing firm would not allow her
firm representatives to open small (less than $300,000) investment advisory accounts.
Respondent indicated that the cost of billing quarterly was expensive and inconvenient, and that
she would have to withhold a certain amount of client funds to pay for fees, instead of having
them fully invested. Respondent stated that she viewed “C” share fees as the cost a client has to
be willing to incur for her services. The Examiner referenced a FINRA examination conducted at
Respondent’s firm in December 2008. The Examiner stated that Respondent indicated that the
FINRA Examiner verbally informed Respondent that selling “C” shares exclusively was a problem,
but he didn’t put it in writing in his deficiency letter. The Examiner brought four additional
matters to Respondent’s attention for response and corrective action: 1. Supervision – Review
and Retention of Correspondence. The Examiner found that Respondent’s firm did not maintain a
correspondence file and there was no evidence of firm review and approval of correspondence.
2. Suitability of Variable Annuity Sales. The Examiner directed Respondent’s firm to revise
written procedures which addressed age, liquidity, time horizons, concentration, tax benefits, and
other suitability issues for variable annuities. 3. Advertisements. The Examiner found that
Respondent’s firm was not maintaining an advertising file. Respondent’s firm was directed to
create an advertising file. 4. Books and Records. Client records should be updated at least every
three years for those accounts for which the firm has made a suitability determination within the
last three years. The Examiner found some client files for which the account information was
more than three years old. The Examiner directed Respondent’s firm to update and complete new
account information for those clients. The Examiner stated that the five above-referenced
matters were referred to the State’s Enforcement Section for further review. In July 2009,
Respondent responded to the Examiner’s Deficiency Letter. Respondent addressed each of the
five matters of concern beginning with the “C” share issue. Respondent stated that her firm’s “C”
share clients had the choice of paying more for the same investment in a fee-based account or to
choose the cheaper ‘C” share option. Respondent pointed out that she discussed the “C” share
issue with a FINRA Examiner during her firm’s 2003 FINRA exam, with another FINRA Examiner
during her firm’s 2008 exam, and again with the State Examiner during the State’s exam.
Respondent stated that in order to be compliant with FINRA’s rules, the firm decided to limit the
timeline for “C” share suitability to 5 to 10 years. Respondent observed that the Examiner did
not believe that this action was an appropriate solution. Respondent stated that her firm would
send letters to “C” share clients educating them on their options and inform them of her firm’s
opinion on the matter, and let the client decide.
Continuation of 2009-2012 State Investigation
In her April 2014 statement to CFP Board, Respondent stated that the State’s investigation was a
firm-wide investigation that spanned three years. She observed that “it would take a truck to
deliver all the documents pertaining to this action [Consent Order].” During a conference call with
CFP Board in June 2014, CFP Board Compliance Counsel directed Respondent to provide a copy of
the timeline she prepared on the State Investigation which included events between the time of
the Deficiency Letter and the Consent Order. In July 2014, Respondent provided a copy of her
timeline.
2012 State Consent Order
In August 2012, Respondent and her firm entered into a Consent Order with the State, neither
admitting nor denying the State’s findings of fact and conclusions of law. The State found that:
• Respondent’s firm used annual fees from “C” shares as a way to receive compensation for
investment advisory services to some clients who did not meet the minimum asset requirements
for its traditional advisory accounts.
• Respondent’s firm’s failure to follow its own procedures concerning the sale of mutual funds
resulted in clients receiving inadequate disclosures, and, in some cases, unsuitable investments.
• Respondent’s firm and Respondent failed to provide “C” share advisory clients with written
disclosures containing the information then so required by Part 2 of Form ADV. They also failed to
provide to customers a complete, comprehensive description of the share class options and fees
of mutual funds.
• The offer of “C” share mutual funds was made in violation of a State statute because
Respondent’s firm and Respondent made misrepresentations of material facts and/or omitted to
state material facts necessary in order to make the statements made, in light of the
circumstances in which they were made, not misleading, and they engaged in acts, practices, and
courses of business which operated as a deceit.
• Respondent’s firm and Respondent violated another State statute by failing to enter into written
advisory agreements, failing to provide written disclosures, and failing to provide a complete
description of the share class options and fees of mutual funds. Such practices operate as a
deceit. The State statute provides that it is unlawful for an investment adviser to engage in any
practice which would operate as a deceit.
• Respondent’s firm and Respondent failed to reasonably supervise their salespersons by failing
to ensure that salespersons were making suitable “C” share investment recommendations.
Respondent’s firm and Respondent also failed to reasonably supervise their salespersons by
failing to enforce the RIA Manual requirement of a written advisory agreement for clients using
“C” shares as an advisory fee and failing to enforce the requirement of delivery of the Disclosure
Document. Pursuant to another State statute, such
conduct is grounds to suspend Respondent from acting in any principal or supervisory capacity
for twelve months and impose a fine against Respondent’s firm.
The State ordered:
1. Respondent’s firm and Respondent to cease and desist from violating the State statutes;
2. Respondent’s suspension from acting in any principal or supervisory capacity with any firm for
a period of 12 months, beginning on the date of entry of the Consent Order. In addition, before
associating with any firm in any principal or supervisory capacity, Respondent will have to retake
and pass the examination for registration as a General Securities Principal.
3. Respondent’s firm to pay a fine of $25,000.
4. Respondent’s firm to pay investigative costs of $15,000.
Respondent’s suspension was effective from August 1, 2012, through August 1, 2013. In her
June 2014 Response to CFP Board, Respondent provided proof of payment of the $25,000 fine
and the $15,000 in investigative costs. Respondent’s Broker Check Report confirmed that
Respondent passed the Series 24 General Securities Principal Exam in August 2013. In her July
2014 Response to CFP Board, Respondent confirmed that she was not personally fined. She
stated that her firm paid the fine and fees. She also stated that the majority of her accounts at
the time of the State examination were “fee-in lieu.” She estimated that she had 70 account
relationships and that most of the accounts that were “C” shares in lieu of fees had a time
horizon of 5 to 10 years. She further explained that of the “C” share clients that were at issue,
most were still her clients. Those that are still with her firm and all new clients have written
advisory agreements that have “C” share disclosures.
In August 2014, the firm’s current CCO provided further information and documentation in
response to CFP Board’s July 2014 request. The CCO provided a copy of FINRA’s November 2008
Deficiency Letter, referenced above. The Examination Report identified 26 exceptions relating to
Respondent’s firm covering many regulatory areas including: firm supervision, anti-money
laundering, net capital, customer protection, suitability, and customer information and
disclosures. The Report did not reference any exceptions concerning the firm’s use of “C” shares
in lieu of fees. An Addendum to the Report addressed 87 deficiencies regarding the firm’s Written
Supervisory Procedures. The CCO also provided copies of the written Investment Management
Agreements now in place for Respondent’s “C” Share clients referenced in the State’s Deficiency
Letter. The CCO addressed how Respondent determined that “C” shares were suitable for her
clients with a 5-10 year time horizon. He stated that Respondent believed that “C” shares were
better for her clients than “A” or “B” shares due to the avoidance of the front-end load of “A”
shares and the contingent deferred sales charges of “B” shares. Respondent did not view “C”
shares as a short-term solution, but as a pricing choice. The CCO added that the former CCO
understood Respondent’s approach and approved it. In order to make sure the firm addressed
regulatory concerns, the firm used a time horizon of 0 to 5 years.
As to Respondent’s supervision of salespersons making suitable “C” share recommendations, the
CCO stated that another firm representative also used “C” shares as Respondent did. This
representative indicated to the State that he explained all share class options and gave the client
the chance to choose for themselves which share class they wanted to purchase. As to
supervision, the CCO noted that the former CCO did all the blotter reviews, suitability
spot checks and supervised Respondent’s new account activities. The former CCO believed that
use of “C” shares with a 5 to 10 year time horizon could be suitable under “certain
circumstances.” The CCO also responded to CFP Board’s inquiry as to whether Respondent’s firm
obtained any legal opinion prior to the commencement of the State’s investigation regarding its
need to have written advisory agreements for its “C” share clients. He stated that the former CCO
and Respondent met with Respondent’s attorney when he was in town in the fall of 2008, during
the firm’s FINRA exam. They asked him for guidance on “C” shares and after explaining how the
firm used them, he indicated that the firm was using them as “C” shares in lieu of fees. The firm
then immediately added a disclosure to its automated notices system that “C” shares may be
used in lieu of fees. At that time, Respondent’s attorney did not mention that the firm needed to
have written agreements, nor was he asked if the firm needed to have them. The CCO stated
that Respondent observed “[i]t later made sense that he didn’t mention it, because he didn’t
believe we needed them.” Respondent also observed that she noted the meeting with her
attorney in her August 2008, through December 2008, summary that she provided to CFP Board.
Case # 24706 Q 17
I. Issues Presented
Whether a CFP® professional (“Respondent”) violated CFP Board’s Standards of Professional
Conduct when he failed to: 1) communicate with Husband and Wife appropriately regarding
conflicts with representing both after he became aware of their potential divorce; and 2)
appropriately respond to Wife’s inquiries and subsequent check processing by failing to inform
her that Husband refused to consent to the sale of investments to cover a large check.
II. Findings of Fact Relevant to the Commission’s Decision
Respondent first entered into a financial planning engagement with Husband and Wife in June
2007. According to Respondent, he prepared a detailed asset allocation and retirement analysis
using Naviplan financial planning software. Respondent stated that he recommended the clients
establish several accounts. One of the accounts was a joint account with check-writing
capabilities for both clients, to address short and moderate term income needs and cash
management. The second account contained a deferred variable annuity for long-term growth
and income needs. According to Respondent, he recommended and all three parties agreed that
it was strategically advantageous to name Husband as owner and annuitant for greater income in
the event of annuitization. Wife was named beneficiary of the variable annuity. According to Wife
she never knew there was a separation of ownership of the couple’s assets into two separate
accounts. Wife stated that Respondent always addressed her and Husband as the owners of both
accounts.
According to Wife, she consulted an attorney in October 2009 for the purpose of obtaining a
divorce. Wife informed the attorney that all funds invested with Respondent were held jointly in
both her and Husband’s name. The attorney advised Wife to withdraw half of the funds
immediately to prevent Husband from taking more than his fair share of the couple’s funds.
Attorney informed Wife that a judge would eventually decide the amount each party would be
awarded in the divorce proceedings. Pursuant to Wife’s attorney’s advice, she contacted
Respondent via telephone on October 2, 2009 and asked him to tell her the total amount of
money in her and Husband’s account. Wife stated that she was shocked when Respondent told
her the total amount in the account was $400,000. Wife asked Respondent how the account
balance could be so low, and he replied that she had asked about the joint account. Wife asked
Respondent if there was another account and Respondent told her there was another account
with $700,000, but it was in Husband’s name only. Wife told Respondent that she had no idea
that her name was not on the account and Respondent replied, “Well, you are the beneficiary.”
Wife contacted her attorney to inform him of the conversation with Respondent and he advised
her to withdraw almost all the funds in the joint account because the second account with the
majority of the couples’ assets was in Husband’s name only.
Wife called Respondent on October 2, 2009 and asked how long it would take to clear a very
large check she was writing on the joint account. Respondent’s only question to Wife was
regarding where to deposit the proceeds. Wife ordered Respondent to deposit the funds in a local
bank. Respondent told her that the check would clear by the following Monday. Respondent did
not tell Wife that that there were margin restrictions on the account. In October 2009, Wife
wrote a check for $390,000 on the joint account and deposited it in her
account at the local bank. Wife called Respondent on October 5, 2009 and asked him to review
the joint account and determine whether the October 2 check had cleared. Respondent told her
that $390,000 had been removed from the account and the remaining balance was $2,000.
Respondent did not tell her that there were insufficient funds to cover the check she had written.
Respondent denied that the October 5 conversation ever took place. On October 7, 2009,
Respondent called Wife to tell her that the $390,000 check had been returned to the joint
account because there were insufficient funds to cover the amount of the check. According to the
grievance, Wife was surprised because two days earlier, Respondent told her the check had
cleared. Wife went to her local bank to obtain information regarding the check and the bank
informed her that the check was returned due to insufficient funds. Wife called the bank, which
informed her that Respondent directed the bank to return the check to the joint account on
October 5, 2009. The bank representative told Wife that normally financial advisors would ask the
bank to hold the check until investments were sold to cover the amount of the check. In this
case, Respondent did not make such a request, as he had spoken with Husband to request
permission to sell securities, which Husband refused to provide.
According to Wife, she confronted Respondent with this information and he responded that he
had no authority to sell the investments. According to the grievance, when Wife asked
Respondent why he did not call her to get permission, or at least advise her of that the account
had insufficient funds to cover the $390,000 check, he did not respond and became very
defensive. Wife stated that by instructing the bank to return the check, Respondent was acting in
Husband’s best interest and against her interest. According to Respondent, Wife contacted him
on October 2, 2009 and informed him that she would be writing a check out of the joint account,
but did not tell him the amount of the check. According to Respondent, the $390,000 check was
not honored because the amount of the check written in relation to the account balance greatly
exceeded margin limitations. Respondent stated that he did not stop any transfer of assets from
the account. Wife provided Husband’s cell phone record detailing calls between Respondent and
Husband during the period Wife’s check was returned for insufficient funds. These calls appear to
have been initiated by Respondent. Wife stated that this was additional evidence that Respondent
favored Husband over her. The phone records indicate a series of calls from Respondent to
Husband from October 5, 2009 to October 7, 2009. According to account documents provided by
Wife, on October 6, 2009, Husband removed Wife as beneficiary of the variable annuity and
replaced her name with his two children from a previous marriage. Wife provided a copy of
Husband’s June 7, 2011 deposition in the couple’s divorce proceedings, which she stated
indicated that it was Respondent’s sole decision to set up the ownership of their accounts without
input from her and Husband. Husband testified that when the accounts were set up, he intended
that both accounts be joint accounts. Husband also testified that after Wife wrote the $390,000
check, a representative of the financial institution to which it was delivered contacted Respondent
on October 5, 2009 concerning the insufficient funds. Respondent called Husband that same day
to ask if he was aware of the amount of the check Wife had written on the account. Respondent
asked Husband what to do with the check and it was decided to return the check to AXA. Wife
stated that Respondent’s action benefitted Husband and had an adverse effect on her. Wife’s
attorney asked Husband how much money was in the account at the time and he responded
“$394 [thousand].” Husband also testified that the clearing house called Respondent and told him
that if he wanted the check to clear he would have to liquidate the margin account, but
Respondent would not do anything without Husband’s approval. Husband told Respondent that he
wanted the check returned.
Wife stated that the joint account was frozen at the request of Husband’s attorney and
Respondent did not advise her or Husband that the freezing of the account would cause the
account to incur monthly charges of $900 due to margin interest. Respondent asserted in his
testimony that Husband and Wife were very clear about the use of margin in the account. During
Husband’s deposition, when asked by Wife’s attorney what made him decide to freeze the
account, Husband testified that Respondent called him and asked, “[Husband], did you know that
[Wife] tried to clean you out?” Respondent told Husband that Wife wrote a check for $390,000 on
the joint account. Husband told Respondent that he wanted the check returned. Wife stated that
as a result of Respondent’s failure to inform her and Husband about the monthly charges from
freezing the account, they suffered a $16,200 loss from December 10, 2009 until June 10, 2011.
An examination of the joint account brokerage statements for September, October and November
2009 indicate that no margin interest was charged to the account in August and September. A
total margin interest of $3,000 had been accrued year to date through September 30, 2009. The
October statement indicates that margin interest began accruing on October 5, 2009 at a rate of
9.5%.