With the deadline fast approaching for adhering to the expanded fiduciary standard included in the CFP Board's new code of ethics, pressure is heating up on broker-dealers and their reps to decide how to comply.

The standards, which require that the CFP Board's 63,000 credentialed professionals act in the best interests of their clients at all times when providing an investor with “financial advice,” go into effect on October 1, although the CFP Board has announced it will not enforce the new requirements until June 30, 2020.

“Broker-dealers and advisors will want to begin considering whether they should take any action to help ensure that their associated persons who are CFP professionals comply with the new fiduciary standard,” Clifford Kirsch, a partner with the law firm of Eversheds Sutherland, said in a new legal alert. Kirsch advised some of the most prominent U.S. dual-registrant broker-dealer regarding investment product sales and compliance.

What is clear is that the standards’ broad definition of financial advice gives reps and their broker-dealers much less wiggle room when it comes to side-stepping fiduciary duty.

“If you’re a CFP and you don’t abide by this fiduciary standard, you’re going to be in a lot of trouble if you land in arbitration,” said Adam Gana, director of the New York City-based securities litigation firm Gana Weinstein.

“These standards are putting CFPs on notice that they better put their clients’ interest above their own and stop chasing commissions [and] selling products that aren’t in the client’s best interest,” Gana added.

The revised standards define “financial advice” broadly as any recommendation to purchase, hold or sell any financial asset, Kirsch said.

In effect, any recommendation by a CFP professional can subject them to the code’s fiduciary duty, unless they specifically attempt to create an investor disclosure that states the professional is limiting the engagement to the transaction and not acting as a fiduciary or doing financial planning. 

Even then, it may be an uphill battle for brokers and advisors if regulators or aggrieved investors file a claim since the new standards define an engagement as any “oral or written agreement, arrangement or understanding.” What is simply a one-off commission-based sale to a broker may well be the oral promise of retirement planning to an investor and his or her attorney.

It is likely that aggrieved investors and their attorneys will use the new CFP standards and the fiduciary duty in particular in claims citing negligence or breach of fiduciary duty, attorneys said. “Therefore, any deviation from that fiduciary standard of care may be able to be used to show a violation of the CFP professional’s duty,” Eversheds Sutherland said in its legal brief.

At a bare minimum, attorneys said, firms interested in ensuring that associated persons comply with the new CFP Board standards will want to address the following issues:

• The specific fiduciary duties owed to a CFP’s client, including the duty to avoid or fully disclose material conflicts of interest.
• Considerations for firms regarding how they should supervise the new standard.
• Enforcement of the new fiduciary standard.

Th CFP fiduciary standard should be straightforward for registered investment advisors, who are already held to a fiduciary standard under securities law and Securities and Exchange Commission regulation.

In contrast, registered representatives do not have a explicit fiduciary duty in regulation or law.

Under the CFP standards, however, brokers and dually-registered reps who are “a CFP will be required to act as a fiduciary and in the client’s best interest at all times. Among other things, the CFP will have to satisfy a duty of loyalty and a duty of care, which include an obligation to provide a significant amount of information not required by [the SEC's standard of conduct], an obligation to update this information and an obligation to provide ongoing monitoring and updates to financial plans, unless excluded from the scope of an engagement.” Eversheds Sutherland said.

Compliance with the SEC's Regulation Best Interest rules will not satisfy a CFP’s fiduciary duties under the CFP Board's new rules, Kirsch said.

In determining whether disclosure of a material conflict of interest to a client is sufficient ... the CFP Board will evaluate whether a reasonable client would have understood the conflict and how it could affect the advice provided by the CFP. Violations that depart from a CFP’s commonly accepted practices or cause potential harm will make it tougher for a professional or a firm to infer informed consent, Eversheds Sutherland said.

Additionally, the CFP Board has noted that ambiguity in disclosures will be interpreted in favor of the client.

Firms do not have a legal responsibility to enforce the CFP standards, which are primarily enforced by the CFP Board through its own internal disciplinary process, Eversheds Sutherland said.

Will the SEC or Finra enforce the CFP Board’s Code and Standards? The SEC and Finra “could bring a disciplinary action against a CFP professional alleging violations of Finra's ‘just and equitable’ principles rules for violations of the new Code or Standards,” the law firm said.

“If a firm implements new internal policies and procedures to address how to supervise its registered representatives who carry the CFP designation, the SEC or Finra might be able to bring an action against it for failure to follow its own internal policies,” the law firm said.

Will the new standards put pressure on broker-dealers to implement the standards firm-wide? “Broker-dealers and investment advisors will need to consider whether they want to leave it to the individual CFP professionals to handle compliance with the Code and Standards, or whether the firms want to restructure their own policies and procedures to reflect the expanded CFP fiduciary duty,” Kirsch said.