CFP Notes: Professional Conduct and Regulation - Code of Ethics and Professional Responsibility

Preamble and Applicability
The Code of Ethics and Professional Responsibility, composed and published by the Certified Financial Planner Board of Standards, was adopted to outline the principles and rules that apply to all certified financial planners. In other words, all those people who use the CFP certification mark and count themselves as Certified Financial Planners are bound by these principles and rules. In addition, the Code of Ethics applies to those candidates for the CFP certification exam who have been registered as such with the CFP Board. The CFP Board of Standards recommends that every CFP candidate study the Code thoroughly before examination.

Composition, Scope, and Compliance
The Code of Ethics and Professional Responsibility is divided into two parts. The first part covers principles and the second part covers rules. Principles are statements that express in general terms the ethical and professional ideals that the CFP Board expects certified financial planners to exhibit in their professional activities. Basically, the principles are designed to provide a source of guidance for CFP Board designees. The rules section, on the other hand, contains descriptions of the standards of ethical and professionally responsible behavior that the Board expects of designees in specific situations. Of course, the varied nature of financial planning means that all of the rules will not be applicable to all designees at all times. The CFP Board does require, however, that all CFP designees adhere to this code at all times.

Client, CFP Board Designee, Commission, Compensation, and Conflicts of Interest
The Code of Ethics and Professional Responsibility defines a number of terms that are essential to the practice of financial planning. A client is a person, persons, or entity who engages a financial planner and for whom professional services are rendered. A CFP Board designee is any person who currently holds a CFP certificate, is a candidate for certification, or has any entitlement to the CFP certification marks. A commission is the compensation an agent or broker receives when this compensation is calculated as a percentage of the amount of his or her sales or purchase transactions. Conflicts of interest are problems that arise when a CFP Board designee’s work could be impaired by a personal interest, business relationship, or other circumstances.

Fee-Only, Financial Planning Engagement, and Personal Financial Planning
The Code of Ethics and Professional Responsibility defines a number of terms that are essential to the practice of financial planning. The term fee-only refers to a method of compensation in which the financial planner receives compensation only from the client and receives no compensation that depends on the purchase or sale of any financial product. A financial planning engagement is said to exist when a client is relying on the information or services provided by a CFP Board designee using the financial planning process.
Personal financial planning, also known just as financial planning, refers to the process of determining the proper means for an individual to achieve his or her financial goals through the financial planning process.

Personal Financial Planning Process
The Code of Ethics and Professional Responsibility defines a number of terms that are essential to the practice of financial planning. The personal financial planning process, sometimes just known as the financial planning process, is the process that includes (but is not necessarily limited to) six basic elements: establishing and defining the client-planner relationship; gathering client data, objectives, and goals; analyzing and evaluating the client’s financial status; developing and presenting financial planning recommendations; implementing the financial planning recommendations; and, finally, monitoring the financial planning recommendations.

Personal Financial Planning Subject Areas and Personal Financial Planning Professional
The Code of Ethics and Professional Responsibility defines a number of terms that are essential to the practice of financial planning.
Personal financial planning subject areas are the main subject fields in financial planning. Specifically, these subject areas are financial statement preparation and analysis; investment planning (including portfolio design); income tax planning; education planning; risk management; retirement planning; and estate planning. A personal financial planning professional is someone who is able and qualified to offer accurate, honest, and comprehensive financial advice to individuals who are trying to reach specific financial goals.

Part One, Principles
The principles on the Code of Ethics and Professional
Responsibility outline the general ethical considerations of a financial planner. These principles apply to all CFP Board designees and are meant to provide guidance to financial planners as they go about their business. The seven principles are qualities that an ethical financial planner will cultivate. They are integrity, objectivity, competence, fairness, confidentiality, professionalism, and diligence. Though these principles in general have the well being of the client in mind, they do not assert that a financial planner should manipulate facts in order to please a potential client. On the contrary, the second principle, objectivity, directly asserts that financial planners should remain objective regarding the achievable goals for each client.

Rules 101, 102, and 103
The second section of the Code of Ethics and Professional
Responsibility contains specific rules for handling common financial planning situations. Rule 101 asserts that a financial planner should not solicit clients through false or misleading communications or advertisements. Rule 102 asserts that a financial planner should not engage in any conduct that involves dishonesty, fraud, deceit, or misrepresentation. Rule 103 is more complex; it lists the specific responsibilities a Board designee has to his or her clients.
These are as follows: acting in accordance with the authority set forth in the governing legal instrument; identifying and maintaining records of funds and other property held by a client; delivering any funds or other property to which the client is entitled; not commingling client funds with the designee’s own personal property; and showing the care required of a fiduciary.

Rules 201, 202, 301, and 302
The Code of Ethics and Professional Responsibility outlines some specific rules for situations that are common to a financial planner. Rule
201 states that a financial planner must exercise reasonable and prudent professional judgment. Rule 202 states that a financial planner must act in the interest of the client. Rule 301 states that a financial planner must stay informed of developments in the field of financial planning and participate in continuing education. Rule 302 states that a financial planner must offer advice only in those areas in which that financial planner has competence. In those matters in which the financial planner is not competent, he or she should seek the counsel of qualified individuals.

Rule 401
The Code of Ethics and Professional Responsibility has specific rules for situations that are common in financial planning. Rule 401 requires that a financial planner disclose to the client any important material information, including conflicts of interest and any changes in business affiliation, address, telephone number, credentials, qualifications, licenses, compensation structure, and agency relationships. Also, Rule 401 states that a financial planner must disclose the information required by all laws applicable to the relationship in a manner that is consistent with the relevant laws. Rule
401 is based on the Principle of Fairness, insofar as its objective is to ensure that the client has all of the information needed to make informed decisions about a financial planner.

Rule 402
Rule 402 of the Code of Ethics and Professional  Responsibility is designed to support the Principle of Fairness, ensuring that clients have the necessary means to make decisions in their own best interests.
Specifically, Rule 402 states that a financial planning practitioner shall make timely written disclosure of all material information relative to the professional relationship. This information always includes conflicts of interest and sources of compensation. A source document is considered in compliance if it includes: a statement of the designee’s philosophy; resumes for those individuals who can be expected to contribute to the client’s financial plan; a source of compensation and referral fees; a statement describing the designee’s compensation system; any material agency or employment relationships with third parties; and a statement identifying any conflicts of interest.

Rules 403, 404, and 405
In the Code of Ethics and Professional Responsibility, Rule
403 states that before the client relationship is established, a financial planner must disclose in writing any relationships that could reasonably compromise the financial planner’s objectivity or independence. Rule 404 states that if a conflict of interest should develop during the course of the financial planning process, the financial planner should immediately disclose the conflict. Rule 405 states that the disclosure of compensation must be made annually to ongoing clients. This means offering clients a current copy of the
Securities and Exchange Commission Form ADV, Part II, or all of the disclosure information described in Rule 402.

Rules 406, 407, 408, 409, and 410
The rules in the 400 series of the Code of Ethics and Professional Responsibility relate to the Principle of Fairness. Rule 406 of the states that the compensation of a financial planner should be fair and reasonable. Rule 407 states that references may be provided that include recommendations from present or former clients. Rule 408 states that the scope of the authority of a financial planner must be clearly defined and properly documented. Rule 409 states that all CFP Board designees are obliged to adhere to the same standards of disclosure and service. Rule 410 states that a financial planner must perform his or her professional services with strict dedication to the lawful objectives of the employer and in accordance with the Code of Ethics and Professional Responsibility.

Rules 411, 412, and 413
Rule 411 of the Code of Ethics and Professional Responsibility states that a CFP designee must advise his or her employer about any outside affiliations that may reasonably compromise his or her service to an employer. This rule also states that a financial planner must provide timely notice to the employer and clients, unless this is precluded by contractual obligation, in the event of change of employment or change in CFP Board certification status. Rule 412 states that a CFP Board designee must act in good faith with partners. Rule 413 states that a CFP Board designee must disclose to his or her partners all relevant and material information regarding credentials, competence, experience, licensing, legal status, and financial stability.

Rules 414, 415, and 416
The rules in the 400 series of the second part of the Code of Ethics and Professional Responsibility relate to the Principle of Fairness.
Rule 414 states that a CFP Board designee who is a partner or co-owner of a financial services firm must withdraw in compliance with any applicable agreement and in a fair and equitable manner. Rule 415 states that a CFP Board designee must disclose to an employer any compensation or other benefit arrangements in connection with his or her services to clients that are in addition to compensation from the employer. Rule 416 states that if a CFP Board designee enters into a business transaction with a client, the transaction shall be on terms that are fair and reasonable to the client.

Rule 501
The rules in the 500 series of the Code of Ethics and Professional Responsibility relate to the Principle of Confidentiality. Rule 501 states that a financial planner should not reveal any personally identifiable information relating to the client relationship without the client's consent. There are only a few sets of circumstances in which such use is reasonably necessary: to establish an advisory or brokerage account, to effect a transaction for the client, or to carry out any other aspect of the client engagement; to comply with legal requirements or the legal process; to defend the CFP Board designee against charges of wrong-doing; and in connection with a civil dispute between the CFB Board designee and the client.

Rules 502, 503, 601, 602, and 603
Rule 502 of the Code of Ethics and Professional Responsibility states that a CFP Board designee must maintain the same standards of confidentiality to employers as clients. Rule 503 states that a financial planner must adhere to reasonable expectations of confidentiality while in business and thereafter. Rule 601 states that a financial planner must use the marks in compliance with the rules and regulations of the CFP Board.
Rule 602 states that a CFP Board designee must show respect for other financial planning professionals and related occupational groups by engaging in fair and honorable competitive practices. Rule 603 states that a financial planner must inform the CFP Board when another CFP designee has undoubtedly committed a violation of the Code of Ethics.

Rules 604, 605, and 606
Rule 604 states that a financial planner must inform the appropriate regulatory and/or professional disciplinary body when there is any unprofessional, fraudulent, or illegal conduct by another CFP Board designee or another financial professional. Rule 605 states that a financial planner must disclose illegal conduct to the supervisor and/or partners if illegal conduct is suspected. Rule 606 states that a financial planner must perform his or he services in accordance with all applicable laws, rules, and regulations of governmental agencies and other applicable authorities. Also, it states that a financial planner must act in accordance with all the applicable rules, regulations, and other established policies of the CFP Board.

Rules 607, 608, and 609
Rule 607 of the Code of Ethics and Professional Responsibility states that a financial planner must not engage in any conduct that reflects adversely on the profession. Rule 608 states that a financial planner must disclose to clients the firm’s status as registered investment advisers. It is appropriate to use the term registered investment adviser if the designee is registered individually. If the designee is registered through his or her firm, then the firm is a registered investment adviser. Rule 609 states that a CFP Board designee must not practice any other profession or offer to provide such services unless the CFP Board designee is qualified to practice in those fields and is licensed as required by state law.

Rules 610, 611, and 612
Rule 610 of the Code of Ethics and Professional Responsibility states that a financial planner must return the client’s original records in a timely manner whenever the client should request them.
Rule 611 states that a financial planner should not bring or threaten to bring a disciplinary proceeding under the Code of Ethics, or report or threaten to report information to the CFP Board pursuant to Rules 603 and/or 604, for no substantial purpose other than to harass, embarrass, and/or unfairly burden another CFP Board designee. Rule 612 states that a financial planner should comply with all applicable renewal requirements that have been established by the CFP Board.

Rules 701, 702, 703, 704, and 705
Rule 701 of the Code of Ethics and Professional Responsibility states that a financial planner should provide services diligently. Rule 702 states that a financial planner should enter into an engagement only after securing sufficient information to satisfy him or herself that the relationship is warranted by the client’s needs and objectives and that the designee has the ability to provide competent service or to involve professionals who can. Rule 703 states that a financial planner should implement only those recommendations that are suitable for the client. Rule 704 states that a financial planner should make a reasonable investigation regarding the financial products recommended to clients. Rule 705 states hat a financial planner should supervise subordinates with regard to their delivery of financial planning services.