Compliance January 12, 2022

More CFP Board Sanctions Revealed, in Warning to Adviser Professionals

From personal income tax issues to fraud and involvement in civil litigation, the financial professional accreditation organization has identified a variety of punishable issues among its members or candidates.

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Earlier this week, the Certified Financial Planner Board of Standards (CFP Board) announced a new set of public sanctions against 20 current or former CFP professionals or candidates for CFP certification.

Public sanctions taken by the CFP Board, in order of increasing severity, are public censures, suspensions, temporary bars, permanent bars and revocations of the right to use the CFP marks.

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In many cases, the public sanctions are the result of “historical investigations” the board opened following background checks conducted on all CFP professionals. These checks are meant to detect potential misconduct that previously had not been reported to the CFP Board. In this latest round of sanctions, 13 of the actions taken by the CFP Board were the result of historical investigations.

Examples of relevant misconduct include regulatory actions, firm terminations, customer complaints, arbitrations and civil court litigation that involve professional conduct, criminal matters, bankruptcies, civil judgments and tax liens.

Unlicensed Securities Sales

In one case identified by the CFP Board that has resulted in a public censure, a financial professional admitted to engaging in unlicensed sales representative activity by receiving transaction-based compensation in connection with the sale of real estate investment trusts (REITs) and private placement securities. According to the CFP Board, these actions were undertaken in violation of Rule 4.3 of the CFP’s Rules of Conduct.

The adviser also consented to findings that his firm’s advertising materials, for which he was responsible, falsely represented an affiliation with a broker/dealer (B/D) entity that was, in fact, no longer registered, and falsely stated that the firm was a member of the Securities Investor Protection Corp. (SIPC), which was a violation of Rule 2.1 of the Rules of Conduct.

As a result of this conduct, the adviser and his firm entered into a consent order with the Colorado Securities Division (CSD) in August 2017, which required the adviser to reimburse clients for $35,000 in transaction-based compensation and imposed other undertakings. Subsequently, the adviser made a false statement to CFP Board on his ethics declaration in December 2018 by failing to disclose the CSD order, which was a violation of Rule 6.2 of the Rules of Conduct.

Taxes and College Tuition

In another case, the CFP Board found that a financial services professional prioritized paying for college tuition and expenses over paying taxes to the Internal Revenue Service (IRS) for a period of six years, resulting in the IRS filing federal tax liens against the adviser totaling almost $230,000. Currently, the adviser is making timely payments to the IRS pursuant to an installment agreement, but the CFP Board determined that the adviser’s conduct violated Rule 6.5 of the Rules of Conduct, which provides that a certificate holder shall not engage in conduct which reflects adversely on his integrity or fitness as a certificate holder, upon the CFP marks, or upon the profession.

Accordingly, the CFP Board determined to issue the individual an order of public censure.

Sensitive Data Violation

Another issue pointed out by the CFP Board occurred when a financial professional printed and removed hard copies of the nonpublic personal information of 1,300 customers of his firm, without the firm’s or the customers’ knowledge or consent.

The information included the customers’ Social Security numbers, account numbers and dates of birth. Furthermore, the adviser retained this information in a secure location without the firm’s or the customers’ knowledge or consent for approximately six weeks after his resignation from the firm.

After the firm determined that the adviser had removed the nonpublic personal information, the adviser returned the information. By thus improperly removing and retaining customer information, the adviser caused the firm to violate Regulation S-P, and in so doing, violated Financial Industry Regulatory Authority (FINRA) Rule 2010.

Accordingly, the CFP Board issued a public censure to the adviser.

Copied Customer Signature

Another adviser received a 30-month suspension of his right to use the CFP certification marks after the CFP Board determined that he violated Rule 6.5 of the Rules of Conduct when he copied a client’s signature to asset transfer paperwork in June 2020, with the goal of implementing the client’s transition to his new firm.

Among other issues, the adviser was also found to have violated the Rules of Conduct when he failed to treat client information as confidential by saving copies of documents containing nonpublic personal information, including names, birthdates, Social Security numbers and account numbers for at least four customers into an electronic folder on a thumb drive prior to leaving his previous firm to start his own firm—with the intention of using this information at his new firm.

The adviser agreed to the CFP Board’s findings that he entered into a letter of acceptance, waiver and consent order with FINRA, in which FINRA determined that the adviser violated its Rule 2010.

Sale of Unsuitable Products

In another situation that resulted in a temporary one-year bar on an adviser’s opportunity to apply for the CFP certification, an adviser failed to timely respond to the CFP Board’s notice of investigation.

In this case, the CFP Board sought to investigate an arbitration filed against the adviser, in which it is alleged that the adviser sold unsuitable products. The adviser did not provide a response to CFP Board’s second notice of investigation within 30 calendar days, as required by Article 1.1 of the Procedural Rules.

Improper Hedge Fund Operation

In one case resulting in a permanent bar of an adviser’s right to use the CFP marks, the CFP Board sought to investigate a cease and desist and revocation order filed against an adviser by the U.S. Virgin Islands Division of Banking, Insurance and Financial Regulation.

That regulator found the adviser committed a breach of fiduciary duty and committed other misconduct related to her operation of a hedge fund and her lack of cooperation with auditors. The adviser involved did not timely provide a response to the CFP Board’s notice of investigation or the CFP Board’s second notice.

In accordance with Article 4.2 of the CFP Board’s Procedural Rules, based on its determination of the seriousness, scope and harmfulness of the adviser’s conduct, the CFP Board issued an administrative order of permanent bar.

Cherry-Picking Scheme

One case resulting in a permanent revocation of an adviser’s CFP certification followed the adviser’s failure to comply with a CFP Board interim suspension order.

The CFP Board had suspended the adviser’s right to use the CFP certification marks after the U. S. Securities and Exchange Commission (SEC) filed a civil action against him, alleging that he participated in a “cherry-picking scheme.” The adviser subsequently failed to timely provide the CFP Board with evidence of his compliance with the interim suspension order.

Accordingly, under Article 4.1.c of the Procedural Rules, the adviser was deemed in default. In accordance with Article 4.2 of the Procedural Rules, based on the CFP Board’s determination of the seriousness, scope and harmfulness of his conduct, the CFP Board issued an administrative order of revocation.

Data & Research January 12, 2022

Inflation Figures and Volatility Expectations Confront Investors

While supply chain bottlenecks have lasted longer than initially expected, LGIMA says it believes inventories will eventually catch up as demand moderates.

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The increase in volatility that’s been happening since Thanksgiving ended a stretch of relative calm for the markets, says Legal & General Investment Management America (LGIMA) in a recent report analyzing the fourth quarter of 2021.

Recent factors responsible for the swing in asset prices include the emergence of the highly transmissible COVID-19 Omicron variant and the Federal Reserve’s December decision to accelerate the pace of tapering and acknowledge that inflation may be more persistent than its previous forecasts indicated, the firm says.

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LGIMA suggests that fixed-income investors still tend to believe conditions will eventually return to the way they were earlier in 2021. With core inflation ending the year at 5% and the gross domestic product (GDP) also averaging roughly 5% over the second half of 2021, the firm says, it is difficult to justify 10-year Treasury yields in the 1.5% to 1.75% range, unless both inflation and growth decline back to trend soon.

Though bottlenecks have lasted longer than initially expected, LGIMA says it believes inventories will eventually catch up as demand moderates, leading to reduced inflation for automobiles, microchips and other goods that have been subject to acute price pressure, the report says. Investors remain confident that Fed hikes will quickly bring inflation under control, though inflation concerns have shifted to the shelter and services component against a backdrop of rising home prices and tight labor markets.

“In our view, the market not only believes inflation will decline back to target but also that rate hikes will have an even greater impact on the economy than the Fed believes,” LGIMA says. “Said differently, markets are priced as if the pandemic will have little lasting impact. Deflationary forces will reassert themselves in the coming years, and, as in the previous cycle, we expect the Fed will find it unnecessary or unable to hike aggressively.”

The economy of 2022 looks very different than that of 2019, and, as a result, the possibility that both growth and inflation remain well-above their pre-pandemic trend throughout 2022 and beyond should not be discounted, LGIMA says. The year ahead is likely to require a higher emphasis on security selection as investors evaluate which investments offer sufficient premium to compensate for a more volatile world.

Fixed Income

It is difficult to judge the impact of the Fed’s decision to accelerate the pace of tapering, as it came squarely during the surge in Omicron cases, the report says. Yet, LGIMA adds there is no doubt it contributed to the increase in interest rate volatility during the fourth quarter, which was the highest since the beginning of the pandemic.

Credit market volatility was sharply higher in the fourth quarter along with rates, the report says. After trading within a narrow range from April through the last week of November, investment-grade credit spreads wiped out all the spread tightening experienced during the year before recovering marginally by year end.

The high-yield market was more volatile, yet better performing, during the ending quarter of 2021. Furthermore, for much of 2021, full valuations were a barrier to adding credit risk across portfolios. However, the combination of volatile markets and a rush of year-end issuance provided a short window to add risk at more attractive levels, the report says. More than $63 billion of investment-grade corporate debt was issued in December, well above the $23 billion average over the past four years.

Client Solutions

LGIMA estimates that an “average” pension plan with 60% global equity and 40% U.S. aggregate fixed income investments began 2021 with a funding ratio of approximately 82%. Funding ratios for the average plan closed out 2021 at the high-water mark for the year at just shy of 93%, with the main contributor to the increase being the strong performance of equity markets. Global equities climbed approximately 20%, while the S&P 500 rose almost 30% during 2021, says LGIMA.

Pension plan sponsors and other institutional investors also likely benefited from an increase in plan discount rates. The firm estimates discount rates rose close to 45 basis points (bps) over the year, helping to lower liability valuations. As funding ratios improve, demand has also increased for custom fixed-income strategies to dampen funded status volatility and increase predictability for plan sponsors.

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