CFP Board Code of Ethics Case Study 1: Financial Conflict of Interest A CFP® pro

Question

CFP Board Code of Ethics

Case Study 1: Financial Conflict of Interest

A CFP® professional served as the president and owner of an investment advisory firm and had primary responsibility for the financial and investment services offered by the firm. The firm held a private offering to raise money for working capital, marketing, expansion of present facilities, and operating expenses. The CFP® professional recommended that clients purchase shares in the private offering. Four clients purchased $2,550,000 worth of shares of the firm, which represented 12.5% of the company.

What rule(s) of conduct were broken? Explain the rule(s) and how it was broken in the case study.

How might you handle this situation differently?

Explanation / Answer

As per the CFP Board Code of Ethics and Standards of Conduct, a CFP professional, rule 5 of Standards of Conduct was broken, which deals with Disclosure and management of conflict of interest.

The subject rule is as under:

5. DISCLOSE AND MANAGE CONFLICTS OF INTEREST

a. Disclose Conflicts. When providing Financial Advice, a CFP® professional must make full disclosure of all Material Conflicts of Interest with the CFP® professional’s Client that could affect the professional relationship. This obligation requires the CFP® professional to provide the Client with sufficiently specific facts so that the Client is able to understand the CFP® professional’s Conflicts of Interest and the business practices that give rise to the conflicts, and give informed consent to such conflicts or reject them. A sincere belief by a CFP® professional with a Material Conflict of Interest that he or she is acting in the best interests of the Client is insufficient to excuse failure to make full disclosure. i. In determining whether to infer that a Client has consented to a Material Conflict of Interest, CFP Board will evaluate whether a reasonable Client receiving the disclosure would have understood the conflict and how it could affect the advice the Client will receive from the CFP® professional. The greater the potential harm the conflict presents to the Client, and the more significantly a business practice that gives rise to the conflict departs from commonly accepted practices among CFP® professionals, the less likely it is that CFP Board will infer informed consent absent clear evidence of informed consent. Ambiguity in the disclosure provided to the Client will be interpreted in favor of the Client. ii. Evidence of oral disclosure of a conflict will be given such weight as CFP Board in its judgment deems appropriate. Written consent to a conflict is not required.

b. Manage Conflicts : A CFP® professional must adopt and follow business practices reasonably designed to prevent Material Conflicts of Interest from compromising the CFP® professional’s ability to act in the Client’s best interests.

In this case, appears that CFP Professional has not made full disclosure of his conflict of interest to the client being the direct beneficiary of the Finance raised from the client through Private offering.

If I was in his place, I would take services from an independent investment advisory firm for the Private Placement and avoid the conflict of interest directly.

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