CFP Board’s Code and Standards vs. SEC’s Reg BI
CFP® Certificants in the News
CFP Board published “What You Need to Know About CFP Board’s Code and Standards and Reg BI” on August 17, 2020; we will address the following questions with direct quotes from CFP Board’s publication:
- Does Reg BI apply to CFP® Certificants?
- How do the standards of conduct differ?
- How do disclosure requirements differ?
- Which client relationships are covered?
Does Reg BI Apply to CFP® Certificants?
“All CFP® professionals who are registered representatives of broker-dealers are subject to both the Code and Standards and Reg BI, which is why it’s crucial to understand what is expected of [CFP® professionals]… under both rules.”
How Do the Standards of Conduct Differ?
“Arguably, the fundamental distinction between the Code and Standards and Reg BI stems from the foundations that CFP Board and the SEC used to build their standards of conduct. While both impose a “best interest” standard, CFP Board explicitly adopted a fiduciary standard whereas the SEC did not [emphasis added].
The cornerstone of the Code and Standards is its fiduciary duty, which includes a duty of loyalty on CFP® professionals to place the clients’ interest above their own and their firm’s, a duty of care, and a duty to follow client instructions.
This clear standard — along with the entire Code and Standards — is consistent with CFP Board’s mission to benefit the public. Professional bodies, such as CFP Board, exist in part to set standards that go beyond those required by the law, for the benefit of the public and the profession.
The commitment that a CFP® professional makes to CFP Board to act as a fiduciary represents the source of several other differences between the CFP Board Code and Standards and Reg BI:
- Duty of Loyalty: When a CFP® professional gives advice or a recommendation, CFP Board’s Code and Standards explicitly requires the client’s interest to come first and the recommendation to be “without regard” to the interests of anyone but the client. The SEC does not use similar language in Reg BI.
- Duty of Care: The Code and Standards and Reg BI include similar client-specific duties of care. CFP Board requires “prudence” while the SEC says that prudence is covered by other language in Reg BI. Any difference in the duties of care will be revealed when the SEC interprets Reg BI. Notably, the Duty of Care in the Code and Standards uses the “prudent professional” standard, which is a higher standard for fiduciaries than a “reasonable person” standard.”
How Do Disclosure Requirements Differ?
“Under the Code and Standards, CFP® professionals have the option to disclose Material Conflicts of Interest either orally or in writing. However, Reg BI requires written disclosure of material facts, which means that a CFP® professional who is a registered representative also must comply with this requirement.”
Which Client Relationships are Covered?
“The Code and Standards and Reg BI differ in both the recommendations and the relationships they cover. Recommendations covered by Reg BI are strictly limited to those concerning securities transactions and investment strategies involving securities, whereas the Code and Standards applies to recommendations regarding all financial assets including securities transactions and investment strategies involving securities, as well as insurance products, real estate, derivatives contracts, and others.
Under the Code and Standards, a “client” could refer to a natural person as well as a business organization or entity, whereas Reg BI’s “retail customer” definition applies only to a natural person or his or her legal representative who has received and used a recommendation.”
As we look forward, there are outstanding questions and expected communications from the SEC as Reg BI is clarified. In the meantime, check in with CFP Board’s Compliance Resource Library regularly for updates.
