June 13, 2000
By U.S. Mail and Electronic Filing
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Release No. IA-1862; File No. S7-10-00, Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV
Dear Mr. Katz:
I am writing to provide information on the Securities and Exchange Commission's (the Commission) proposed amendments to Form ADV. The CFP Board1 appreciates this opportunity to provide information it hopes is helpful to the Commission in deliberating the amendments to Form ADV.
The CFP Board would like to commend the Commission on its work in updating the Form ADV. The CFP Board believes the new Form ADV and subsequent additional information provided on investment advisors is generally beneficial to investors. The CFP Board also believes the Commission has used clear language that will in turn enable investment advisers to provide investors with information that is both useful and easily understood.
The CFP Board would like to provide specific comment on the following items found in the Release.
A. The Investment Adviser Registration Depository
4. Filing Fees
The Commission states in this section that the Investment Adviser Registration Depository (IARD) "will not accept a filing if insufficient funds are on account to pay fees due." The CFP Board believes the Commission should consider remedies if the account balance is insufficient due to an error not of the investment advisers fault. In this situation, the IARD will block an investment adviser's registration. The CFP Board also believes the system should be designed to quickly reports exceptions and correct any errors. This functionality will be important for compliance purposes if advisory business is to continue through this period.
Concerning the IARD overall, the CFP Board believes that it will be beneficial to investors, financial planning professionals, and securities regulators. As the CFP Board understands the project, the IARD will include information on the required examinations of investment advisers or investment adviser representatives. In order for an investment adviser to register, it must prove passage of certain securities examinations or maintain various professional designations or certifications, including the CFP Board's marks.
The CFP Board has expressed its willingness to participate in an automated verification process for individuals it certifies. This would allow state securities regulators to automatically verify through the IARD that an adviser who is a CFP practitioner and seeking an exemption from the examination requirement is currently certified and in good standing with the CFP Board. This will dramatically reduce administrative costs, lag time, and potential errors for regulators. These operating efficiencies will benefit the registration process for those financial planning professionals who provide investment advice.
The CFP Board understands the IARD will likely include for public viewing, any current designations and/or certifications for each adviser via the IARD public Web site. If the IARD provides information about each designation and certification and the subsequent organization which grants it, investors will increase their knowledge about financial services and sources of competent and ethical financial advice.
As the CFP Board understands, the IARD will also include investment adviser disciplinary history for public viewing. Since the CFP Board makes its own disciplinary actions public, we are well aware of the benefit public disclosure of improprieties and wrongdoing provides consumers in seeking ethical advisers and the deterrent such disclosure creates for those providing financial advice to the public.
B. Proposed Amendments to SEC Rules
4. Hardship Exemptions
The CFP Board would like to suggest the seven business day extension for an electronic filing due to a temporary hardships may not be suitable in all situations. An example might be instances of natural disaster, such as a hurricane, in which electricity can remain unavailable for more than seven days. In these instances, investment advisers may need longer to recoup and be prepared to file electronically. The CFP Board suggests the Commission grant investment advisers an additional extension of 10 business days under certain conditions, such as natural disasters.
D. Proposed Revisions to Form ADV
1. Part 1
a. Part IA
i. Identifying Information
The CFP Board believes requiring inclusion of "web site addresses" may be confusing for investment advisers as they may have multiple "addresses" pointing to a variety of informational areas within their Web site. The CFP Board suggests the Commission require investment advisers to include only a "home page URL." This will provide consumers with a Web site portal which is the most appropriate place to find information on the investment adviser.
iii. Disciplinary Disclosure
Proposed amendments in this section would allow an investment adviser to "omit disciplinary information for advisory affiliates no longer associated with the adviser." The CFP Board believes the Commission should not allow the omission of disciplinary information of affiliates where the investment advisers' oversight policies played a part in the infraction.
v. Small Businesses
The Commission is required to gather information to determine the proposed rules under the Regulatory Flexibility Act to consider their effects on small businesses. Almost all of the investment advisers under the Commission's authority are not small businesses. However, all investment advisers in Wyoming must register with the SEC due to the absence of state investment adviser registration in that state. Many of these investment advisers would be considered small businesses. The CFP Board believes the proposed rules should not be swayed by any consideration of this unusually aberrant situation.
b. Part 1B
This section addresses Part 1B of Form ADV which has been prepared by the North American Securities Administrators Association (NASAA). The CFP Board is submitting the following comment for the Commission to forward to NASAA.
Included in the information that Part 1B will require of state registered investment advisers is passing "certain qualifying examinations or attainment of various professional designations." The CFP Board believes any reference to professional designations that will be available for public view should reference (and hyperlink if displayed via the Internet) the organization granting the designation. This will enable consumers to learn what the designation means, which organization grants it, what certification process is necessary to obtain it, what is required to maintain it, and if a disciplinary action can revoke its use. Investment advisers should not include membership in any professional or trade associations in this field.
2. Part 2
Item 1. Cover Page
The CFP Board believes the brochure cover page should in addition to a business address and telephone number, include the investment advisers' home page URL and primary e-mail address. This will provide greater benefits and uniformity for investors who tend to use electronic research methods.
Item 4. Advisory Business
The CFP Board believes the Commission should not consider financial planning to be a "specialty" or "type" of investment advisory service under the requirement that "an adviser that holds itself out as specializing in a particular service to explain its specialty in detail." Financial planning is a process, not a product. While the practice of financial planning can be performed in conjunction with providing financial products, it can also be performed as a distinct and separate function from the practice of any other profession or occupation. The CFP Board considers the financial planning process to be:
1. Establishing and defining the client-planner relationship.
2. Gathering client data, including goals.
3. Analyzing and evaluating your financial status.
4. Developing and presenting financial planning recommendations and/or alternatives.
5. Implementing the financial planning recommendations.
6. Monitoring the financial planning recommendations.
The federal government and most states define investment adviser as "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities."2 Since this activity focuses strictly on securities and financial planning is the aforementioned six-step process, the CFP Board believes the Commission should maintain the difference and consider financial planning a separate professional service.
Item 5. Fees and Compensation
The CFP Board believes requiring an investment adviser that accepts compensation for the sale of securities to "explain that this practice presents a conflict of interest and gives...an incentive to recommend investment products based on the compensation received" is not necessarily true in all situations. CFP licensees must at all times put the interest of the client first, including when providing investment advice and accepting compensation for the sale of securities. Therefore, the CFP Board believes the rule is not necessary as it states a conflict of interest does exist when that is not always the case.
The CFP Board believes requiring an investment adviser that accepts compensation for the sale of securities to "explain that clients have the option to purchase investment products...through other brokers or agents that are not affiliated with you" may lead consumers to suspect this is either preferable or required. The CFP Board believes full disclosure of this fact is necessary, but could better served by requiring the investment adviser to explain where the client may purchase any recommended securities.
The CFP Board believes requiring an investment adviser that accepts compensation for the sale of securities in addition to commissions to disclose whether it reduces advisory fees to offset the commission all but infers to consumers that this should be standard. Each investment adviser must consider the cost of the various advisory services they provide and charge clients accordingly. The CFP Board believes full disclosure of the methods of compensation is essential to a healthy investment adviser-client relationship. However, this rule heavily suggests the method the Commission favors, yet does not require.
Item 9. Other Financial Industry Activities and Affiliations
The Commission is proposing to require investment advisers to describe relationships with other entities in the financial services industry. Included in this list is "other investment adviser or financial planner." The CFP Board believes the Commission should not include these two together as this will be confusing for consumers, leading them to believe that these services are one in the same. The CFP Board suggests separating these two items and creating a new item four which would solely refer to "financial planners."
Item 14. Custody
The CFP Board believes forcing an investment adviser which requires custody of client assets to explain to clients that most investment advisers do not impose this requirement infers this is either a problematic situation, or at worse an unethical one. Such an explanation has the potential of unnecessarily frightening clients into becoming concerned about their investment adviser. As long as investment advisers provide full disclosure of issues such as the nature of the relationship, the methods of compensation, any potential conflicts of interest, and any prior disciplinary activity, the CFP Board believes this proposed rule is unnecessary to protect consumers.
b. Part 2B: The Brochure Supplement
Item 2 Educational Background and Business Experience
The CFP Board believes that including professional designations and certifications is very beneficial to consumers. Consumers need information on the investment adviser's background in the financial services industry.
Financial planners can help consumers meet life goals and achieve financial well-being. Life goals can include buying a home, funding a child's education, passing along a family business, or planning for the years after retirement. It allows one to understand how each financial decision affects other areas of personal finances. Very often, but not always, financial planning involves investment advice. Consequently, consumers seeking financial planning will at the same time often be seeking investment advice. The CFP Board believes that consumers should take every step possible to assure the investment advice they receive is provided by someone who is competent and trustworthy.
The CFP, Certified Financial Planner, and CFP with flame logo marks help consumers identify financial planners who are committed to competent and ethical behavior when providing financial planning services. CFP practitioners have taken the extra step to demonstrate their professionalism by voluntarily submitting to the rigorous CFP certification process. In addition to significant education and experience requirements, they must pass a comprehensive examination that tests their personal financial planning knowledge and skills (including investment advice), complete a minimum of 30 hours of continuing education every two years, and abide by a strict Code of Ethics and Professional Responsibility.
In addition, CFP practitioners follow certain standards - called practice standards - when they provide financial planning advice. Practice standards describe the process consumers should reasonably expect a financial planner to use during a financial planning engagement. These standards are based on a six-step financial planning process, documented through CFP Board research.3 Considering the preceding rigorous standards, consumers are well served if they are informed of an investment advisers attainment of the right or loss thereof to use the CFP, Certified Financial Planner, or CFP with flame logo marks.
The current Form ADV requires educational information to be reported and this requirement remains in the proposed revisions. The CFP Board believes professional designations carry more weight for consumers in determining with which investment adviser they wish to work and demonstrate far more competency and integrity than a college degree. Therefore, the CFP Board strongly supports requiring inclusion of professional designations.
The CFP Board also believes any reference to professional designations that will be available for public view should reference (and hyperlink if displayed via the Internet) the organization granting the designation. This will enable consumers to learn what the designation means, which organization grants it, what certification process is necessary to obtain it, what is required to maintain it, and if a disciplinary action can revoke its use. Investment advisers should not include membership in any professional or trade associations in this field.
Item 3. Disciplinary Information
The CFP Board believes the inclusion of proceedings revoking or suspending a professional attainment, designation, or license for disciplinary reasons is beneficial to consumers and investment adviser representatives. Consumers will be able to have full disclosure of all relevant activities an investment adviser representative has experienced with such disclosures. However, the CFP Board believes the Commission should only require investment advisers to disclose any proceeding revoking or suspending professional designations or certifications of supervised persons when the cause is disciplinary in nature.
As the CFP, Certified Financial Planner and CFP with flame logo marks are not permanent attainments, individuals may elect to let the right to use them expire or choose not to pay the biennial fee. Therefore, while the CFP Board technically would revoke the right to use the marks in such a situation, the individual has not committed an action that required a disciplinary review. The Commission should provide very clear instructions so as to assure that it only requires investment advisers to report professional revocations and/or suspensions that occur due to a disciplinary action.
The CFP Board hopes the information it has provided is useful to the Commission. If you should have any questions regarding the CFP Board, the individuals it certifies or its marks, please contact me at 303-839-0610 or visit the CFP Board's Web site at www.CFP-Board.org.
Robert P. Goss, CFP
Cc: Bradley W. Skolnik, President, NASAA
Melanie Senter Lubin, Chair, NASAA Investment Adviser Section Committee
Marc Beauchamp, Executive Director, NASAA
1 Founded in 1985, the Certified Financial Planner Board of Standards, Inc. (CFP Board) is a Denver-based nonprofit professional regulatory organization whose mission it is to benefit the public by fostering professional standards in personal financial planning. The CFP Board owns the marks CFP, Certified Financial Planner, and CFP with flame logo, and licenses individuals who meet its certification standards to use them. There are currently over 35,600 CFP professionals nationwide and 11 international affiliates that license additional thousands of qualified persons outside the U.S. The CFP Board also serves as an educational resource to federal and state lawmakers and regulators on personal financial planning issues.
2 Title 15. Commerce And Trade Chapter 2d. Investment Companies and Advisors Investment Advisers
15 USCS § 80b-2(11), (2000)
3 Certified Financial Planner Practitioner Job Analysis Study of 1999, Copyright 2000 Certified Financial Planner Board of Standards, Inc., Linda E. Montgomery, Ph.D., Monica Hemingway, Ph.D., Kathleen T. Jones, Jim Masters, The Chauncey Group International, A Subsidiary of Education Testing Service, Princeton, New Jersey, January, 2000.