01 - Professional Conduct and Regulation

Question 1

The personal financial planning process typically includes six steps. What are the six steps of the personal financial planning process, in order?

Answer 1

(Every Good Apple Does Invest Money)
E - Establish and defining the client-planner relationship
G - Gather client data including goals
A - Analyzing and evaluating the client’s current financial status
D - Developing and presenting recommendations and/or alternatives
I - Implementing the recommendations
M - Monitoring the recommendations

Question 2

What activities will ALWAYS bar someone from the CFP marks?

Answer 2

1. A financial felony
2. Murder, rape, or other violent crime within the last five years
3. Revoked license

Question 3

What activities will POTENTIALLY bar someone from the CFP marks?

Answer 3

1. Non-violent felony
2. Other felonies that are not murder or rape
3. Two or more personal bankruptcies

Question 4

What are the seven principles of the Code of Ethics and Professional Responsibility?

Answer 4

1. Integrity
2. Objectivity
3. Competence
4. Fairness
5. Confidentiality
6. Professionalism
7. Diligence

Question 5

When working with a client, what are the six Rules of Conduct?

Answer 5

1. Defining the relationship
2. Information disclosed
3. Client information and property
4. Obligations to client
5. Obligations to employer
6. Obligations to CFP Board

Question 6

Under CFP Board Practice Standards, if a CFP professional is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, what must a CFP professional do?

Answer 6

The CFP professional must:

1. RESTRICT the scope of the engagement to those matters for which sufficient and relevant information is available; or
2. TERMINATE the engagement

Question 7

When developing a presenting recommendations, does a CFP professional need to disclose conflicts of interest, if any?

Answer 7

Yes, a CFP professional must disclose conflicts of interest, if any exist.

Question 8

Does the CFP Board require a certificant to notify the Board of an arrest? Of a conviction of a crime?

Answer 8

A certificant must notify the Board, in writing, of a charge or a conviction - but not an arrest - of a crime. The notification must be delivered within 30 days of the charge or conviction

Question 9

Does a suspension of one year have an automatic reinstatement provision? Two years?

Answer 9

A suspension of less than one year has an automatic reinstatement provision. A suspension of over one year needs to be petitioned in order for the CFP marks to be reinstated. Someone who receives two suspensions will automatically lose the right to use the CFP marks.

Question 10

What are some common conducts that may lead to an SEC investigations include:

Answer 10

1. Misrepresentation or omission of important information about securities
2. Manipulation of the market prices of securities
3. Stealing customers’ funds or securities
4. Violating broker-dealers’ responsibility to treat customers fairly
5. Insider trading (violating a trust relationship by trading while in possession of material, nonpublic information about a security); and
6. Selling unregistered securities

Question 11

Not all offerings of securities must be registered with the SEC. What are some exemptions from the registration requirement:

Answer 11

1. Private offerings to a limited number of persons or institutions
2. Offerings of limited size
3. Intrastate offerings
4. securities of municipal, state, and federal governments

Question 12

Registered Investment Advisors (RIAs) must register with either the state or the SEC. What is the distinction between registering with the state or the SEC:

Answer 12

Registered Investment Advisors who manage less than $100 million in assets must generally register in the state in which they conduct business. Only those RIAs who manage more than $100 million are required to register with the SEC directly.

Question 13

What types of firms/individuals are generally not required to register as an investment advisor with the SEC:

Answer 13

1. Publisher of a news magazine or newspaper or financial publication for the general public
2. Broker whose advice is incidental to the work
3. Lawyer
4. Accountant
5. Engineer
6. Teacher
7. Domestic Bank
8. Those who provide advice about only U.S. government securities or banks and bank holding companies.

Question 14

What are the two most widely held FINRA licenses?

Answer 14

The two most widely held FINRA licenses are:

1. Series 6 - Allows a licensee to sell mutual funds, unit investment trusts, annuities, and variable life products
2. Series 7 - Allows a licensee to sell nearly all other investment products, except commodities and futures

Question 15

What does the brochure rule state that a Registered Investment Adviser and a Registered Investment Adviser representative must provide to clients within 48 hours? If it is not provided, what is the possible consequence?

Answer 15

The brochure rule states that a Registered Investment Adviser and a Registered Investment Adviser representative must provide clients ADV Part II within 48 hours prior to entering into a contract; otherwise, the client has a five-day right to revoke the contract.

Question 16

What information does ADV Part II state to the client?

Answer 16

ADV Part II outlines advisory services and fees, types of securities recommended, education and business standards, and other important disclosures. ADV Part II also is used to disclose compensation and fees, educational background, investment objectives, strategies, and other types of information.

Question 17

Can a firm or a Registered Investment Adviser representative use the term “RIA” after their name or firm’s name?

Answer 17

No, a firm or Registered Investment Adviser representative cannot use the term RIA after the name of the firm or individually. “RIA” is not a designation. Only the words “Registered Investment Adviser” may be used for marketing purposes

Question 18

What information does ADV Part I state to the client?

Answer 18

ADV Part I is used to disclose an adviser’s name, background, and philosophy.

Question 19

Does an individual need to register with the Securities and Exchange Commission to act as an investment adviser?

Answer 19

Although it is possible for an individual to register with the Securities and Exchange Commission under the Investment Advisers Act of 1940, in most circumstances, the person’s firm registers, with each staff adviser registering as a registered investment (RIA) representative.

Question 20

Which standards, fiduciary or suitability, must anyone who provides advice regarding retirement plans or retirement plan assets must adhere to?

Answer 20

Under DOL and ERISA rules, anyone who provides advice regarding retirement plans or retirement plan assets must adhere to fiduciary standards rather than suitabilty standards when working with individual clients.

Question 21

According to the SEC, what is considered insider trading?

Answer 21

A regulatory priority for the SEC is the identification and prosecution of those who use inside information to make money. According to the SEC, insider trading refers to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence while in possession of material, nonpublic information about the security.

Question 22

Of two financial advisement practices, one that provides investment advice for a fee, and one that sells products for a commission, which practice needs to register (with the state or SEC) and which needs to obtain a license?

Answer 22

Those who provide investment advice for a fee register their practice, while those who sell products for a commission obtain a license.

Question 23

In order to register as an investment adviser at the state level, which examinations must be passed?

Answer 23

In order to register as an investment adviser at the state level, both the Series 66 and Series 7 FINRA examinations must be passed, unless a specific exemption is in place. For example, most states exempt CFP certificants from this rule.

Question 24

Which if any of the following would the SEC prohibit?

1. Assigning advisory contracts to other advisers
2. Receiving an advisory fee based on a percentage of account appreciation

Answer 24

The SEC prohibits both:

1. Assigning advisory contracts to other advisors
2. Receiving an advisory fee based on a percentage of account appreciation

Question 25

Which is the higher standard, the fiduciary or the suitability standard?

Answer 25

The fiduciary standard sets a higher threshold than the suitability standard. All advisers, even those who are not registered with the SEC, who provide advice regarding retirement plans

Question 26

What is needed from an investment adviser to comply with the brochure rule?

Answer 26

The brochure rule can be met by providing clients with ADV Part II or by providing another written document that contains the same information contained in ADV Part II

Question 27

How often do you file Form ADV with the SEC?

Answer 27

There are several schedules associated with Form ADV. You must file both parts of form ADV and the appropriate schedules with the SEC. Schedule I must be filed with the SEC annually, regardless of whether information on the schedule has changed

Question 28

What are the two most common processes (chapter of code) of bankruptcy protection?

Answer 28

Most individual bankruptcies use either a Chapter 7 or a Chapter 13 process. Under current legislation, someone declaring bankruptcy must attempt Chapter 13 prior to Chapter 7. The intent of the law is to encourage debtors to repay some of their outstanding liabilities

Question 29

Chapter 7 and 13 are the most common forms of bankruptcy protection. Can either be used or must one be used before the other?

Answer 29

Under current legislation, someone declaring bankruptcy must attempt Chapter 13 prior to Chapter 7. The intent of the law is to encourage debtors to repay some of their outstanding liabilities.

Question 30

What are some benefits and drawbacks to Chapter 13 bankruptcy protection:

Answer 30

Debtors filing for Chapter 13 bankruptcy will likely:

1. Remain in possession of assets,
2. Wait months or years before debts are discharged
3. Continue to make payments until debts are paid or discharged
4. Obtain protection from lawsuits and garnishments while in bankruptcy, and
5. Receive broader elimination of debts

Question 31

What is an unlimited homestead exemption?

Answer 31

Some states, such as Nevada and Texas, have unlimited homestead exemptions, which means that 100% of the equity held in a personal residence can be protected during a bankruptcy

Question 32

Are Inherited IRAs exempt from bankruptcy?

Answer 32

No, inherited IRAs are not exempt from bankruptcy

Question 33

Under definitions of the Employee Retirement Income and Security Act (ERISA), will financial planners who provide guidance on qualified retirement plan assets with generally be considered a fiduciary? Does how they are paid, based on commission or sale of products make a difference?

Answer 33

Yes, a financial planner will be considered a fiduciary under ERISA guidelines. This is the case regardless of whether paid a commission or be limited by their firm to the sale of certain products and/or services

Question 34

What are possible financial penalties for fiduciaries who fail to follow DOL principles?

Answer 34

Fiduciaries who fail to follow DOL principles of conduct may be personally liable to restore any losses to a plan or to restore any profits made through improper use of plan assets

Question 35

What actions can the courts take against fiduciaries who breach their duties under ERISA?

Answer 35

Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA

Question 36

Can a financial recommendation be both suitable for a client but not a “fiduciary” recommendation?

Answer 36

As noted by CFP Board, a financial recommendation that is suitable for a client may not fit within the definition of a fiduciary recommendation - one that is in the client’s best interest (as legally required for investment advisers)