CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. ANONYMOUS CASE HISTORIES NUMBER 31003 This is a summary of a Settlement Agreement entered into in connection with the October 2018 hearings of the Disciplinary and Ethics Commission ( the Commission ) of Certified Financial Planner Board of Standards, Inc. ( CFP Board ). The conduct at issue in this case occurred after January 1, 2009. The Rules in effect at that time under the Rules of Conduct were Rules 1.1 through 6.5. I. Issues Presented Whether a CFP professional ( Respondent ) violated CFP Board s Standards of Professional Conduct when he drafted misleading contracts in order to hire an unregistered employee, in violation of the rules of the Financial Industry Regulatory Authority ( FINRA ) and his firm s written policies. II. Findings of Fact In December 1986, Respondent passed the General Securities Representative Examination (Series 7). In the same month, he became registered with a FINRA member broker-dealer, and he remained a registered representative for the next 30 years. In March 1988, Respondent became certified as a CFP professional, and he has maintained his certification ever since. Respondent has had no disciplinary history with CFP Board or any regulator. In December 1988, Respondent began working at Firm ABC, where he currently serves as President and part owner. ABC provides accounting and tax services as well as insurance sales. In November 1989, Respondent passed the Uniform Securities Agent State Law Examination (Series 63). In January 1999, Respondent became registered as a broker and investment advisor with Firm DEF. He remained at DEF for 17 years until DEF terminated his employment in January 2016. He has not been registered since that date. Respondent's Termination and FINRA AWC In January 2016, DEF filed a Form U5 Notice of Termination announcing that it had discharged Respondent on January 20, 2016. DEF identified the following "Reason for Termination": "Representative employed a nonregistered person without properly associating them with the firm and obtaining fingerprints as is required by firm policy and industry regulations." In February 2016, CFP Board staff sent a Notice of Investigation ( NOI ) to Respondent requesting documents and information about his termination from DEF. Respondent provided the requested documents and information in March 2016. In May 2016, CFP Board staff sent a letter to Respondent explaining that it was closing its investigation pending the resolution of an ongoing inquiry being conducted by FINRA. The letter stated: - 1 -
"Because the FINRA Inquiry is pending, CFP Board has closed its investigation until after the matter has been resolved... Please be advised that you are required to report the resolution (e.g. dismissal, settlement, award, verdict) of the FINRA Inquiry within 14 days of the resolution date." In September 2016, Respondent completed his Renewal Ethics Disclosure. Respondent answered "Yes" to the questions asking whether he'd ever been terminated for cause or been the subject of a self-regulatory investigation. He provided the following details in the comment section: "I temporarily employed an individual who[se] registration lapsed and was subsequently renewed, but for a partial period of lime with my firm was not registered. Since I was already in the process of leaving the securities side of the profession to move into planning only, I voluntarily resigned my securities license. I disclosed this to [CFP] Board and received a letter stating the matter was closed. " In January 2018, Respondent entered into a Letter of Acceptance, Waiver and Consent ( AWC ) with FINRA consenting to FINRA's findings that he engaged in conduct that violated a FINRA rule. In the AWC, FINRA made the following findings: [Respondent s employee (employee X)] was a registered representative with a FINRA member firm from February 2010 to December 2012, when employee X voluntarily resigned. Between January of 2013 and April of 2014, employee X was not registered with any FINRA member firm. However, during this period, employee X worked with Respondent at [DEF] to facilitate the purchase of approximately 32 alternative investments, such as Business Development Corporations (BDCs) and Real Estate Investment Trusts (RIETs), to 26 customers. Employee X s level of involvement in each of these investments varied. On some occasions, Employee X and Respondent would meet with a customer and assess the customer s suitability for an investment and make a recommendation. On other occasions, employee X would meet with a customer on her own and assess suitability, make a recommendation, and then fill out the required paperwork. Employee X would then drop off the paperwork at Respondent s office to be executed under Respondent s name at [DEF]. Employee X did not become registered with [DEF] until April of 2014. While employee X was not registered, Respondent made payments to her totaling $102,000. After she was registered, Respondent continued to make payments to her until November of 2015, totaling an additional $23,250. These payments were made pursuant to five different contracts entered into between Respondent and employee X, ostensibly for education and training related to alternative investments. However, Respondent concedes that the payments were related to employee X s active role in his securities business and to entice employee X to eventually register and become his business partner. In the AWC, FINRA found that Respondent's conduct violated FINRA Rule 2010: NASD Membership and Registration Rule 1031(a) provides that all persons engaged in the... securities business of a member who are to function as representatives must be registered. The rule defines a representative to include all persons associated with a member firm who engaged in the functions of supervision, solicitation or conduct of business of securities. - 2 -
FINRA Rule 2010 provides that a member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade. By allowing employee X to act in a capacity that required registration, even though she was not registered, Respondent violated FINRA Rule 2010. By accepting the terms of the AWC in January 2018, Respondent consented to the imposition of the following sanctions: A two (2) month suspension from association with any FINRA member firm in any capacity and a $5,000 fine. The fine shall be due and payable either immediately upon reassociation with a member firm, or prior to any application or request /or relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier. In January 2018, Respondent sent a letter to CFP Board explaining that he had signed an AWC with FINRA in connection with the matter that CFP Board had closed in 2016 until after the resolution of FINRA's investigation. Respondent offered the following explanation: Upon advice of counsel, and considering the costs of litigating this matter, I entered into an agreement with FINRA whereby I neither admitted nor denied wrongdoing, but accepted a settlement of a fine and suspension. Both terms... are applicable only if I re-register with FINRA. I previously informed FJNRA that I had sold my practice and did not intend to re-register with any broker-dealer. I continue to have no desire to work for a broker-dealer.... Please advise me if you require any further information... Although I am finished with working for a broker-dealer, I remain committed to and advocate for the principles of true financial planning, and want to remain in compliance. Thank you. On February 6, 2018, CFP Board staff mailed a new NOI to Respondent seeking documents and information regarding his January 2018 FINRA AWC. On March 8, 2018, Respondent's attorney sent a response to CFP Board s NOI and attached a copy of Respondent's executed FINRA AWC. The letter stated: My client s Settlement was motivated by the high cost of litigation. Moreover, he believes that his former broker-dealer was supervising employee X. Furthermore, my client was not her supervisor." In July 2018, CFP Board asked Respondent to produce copies of the "five contracts" identified in the AWC. Respondent produced the contracts in August 2018. The first of the five contracts was dated January 2013 and signed by employee X. The full and complete terms of that contract were as follows: "CONTRACT 100 hours of educational and training services regarding use of alternative investment products within asset allocations, including how to evaluate different products, how to market, and how to implement. All materials to be provided by Employee X. All training to be completed prior to June 2013. 50% of payment due upon completion of 50 hours of training. Balance of payment due upon completion of training. - 3 -
Total contract: $25,000.00." Contracts two through five were unsigned and undated, and they contained the following terms: Contract 2 stated that training was to be completed by January 2014 for $48,000. Contract 3 stated that training was to be completed by April 2014 for $31,000. Contract 4 stated that training was to be completed by May 2015 for $18,000. Contract 5 stated that training was to be completed by November 201 5 for $6,000. The contracts suggested that employee X was providing education and training services related to alternative investments but employee X provided no such training. The contracts were designed to disguise the payments that Respondent was making to employee X to compensate her for the securities-related work she was providing to his securities business. When DEF filed its Form U5 announcing its termination of Respondent in January 2016, it stated that Respondent had violated the firm's policies and procedures which prohibited non-registered persons from acting in a capacity that required registration: "Representative employed a non-registered person without properly associating them with the firm and obtaining fingerprints as is required by firm policy and industry regulations." Conclusion Article 13.1 of the Disciplinary Rules provides that a letter or other writing from a governmental or industry selfregulatory authority to the effect that a Respondent has been the subject of an order of professional discipline by such authority shall conclusively establish the existence of such professional discipline for purposes of disciplinary proceedings and shall be conclusive proof of the basis for such discipline by the Respondent. As defined in Article 13.4 of the Disciplinary Rules, professional discipline "shall include the suspension, bar or revocation as disciplinary measure by... [an] industry self-regulatory organization or professional association. FINRA is an industry self-regulatory authority. The January 2018 AWC is an order of professional discipline by FINRA, and Respondent is the subject of that order. Therefore, the AWC conclusively establishes the existence of such discipline for purposes of this disciplinary proceeding, and is conclusive proof of the basis for such discipline by the Respondent. III. Grounds for Discipline First Ground for Discipline Pursuant to Article 3(a) of the Disciplinary Rules, there are grounds to discipline Respondent for acts or omissions that violate Rule 4.3 of the Rules of Conduct, which provides that a certificant shall comply with applicable regulatory requirements governing professional services provided to the client. Respondent is a certificant. FINRA Rule 2010 requires that "a member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.'' Respondent allowed an unregistered person to act in a capacity the required registration when he allowed her to meet with customers, complete firm paperwork, assess suitability, make investment recommendations, and accept payment for providing these services. By engaging in this conduct, Respondent failed to observe high standards of commercial honor, thereby violating - 4 -
FINRA Rule 2010. The AWC is conclusive proof that Respondent violated the regulatory requirements of FINRA Rule 2010. Thus, Respondent violated Rule 4.3 of the Rules of Conduct. Second Ground for Discipline Pursuant to Article 3(a) of the Disciplinary Rules, there are grounds to discipline Respondent for acts or omissions that violate Rule 5.1 of the Rules of Conduct, which provides that a certificant who is an employee shall perform professional services with dedication to the lawful objectives of the employer and in accordance with CFP Board's Code of Ethics. Respondent, a certificant, failed to perform professional services with dedication to the lawful objectives of the employer and in accordance with CFP Board's Code of Ethics when he violated DEF s policies and procedures that required him to properly associate a non-registered person with the firm and obtain fingerprints before employing that person. Thus, by engaging in these actions that violated his employer's policies and procedures, Respondent violated Rule 5.1 of the Rules of Conduct. Third Ground for Discipline Pursuant to Article 3(d) of the Disciplinary Rules, CFP Board has grounds to discipline a Respondent for any act that is the proper basis for professional discipline. The AWC described acts by Respondent that were determined by FINRA to form the proper basis for a two-month suspension. A FINRA suspension constitutes professional discipline by an industry self-regulatory organization. Therefore, the AWC is conclusive proof that Respondent engaged in acts that violated FINRA's rules and resulted in his professional discipline. Therefore, Respondent can be disciplined under Article 3(d) of the Disciplinary Rules. IV. Discipline Imposed The Commission and Respondent entered into a Settlement Agreement in which Respondent consented to the Findings of Fact and Grounds for Discipline. Pursuant to the terms of the Settlement Agreement, the Commission issued Respondent a suspension for six months as provided in Article 4 of the Disciplinary Rules. The Commission found the following Sanction Guidelines relevant to its decision: 1. Conduct 33 Professional Discipline of less than one year; 2. Conduct 30 Securities Law Violation; and 3. Conduct 12 Employer Policy Violation. In coming to its decision to enter into the Settlement Agreement, the Commission considered the following aggravating factors: 1. The conduct occurred over an extended period of time of almost three years; 2. 26 clients were involved; 3. Respondent attempted to conceal misconduct by creating misleading contracts; 4. Respondent executed paperwork under his own name even though the unregistered person met with the clients; and 5. Respondent was terminated from his employer. - 5 -
The Commission considered the following factors in mitigation: 1. Respondent acknowledged the misconduct; and 2. There was no client harm. Additionally, the Commission consulted two Anonymous Case Histories ( ACHs ). First, the Commission considered ACH 28754, in which the Commission issued a three-year suspension when a CFP professional shared commissions with a representative of another firm without either firm s knowledge. The CFP professional intentionally avoided compliance procedures and the behavior occurred over an extended period of time; these factors were similar to those in the case at hand, however the instant Commission believed the DEC issued a longer suspension in ACH 28754 because the CFP professional admitted that he would have continued the activity if his conduct had not been detected. Second, the Commission considered ACH 29923, in which the Commission issued a public letter of admonition when a CFP professional allowed two other registered representatives to put their names on variable annuity applications simply in order to help them meet sales quotas when they were not otherwise involved in the sales. The CFP professional entered into an AWC with FINRA, which issued a 15-day suspension and a $10,000 fine. There was no client harm in that matter. The Commission found that ACH 29923 was similar to the instant case in that the CFP professional also intentionally put his name on paperwork when he had not been involved in the actual sale to the clients. Further, the Commission found that the instant case had additional factors that support the harsher sanction of a six-month suspension. - 6 -