CFP CFP Professional Conduct and Regulation: practice questions with answers

Question 1

None of the following clients has asked for a 'financial plan.' In which situation is the CFP® professional most likely required to follow the Practice Standards for the Financial Planning Process?

1. A Advising a 58-year-old executive whether to exercise her stock options and retire early, a choice affecting her taxes, cash flow, risk and retirement
2. B Explaining at a public library seminar how Roth IRA conversions work, without commenting on the situation of any person attending the seminar
3. C Carrying out an unsolicited trade at a long-standing client's request, without recommending the trade or exercising any discretion over it
4. D Writing a monthly newsletter article on the outlook for interest rates and bond prices that is mailed to all of the firm's clients and prospects

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Answer: A. The Practice Standards apply when a CFP® professional agrees to provide Financial Planning or provides Financial Advice that requires integration of relevant elements of the client's personal and financial circumstances. CFP Board weighs the integration factors: how many elements of the client's circumstances the advice may affect, the portion and amount of her assets affected, the length of time affected, the effect on her overall risk exposure, and the barriers to changing course later.

The stock option and early retirement decision touches tax, cash flow, investments and retirement, involves a large share of her assets, is long-lasting and hard to reverse, so integration is required. The seminar, the unsolicited trade and the newsletter are not individualized Financial Advice at all.

Question 2

Barrett Hume, CFP®, works for a broker-dealer whose written policy requires representatives to pre-clear trades in their personal accounts. The policy does not conflict with CFP Board's Code of Ethics and Standards of Conduct. Barrett repeatedly trades in his own account without pre-clearance. Which statement is correct?

1. A CFP Board may discipline him, because he violated his firm's policies that do not conflict with the Standards.
2. B Only his firm and FINRA may act, because CFP Board does not enforce the policies of a CFP® professional's firm.
3. C CFP Board may discipline him only if one of his clients suffered a financial loss because of his trading.
4. D CFP Board may discipline him only after his firm has first terminated his employment for cause.

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Answer: A. Section D of CFP Board's Code of Ethics and Standards of Conduct sets out duties owed to firms. Under Standard D.2, a CFP® professional is subject to CFP Board discipline for violating the policies and procedures of the CFP® Professional's Firm that do not conflict with the Standards, but not for violating firm policies that do conflict with them. A personal-trading pre-clearance policy is lawful and consistent with the Standards, so Barrett's repeated violations can lead to discipline. (Standard D.3 also requires a CFP® professional to tell the firm promptly, in writing, of any public discipline imposed by CFP Board.)

Question 3

Emilio Ochoa, CFP®, is convicted of felony tax evasion relating to his own income tax returns. No client was involved or harmed. Which statement best describes his position with CFP Board?

1. A CFP Board has no jurisdiction, because the conduct did not involve professional services to a client.
2. B CFP Board must wait until all of his criminal appeals are exhausted before it may open an investigation.
3. C The conviction is a ground for discipline, because a felony conviction reflects adversely on his integrity and fitness.
4. D The conviction matters only if he was also charged with a misdemeanor involving a client's money.

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Answer: C. Standard E.2 requires a CFP® professional to refrain from conduct that reflects adversely on his integrity or fitness as a CFP® professional, on the CFP® marks or on the profession, and lists a felony conviction as such conduct. CFP Board's jurisdiction is not limited to client work. Emilio also had to report the criminal charge, and later the conviction, within 30 calendar days (Standard E.3). The DEC may then impose a sanction up to revocation under the Procedural Rules.

Question 4

Wexford Tool Co. sponsors a 401(k) plan that meets the requirements of ERISA Section 404(c). One participant put her entire balance in a sector fund on the plan's menu and lost 40% of its value. Which responsibility remains with the plan's fiduciaries despite Section 404(c)?

1. A Making good the participant's loss that resulted from her own allocation decision
2. B Approving each participant's investment election before the plan carries it out
3. C Prudently selecting and monitoring the investment options offered by the plan
4. D Guaranteeing that the plan's default investment option never loses value

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Answer: C. ERISA Section 404(c) protects plan fiduciaries from liability for losses that result from a participant's exercise of control over her account, provided the plan offers a broad range of investment alternatives (at least three diversified options with materially different risk and return) and gives participants enough information and opportunity to choose. It does not relieve fiduciaries of their duty to prudently select and monitor the investment options on the menu, and to act solely in participants' interest. The participant's concentrated choice is her own responsibility; the quality of the menu remains the fiduciaries' responsibility.

Question 5

Harlan Briggs's brokerage firm, a SIPC member, fails, and none of his assets can be found in the firm's customer property. His account showed securities worth $380,000 and a cash balance of $300,000 on the filing date. How much of his claim is protected by SIPC? (SIPC limit: $500,000 per customer, including up to $250,000 for cash.)

1. A $380,000
2. B $500,000
3. C $630,000
4. D $680,000

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Answer: B. SIPC protects customers of a failed SIPC-member broker-dealer against the loss of missing cash and securities, up to $500,000 per customer (in each separate capacity), of which no more than $250,000 may be for cash. It does not protect against declines in market value.

Claim: securities $380,000 + cash limited to $250,000 = $630,000, which exceeds the overall limit, so SIPC protects $500,000. The rest ($180,000) is a claim against the firm's estate and any excess-of-SIPC insurance.

Question 6

Wiebke Qualls's brokerage firm sweeps her idle cash into deposit accounts at program banks. The firm's records show $400,000 of her swept cash at Pellston National Bank, where she also owns a $100,000 CD in her own name. Both are single-ownership deposits, and the requirements for pass-through deposit insurance are met. If Pellston National Bank fails, which statement is correct?

1. A All $500,000 is protected: the CD by the FDIC and the swept cash by SIPC, which covers cash held through a broker-dealer.
2. B $250,000 is FDIC-insured, because the swept deposits and the CD are added together in her single-ownership category at that bank.
3. C $500,000 is FDIC-insured, because deposits placed through a broker are insured separately from deposits she opens herself.
4. D Only the $100,000 CD is insured, because swept cash is a brokerage asset that the FDIC does not cover.

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Answer: B. Cash swept from a brokerage account to an FDIC-insured program bank is a deposit of that bank. If the broker's records show the customer's ownership, FDIC coverage passes through to the customer.

- FDIC coverage is $250,000 per depositor, per insured bank, per ownership category.
- Her $400,000 of swept cash and her $100,000 CD are both single-ownership deposits at Pellston, so they are added together: $500,000, of which $250,000 is insured and $250,000 is not.
- SIPC protects securities and cash held at a failed broker-dealer; it does not insure against a bank failure.

Planning point: sweep programs that spread cash across several banks should exclude banks where the client already holds deposits.