Question

Steve was a certified professional planner who was a general partner of a hedge fund. He placed most of his clients in that hedge fund without telling them of his ownership in it. When the results seemed to be disappointing, he sold his ownership and personal holdings in the fund and thereafter told his clients to get out. Which SEC and CFP violations were violated? What would you recommend he do to try to rectify the situation? What would you do if Steve was your partner or employee?

List the seven principals of the CFP Code of Ethics. Describe and define each of the seven principals. Describe how Steve violated each of the principals.

Thank you!

Answer 1

Answer

Steve has violated following code of conduct while doing business with his clients

1. Principle 4 - Fairness: Since Steve has not disclosed his personal interest in Hedge fund and informed customer only after he came out of the investment. The time he took to get out of investment and telling the customer to get out might have given loss the the customer.

2. Principle 1-Integrity: This principle demands honesty and candor which must not get subordinated to personal gain.

I recommend Steve should immediately talk to their customer before use of their money and investment in any fund. Give them details of fund and tax impact and take note in writing from them.Also provide them the update of their investment every day.

If Steve would have been my partner or employee, I would have immediately reported to CFP board about his violation of code of conduct.

Lastly, let us know the 7 principles in details. I have already described the principles violated by Steve.

Principle 1 – Integrity: Provide professional services with integrity.

Integrity demands honesty and candor which must not be subordinated to personal gain and advantage. Certificants are placed in positions of trust by clients, and the ultimate source of that trust is the certificant’s personal integrity. Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles.

Principle 2 – Objectivity: Provide professional services objectively.

Objectivity requires intellectual honesty and impartiality. Regardless of the particular service rendered or the capacity in which a certificant functions, certificants should protect the integrity of their work, maintain objectivity and avoid subordination of their judgment.

Principle 3 – Competence: Maintain the knowledge and skill necessary to provide professional services competently.

Competence means attaining and maintaining an adequate level of knowledge and skill, and application of that knowledge and skill in providing services to clients. Competence also includes the wisdom to recognize the limitations of that knowledge and when consultation with other professionals is appropriate or referral to other professionals necessary. Certificants make a continuing commitment to learning and professional improvement.

Principle 4 – Fairness: Be fair and reasonable in all professional relationships. Disclose conflicts of interest.

Fairness requires impartiality, intellectual honesty and disclosure of material conflicts of interest. It involves a subordination of one’s own feelings, prejudices and desires so as to achieve a proper balance of conflicting interests. Fairness is treating others in the same fashion that you would want to be treated.

Principle 5 – Confidentiality: Protect the confidentiality of all client information.

Confidentiality means ensuring that information is accessible only to those authorized to have access. A relationship of trust and confidence with the client can only be built upon the understanding that the client’s information will remain confidential.

Principle 6 – Professionalism: Act in a manner that demonstrates exemplary professional conduct.

Professionalism requires behaving with dignity and courtesy to clients, fellow professionals, and others in business-related activities. Certificants cooperate with fellow certificants to enhance and maintain the profession’s public image and improve the quality of services.

Principle 7 – Diligence: Provide professional services diligently.

Diligence is the provision of services in a reasonably prompt and thorough manner, including the proper planning for, and supervision of, the rendering of professional services.