CFP - Professional Conduct and Regulation (8% of the exam) - Section A.1

CFP Board's Code of Ethics and Standards of Conduct

The Code's six commitments and the Standards' duties owed to clients, including the fiduciary duty when providing financial advice, the duty of integrity, competence, diligence, and the disclosure and management of material conflicts of interest. Items test applying the Standards to a planner's conduct in a described situation.

CFP Board Code of Ethics and Standards of Conduct

Practice question for this objective

Free sampleProfessional Conduct and Regulationhard

A CFP professional works as a registered representative of a broker-dealer and is not an investment adviser representative. A retail client aged 58 asks whether to move 90,000 dollars of taxable savings into a bond fund, and the CFP professional recommends a specific fund and earns a commission on the purchase. No financial planning engagement has been signed. Which statement best describes the standard of conduct that governs this recommendation?

ABecause the transaction is a brokerage recommendation rather than advisory work, the care obligation of Regulation Best Interest governs it and CFP Board's fiduciary duty is not engaged.
BCFP Board's fiduciary duty attaches once a written financial planning engagement is signed, so until then this stand-alone product recommendation is governed by Regulation Best Interest alone.
CThe recommendation is Financial Advice, so CFP Board's fiduciary duty applies to it, and Regulation Best Interest applies to the same recommendation because a broker-dealer is recommending a security to a retail customer. Correct
DThe fiduciary duty of the Investment Advisers Act of 1940 governs the recommendation because a CFP professional giving securities advice for compensation is treated as an investment adviser.

CFP Board's fiduciary duty applies whenever a CFP professional provides Financial Advice, and can apply alongside Regulation Best Interest. The scope trigger for CFP Board's fiduciary duty is the provision of Financial Advice, which includes a recommendation to buy a particular investment, so it does not depend on a signed planning engagement or on which regulator supervises the firm. Regulation Best Interest is a separate obligation on the broker-dealer and its associated persons when recommending a securities transaction to a retail customer, so both standards reach this single recommendation at once.

Why A is wrong: Tempting because Regulation Best Interest is genuinely the securities standard for a broker-dealer recommendation, but CFP Board's fiduciary duty is imposed by the certification, not by registration status, so a regulatory standard cannot switch it off.

Why B is wrong: Tempting because the Practice Standards do turn on whether Financial Planning is being provided, but the fiduciary duty is triggered by Financial Advice, which is a wider category than a financial planning engagement.

Why C is correct: Correct because the two standards operate on different sources of authority and both are capable of reaching one act. CFP Board imposes a fiduciary duty at all times when a CFP professional provides Financial Advice, and Regulation Best Interest reaches the broker-dealer recommendation.

Why D is wrong: Tempting because the adviser fiduciary duty is the best known one, but it attaches to investment advisers and their representatives, and this person is a registered representative relying on the broker-dealer relationship instead.

See more CFP practice questions, answers explained.

Exam traps in Professional Conduct and Regulation

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

She may describe the practice as fee-only, because the renewal commissions relate to policies sold before the current planning engagements began and no new sale is involved in her present work.
Why it is wrong: Tempting because the sales are historic, but renewal commissions are sales-related compensation received now. The test looks at what she and her related parties receive, not at when the policy was originally written.
Choose the retail class, since the revenue sharing lowers the net cost borne by the plan and the fiduciary duty is satisfied whenever the net cost of the selected share class is defensible against the market.
Why it is wrong: Tempting because net cost analysis is a real part of a prudent process, but here the rebate is being routed to the employer rather than the plan, so the net cost to participants stays at 0.75 per cent.
The matter is dismissed for want of prosecution, because Enforcement Counsel did not obtain an answer within the thirty day window it set.
Why it is wrong: Tempting because civil courts do dismiss stale claims, but the deadline binds the respondent rather than Enforcement Counsel, so his own inaction cannot end the proceeding in his favour.

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