a question of ethics Obeying the Letter and Spirit of the Laws and Regulations That Govern My Profession

Advisors who honor this obligation are likely to find good persistency and compliance records, and a growing source for referrals.

By Frank Bearden, Ph.D., CLU, ChFC

For this issue, we will provide some reflection upon the sixth obligation from the NAIFA Code of Ethics: To obey the letter and spirit of all laws and regulations which govern my profession. This obligation provides additional rules for our professional behavior, based on the values of NAIFA as expressed in the preamble of our code of ethics. Within the laws and regulations that apply, we can discover both the framework and specific stipulations that inform us regarding ethical practice.

Like many other avenues in life, maintaining and abiding by the letter and spirit of laws and regulations for a member of NAIFA can appear somewhat complicated. The licenses and affiliations a financial advisor may have include various insurance licenses, by line and state, registrations with the Financial Industry Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission and other organizations. The sixth obligation requires that a NAIFA member maintain all pertinent licenses and registrations, as well as maintain knowledge of all laws and regulations in letter and spirit.

Demonstrating diligence

So how can a financial advisor demonstrate such diligence? In basic terms, we can do this by providing all required client information and documents that a given financial product and license or registration requires.

In addition, to abide by the spirit of the laws and regulations, an advisor should be sure the client understands the nature of the product(s) being purchased, the application of the product(s) and any risks that may be involved. We want to do all required and within our capabilities to ensure that the client understands the nature and use of the product(s) we are recommending.

The provisions in the obligations of the Code of Ethics point to an ethically sound and fulfilling way to practice our profession.

Let’s look closer at meeting the letter and spirit by considering how a disability income insurance presentation should be provided. We’ll assume the disability policy has an own occupation definition of disability for 5 years and then changes to a definition of any occupation for the remainder of the policy.

This provision means that for the first 5 years, the insured will be covered if he or she is unable to perform his or her own occupation. After that time, the coverage is provided if the insured cannot perform any occupation for which he or she is reasonably suited in terms of education, training and experience. The provision is a material part of the coverage and should be explained to the applicant, to meet the spirit of full disclosure.

If the financial advisor provides a written description of the coverage without thoroughly discussing how the coverage functions and applies to the applicant, the financial advisor will be satisfying the letter of the disclosure requirement without satisfying the spirit.

When we are unsure of the letter and spirit of any laws and regulations under which we practice, we should inquire from sources within our practice, sources providing the products, and the laws and regulations themselves

Financial advisors who honor both the letter and the spirit of the laws and regulations are likely to find good persistency and compliance records, as well as a growing source for referrals.

When we encounter an ethical situation in which we do not know what to do, the values and obligations of the code can be useful in regaining our professional direction. The provisions in the obligations of the code of ethics point to an ethically sound and fulfilling way to practice our profession.