Still Trying to Understand NAPFA’s New Membership Rules

When I asked Brown what latitude the compensation committee has, and what options are available to members, he replied: "There are lot of moving parts. We don't have any specifics, because we don't want to tie our hands, or get locked into any time frame. But we do have some latitude." If the committee's former dispensation on Kahler's 50% ownership is any indication, one can only infer it has quite a bit of latitude.

Then I raised the question of retirement plan holdings: what about the mutual funds in members' 401(k)s or IRAs? Undoubtedly some of those funds hold stock of what are clearly financial services industry firms. "We're not concerned with private holdings in public companies," Brown said. "I'd think this would be kind of obvious. I don't know how we could get that information, or even enforce a requirement like that. This is a membership standard; it's not a law or a regulation. For us to sit down and think about every possibility would be just mind bending." 

I have to admit, just trying to figure it out is bending my mind. For instance, to find out which possibilities the NAPFA did think about, I took a look at the rest of NAPFA's membership guidelines. (I know, big mistake.) Section 2 clearly states that: "Neither a member nor an affiliate may be employed by a financial services industry firm (see definition below) that receives transaction based compensation…"

But when it comes to ownership restrictions, things appear a bit more murky:

"A related party to a member or an affiliate may not own any interest in a financial services industry firm that receives transaction based compensation as prohibited by NAPFA; and to whom the member or affiliate makes referrals or otherwise directs business."

Note that this seems only to restrict ownership by related parties or affiliates, while saying nothing about ownership by members themselves. Also, the "and" in the last clause suggests that ownership in transaction compensated firms is only restricted if the member directs business its way.

I may be missing something in the legalese here, but I don't see anything in NAPFA's membership standards that restricts members from having an ownership interest in such firms. 

I'm sure it makes some sense for NAPFA to give the membership committee some latitude to work with existing members who currently have ownership of up to 2% of financial services industry firms. But if the Kahler case is any indication, the committee has huge latitude to make unlimited exceptions at its own discretion with all memberships.

Combined with Geoff Brown's dismissal of addressing the "mind-bending" issues such as ownership of mutual funds (which I've heard was the reason for the 2% rule in the first place), this lack of clarity and consistency can only create confusion among existing members—and prospective members.

Rick Kahler put it best: "They should put a moratorium on doing anything until they think through this stuff."