Standard I consists of four subsections:
- I-A: Knowledge of the Law
- I-B: Independence and Objectivity
- I-C: Misrepresentation
- I-D: Misconduct
Standard I-A: Knowledge of the Law
Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must not knowingly participate or assist in and must disassociate from any violation of such laws, rules, or regulations.
Obey the Law!
It seems like common sense. However, when applied to international situations, in which laws in some jurisdictions are stricter than in others, standards of conduct can be unclear. Let's say an analyst resides in a country where securities laws are less strict and conducts business in a country where the laws are stricter. Now assume the analyst is a CFA charterholder, meaning he or she is bound by the Code and Standards. Which laws and standards apply? The CFA Institute Standards of Conduct recognize that the typical CFA charterholder or candidate is not going to be an attorney with specific knowledge and expertise on which laws apply to which situation. To provide guidance in these ambiguous situations, Standard I-A contains a rule of thumb for members operating in multiple jurisdictions:
|Rule of Thumb: When applicable law is stricter than the Code and Standards, members and candidates must adhere to applicable law. If conduct is governed by local laws that are less strict than the Standards, members and candidates must adhere to the Code and Standards.|
Applying Standard I-A
Since Standard I-A covers laws, rules and regulations, the situations presented to test knowledge of the Standard (and whether the Standard has been violated) will likely involve some possible violation of the law, and how a CFA Member or Candidate should proceed. The following questions may apply:
Did the Member seek the advice of counsel?
Consulting an attorney is typically seen as a good defense against an alleged violation of Standard I-A. Many cases involve someone who works for a firm that has violated the law (made misleading statements on a prospectus, for example). In these cases, look to see if the CFA member or candidate sought and followed the advice of counsel.
Did the member report the violation, and to whom did the member report it?
For any potential violation of a law, rule or regulation, if the situation suggests that the member either went along with it, did nothing, tried to cover it up or was afraid to say anything for fear of losing his or her job that is a clear sign that the Standard has been violated. In any example, look for evidence that the CFA member tried to do the right thing. If that person's firm is potentially guilty of violating a law or regulation, he or she needs to start by reporting this situation to his or her supervisor and/or compliance officer. If the situation is not remedied, he or she should distance him or herself from the potential violation and seek the advice of counsel.
For multinational operations, which country's laws apply to the situation at hand?
In the real world, it can be ambiguous if an advisor is domiciled in one country and operates in another. For the purposes of the CFA Level I exam, the candidate isn't expected to be a lawyer and make a judgment - the exam will indicate which country's laws apply to the situation. If a broker or advisor operates solely or exclusively in a country, assume that those laws apply unless it's stated otherwise. The rule of thumb (which states it's the law that applies if it's stricter than the Standards; otherwise, the Standards apply) is usually going to make it easy to arrive at the right answer.
How to Comply with Standard I-A
The Standards of Practice Handbook makes a number of suggestions to avoid violating Standard I-A.
- Establish Files - These files would cover all applicable laws, rules, regulations, statutes and important cases that might be relevant to any potential business situation involving the firm. Files must be readily accessible, and a process to manage, distribute and interpret such material should be in place.
- Stay Informed - Laws, rules and regulations frequently change, and key employees in a firm must be informed continually of such changes. CFA members and candidates are obligated to establish, or encourage others to establish, a procedure by which everyone in a firm is kept informed and applicable changes are disseminated in a timely manner. Usually, this procedure is the domain of the firm's counsel or compliance department, but every situation is different. There are a number of real-world cases in which everyone just assumed that a certain person or department was taking care of it.
- Distribution Area Laws - In an increasingly global marketplace, members and candidates must make every effort to understand the laws of the country or region in which they operate, including those where their products or services are distributed across borders.
- Legal or Illegal? - Certain conduct may not in fact be a violation. Members should consult counsel in ambiguous situations.
- Disassociate - This is such a good word and a worthwhile course of action that the CFA Institute decided to include it when it recently revised this Standard. It is good advice: it may have been OK at some time in the past to do nothing if one witnessed illegal or unethical conduct, but in today's environment, the Standards have changed. One must now disassociate from any illegal activity and actively urge the firm (either an immediate supervisor or a compliance officer) to cease any conduct that violates the law or an applicable regulation or standard. Inaction might be judged, (even in a court of law), as participating or assisting, which violates the Standard.
Standard I-B: Independence And Objectivity
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