CFA Level 1

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Ethics and Standards - Standard IV-C: Responsibilities Of Supervisors

Members and Candidates must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority.

Reasoning behind Standard IV-C
An ethical violation reflects not only on the conduct of that employee, but on the ability (or inability) of that person's supervisor to control or influence this conduct in an ethical manner. In a number of situations, a violation of some law, rule or regulation takes place purely due to the fact that the employee who was guilty of the conduct did not know any better and was not adequately guided by the supervisor. In other words, this employee would've likely not made the violation had he or she been fully aware that it was a violation.

Supervisors can play a crucial role in terms of taking the authority and responsibility to positively influence the behavior and conduct of those below them on the company chart. If a supervisor is a CFA Member or Candidate, this Standard takes this responsibility a step further and requires those with supervisory responsibilities to take specific preventative actions in the course of guiding the conduct of others.

Key Points to Remember about Standard IV-C

1.The responsibility to guide employee conduct in an ethical manner is that of the CFA Member or Candidate who assumes that supervisory role, and the Standard holds whether or not the supervised employees are CFA Institute members, CFA charterholders or candidates in the CFA program. The Code and Standards are not something that we as CFA charterholders follow but don't expect others to abide by; rather, they are a minimum standard to which we hold ourselves and which we wish to spread to those around us. Standard IV-C uses the authority we have to impress these ideals on others, even if these people are not specifically bound by the Code and Standards.

2."Reasonable supervision" is determined by the situation, typically as a function of the number of employees supervised and the specific jobs being done. For example, an individual who oversees a large equity-trading operation with hundreds of employees will need to pay particular attention to procedure, given the large number of employees and the scrutiny (and potential for insider dealings and other malfeasance) found when trading securities. A person in this role cannot possibly keep track of every individual every minute of the day, which is why a supervisor is permitted to rely upon reasonable procedures. By contrast, someone who supervises just one person, or a handful of people, is likely to be capable of personally evaluating every individual's conduct, and if the jobs are of a less sensitive nature (e.g. administrative help around the office), where violations are simply less likely to occur, then the reasonable procedures and controls on which one can rely may be relatively simple and straightforward. Each case will have its unique procedures.

3.In cases where a law, rule or regulation is violated, it does not necessarily indicate that the supervisor violated Standard IV-C. However, when rules are broken, it is likely that the rules and procedures will be scrutinized, and it could mean that established rules are inadequate.

4.Merely enacting procedures does not necessarily discharge a supervisor of a potential violation of this Standard. For example, if a supervisor assembles a compliance manual just to satisfy the regulators, but then looks the other way while subordinates plagiarize or engage in insider trading, we would say that the supervisor's controls were insufficient for the case and he or she violated the Standard.

5.If a Member or Candidate finds a compliance system to be inadequate and prone to violations, but is unable to take corrective action, he or she must decline supervisory responsibility, in writing, until improved procedures are enacted. Members and Candidates are responsible for themselves and for subordinates on the company chart, and they are not permitted to ignore this Standard simply because "That's the way they did things there".

Applying Standard IV-C

  • Take extra care when designing procedures that could be misconstrued as a conflict of interest. As has been outlined previously, the mere appearance of impropriety must be addressed with increased sensitivity. For example, if a supervisor is charged with upholding securities laws at a brokerage, and he or she is compensated based on trading volume, it is possible that he or she could be accused of not adequately investigating (and potentially halting) certain trading patterns simply because doing so would decrease his or her compensation
  • It is the supervisor's responsibility to ensure that investment recommendations, reports and other products of a research effort are fully compliant with the Code and Standards. For example, when a supervisor passes along a report without an adequate review and that report contains misstatements, is plagiarized or uses material nonpublic information (or violates any other Standard), it is a violation for both the supervisor and the employee - particularly if the report is the basis for investment action.
  • A violation under a supervisor's watch isn't a violation per se, but the subsequent process for handling a potential violation can by itself violate Standard IV-C. As an example, if a subordinate employee is suspected of unfair dealings that may favor wealthy clients, and the supervisor brings the matter to the attention of the employee, the supervisor may not be doing enough by simply taking the employee's testimony that "it won't happen again". Even reporting the violation up the chain of command is not likely to be enough. So long as the matter is under investigation, additional actions must be taken (e.g. extra monitoring, limiting that employee's activities, suspending certain responsibilities) as a preferred course of action.

How to Comply

Questions regarding procedure on the exam may test Standard IV-C. If it comes up, remember two simple questions that will help in designing an effective compliance program:

1.Which violations in particular are most likely to occur?

2.What rules will best uncover and prevent these violations?

Designating a compliance officer, as well as making a compliance manual available to the organization are effective methods in ensuring the organization has a system of checks and balances. There should be an educational program in place, which continually updates personnel on compliance procedures.

Standard V-A: Diligence And Reasonable Basis
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