LM03 Guidance for Standards I-VII

Part 1

Introduction

This is a long reading, which provides guidance and recommended compliance procedures for each standard. Several examples are also given on how the standards should be applied. IFT Notes focus on the guidance and recommended compliance procedures. Read the examples (applications of the standards) from the curriculum.

Standard I: Professionalism

Standard 1 (A) Knowledge of the Law

Members and Candidates must understand and comply with all applicable laws, rules, and regulations of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations

Interpretation:

You, as a member or candidate, must be aware of all laws where you conduct business. Stating that you are not aware of the laws and hence a violation occurred, will not be acceptable.

Guidance:

• Relationship between the Code and Standards and Applicable Law: Assume you are an investment adviser based in Malaysia. You are a Malaysian citizen and your clients are also based in Malaysia. Here the Malaysian law is the ‘applicable law’. As a Level I candidate, the Code and Standards must also be considered. Let’s assume that Malaysian laws prohibit participation of investment advisers in IPOs but the Code and Standards allow participation under specified circumstances, then you have to follow the stricter law – the Malaysian law in this case. If there is no applicable law or regulation, then Members and Candidates must follow the Code and Standards.
• Investment products and applicable laws: Follow the more strict law.
• Participation in or association with violations by others: You are responsible for violations in which you knowingly participate or assist. Knowingly is the key word here. Assume you are part of a group and you have reasonable grounds to believe a violation is taking place. Under such circumstances:
  • First, make an attempt to stop the behavior by bringing it to the notice of your supervisor/compliance department.
  • Seek the advice of independent legal counsel if the compliance department was not helpful.
  • Dissociate yourself with that activity. Dissociation varies based on your role in the organization; it could be:
    • Removing your name from the investment reports and recommendations.
    • Asking for a different assignment.
    • Refusing to accept a new client or continuing to advise the current client.
  • In extreme cases, leave the organization.
• Not taking an action after reporting a violation (and continuing association with the illegal activity), can be considered as participating in the illegal or unethical conduct.
• If you are not sure that a violation is taking place, then the appropriate action would be to seek the advice of legal/compliance counsel.
• CFA Institute does not compel you to report violations to the government or regulatory organization unless required by law.

Recommended procedures for compliance:

• Stay informed: Have a procedure or regular training to keep employees informed of the changes in applicable laws, rules, regulations etc.
• Review procedures: Periodically review firm’s written compliance procedures to ensure it conforms to the applicable law.
• Maintain current files: Latest copies of applicable rules and regulations should be available for reference.
• Legal counsel: If in doubt how to respond to a possible violation, seek the advice of legal/compliance personnel.
• Dissociation: Document the violation if you are dissociating from an illegal activity; urge the firm to take steps to cease the activity, and resign in extreme cases.
• Advise/encourage your firm to:
  • Develop and/or adopt a code of ethics.
  • Provide information on applicable laws: make all the information regarding laws and rules available in a central location.
  • Establish procedures for reporting violations: make it easy to report violations.

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