Standard 1(A) – Knowledge of the Law

I. Professionalism

Standard I is broad in scope and directed toward competence within a small business environment. This standard makes it clear high ethical standards must apply even when an issue hasn’t been identified in writing.

Standard I(A)

Standard 1(A) – Knowledge of the Law specifies that investment professionals must have a working knowledge of all applicable laws, as well as a framework for resolving ethical dilemmas.

Compliance

When providing a service to clients of a different country, perhaps with different laws governing its financial sector, CFA members must adhere to whichever regulations are the strictest. This may be one’s local laws or those of a client.

In some cases, it may also mean a hybrid of the two. While in other cases, local codes of ethics may be laxer than the CFA Code of Standards.

In these instances, members are required to adhere to CFA standards. Please refer to Table 1(A) for a few detailed examples.

Examples

Example 1

Circumstance:

A CFA member lives in a country with no securities laws and does business in a country whose laws are less strict than the Code of Standards.

Which laws apply?

The laws of the country in which the member is operating apply.

Duty

The member must adhere to the Code of Standards.

Example 2

Circumstance:

A CFA Member lives in a country with less strict laws than the Code of Standards and does business in a country with no securities regulations.

Which laws apply?

The laws of the country in which the member resides apply.

Duty

The member must adhere to the Code of Standards.

Example 3

Circumstance:

A CFA member resides in a country whose securities regulations are less strict than the Code of Standards and does business in a country with stricter laws.

Which laws apply?

The laws of the country in which the member does the business do apply.

Duty

Because the country’s laws in which the member does business are stricter than the Code of Standards, members are obligated to follow the stricter laws of the country.

Note. Adapted from 2017 CFA Curriculum (p. 48) by CFA Institute, New York: 2017

Global Application of Code of Standards

Similarly, the application of law may be dictated by a complex client situation in which several choices could be made in determining a course of action. Therefore, it is incumbent upon CFA members to interpret proper decision-making based upon whichever laws are most stringent in protecting client interests.

Avoiding unethical behavior is imperative, up to the point of separating from an employer or client relationship if a CFA member is knowledgeable of unethical behavior. Although there are intermediate steps to dissociate from unethical activity, the CFA does expect its members to do whatever necessary for its members to adhere to the Code of Standards, including employment separation and/or reporting of ethics violations to the CFA.

Finally, Standard 1(A) – Knowledge of the Law specifies that the Code of Standard is a minimum threshold for adherence to ethical behavior.  Therefore, investment professionals are urged to make decisions that exceed minimal requirements whenever possible. At a minimum, investment professionals are required to stay informed, review procedures, and maintain current files.

Violation

CFA members will be held in violation of Standard 1(A) – Knowledge of the Law when they participate in violating any applicable law or the Code of Standards.  Although members are expected to adhere to the Code of Standards, the CFA recognizes that members may not be fully informed of all facts giving rise to a violation of laws. Therefore, it is the willful disregard of ethical requirements that determines a violation.

The CFA urges members to report alleged violations, though failure to report does not necessarily constitute a violation in itself. Wherever local laws require the report of illegal behavior by investment professionals, it is expected that members will comply. All members are encouraged to consult with legal and compliance counselors for advice in this regard.

Question

John McIntyre has been offered by his U.S. employer a temporary investment analyst assignment in Singapore. John is well-versed in investment regulations within the United States, knowing that in most cases, these laws are more stringent than the CFA Code of Standards. When he arrives in Singapore, he is surprised to learn that laws governing the financial industry are stricter than his home office. To what level of regulation must McIntyre hold his professional conduct?

1. United States laws and regulations
2. Singapore laws and regulations
3. Code of Standards

Solution

The correct answer is B.

McIntyre is bound by CFA standards to adhere to whichever regulations are the strictest.  In this case, while he operates in Singapore, he must follow Singapore laws and regulations.