Standard I(A) Knowledge of the Law
Updated April 2024
CFA Institute
The Standard
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 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.
Guidance
Members and candidates must understand the applicable laws and regulations of the countries and jurisdictions where they engage in professional activities. On the basis of their reasonable and good faith understanding, members and candidates must comply with the laws and regulations that directly govern their professional activities.
As applicable laws, rules, or regulations are updated, members and candidates must remain vigilant in maintaining their knowledge of the requirements for their professional activities. When questions arise, members and candidates should access compliance and legal guidance from their employer or outside compliance or legal resources to assist them in meeting their responsibilities under this standard. This standard does not require members and candidates to become experts, however, in compliance. Additionally, members and candidates are not required to have detailed knowledge of or be experts on all the laws that could potentially govern their activities. However, members and candidates must have knowledge of and comply with laws, rules, and regulations that directly relate to their professional responsibility. For instance, depending on the circumstances, an employee of a firm who has no supervisory responsibility may not need to have detailed knowledge of employment law, while a member or candidate in a management position who oversees one or more divisions with many employees may need to be familiar with employment law as it directly relates to his or her professional responsibilities.
Relationship Between the Code and Standards and Applicable Law
Some members or candidates may live, work, or provide investment services to clients living in a country that has no law or regulation governing a particular action or that has laws or regulations that differ from the requirements of the Code and Standards. When applicable law and the Code and Standards require different conduct, members and candidates must follow the more strict of the applicable law or the Code and Standards.
“Applicable law” is the law that governs the member’s or candidate’s conduct. Which law applies will depend on the particular facts and circumstances of each case. The “more strict” law or regulation is the law or regulation that imposes greater restrictions on the action of the member or candidate or calls for the member or candidate to exert a greater degree of action to protect the interests of clients. For example, applicable laws or regulations may not require members and candidates to disclose referral fees received from or paid to others for the recommendation of investment products or services. Because the Code and Standards impose this obligation, however, members and candidates must disclose the existence of such fees.
Members and candidates must adhere to the following principles:
- Members and candidates must comply with applicable laws or regulations related to their professional activities.
- Members and candidates must not engage in conduct that constitutes a violation of the Code and Standards, even though it may otherwise be legal.
- In the absence of any applicable law or regulation or when the Code and Standards impose a higher degree of responsibility than applicable laws and regulations, members and candidates must adhere to the Code and Standards. Applications of these principles are outlined in Exhibit 1.
Complying with applicable laws governing the professional responsibilities of a member or candidate is the minimum threshold of acceptable actions. When members and candidates take actions that exceed the minimum requirements and go above and beyond the law to protect client interests or otherwise act in an ethical manner, they further support the conduct required by Standard I(A).
CFA Institute members are obligated to abide by the CFA Institute Code of Ethics, Standards of Professional Conduct, Rules of Procedure, and Membership Agreement, as well as other applicable rules promulgated by CFA Institute, all as amended periodically. CFA candidates who are not members must also abide by these documents (except for the Membership Agreement), as well as the Candidate Agreement, the rules and regulations related to the administration of the CFA exams, the Candidate Responsibility Statement, and the Candidate Pledge.
Participation in or Association with Violations by Others
Members and candidates are responsible for violations in which they knowingly participate or assist. Although members and candidates are presumed to have knowledge of all applicable laws, rules, and regulations, CFA Institute acknowledges that members may not recognize violations if they are not aware of all the facts giving rise to the violations. Standard I(A) applies when members and candidates know or should know that their conduct may contribute to a violation of applicable laws, rules, or regulations or the Code and Standards.
If a member or candidate has reasonable grounds to believe that imminent or ongoing client or employer activities are illegal or unethical, the member or candidate must dissociate, or separate, from the activity. In extreme cases, dissociation may require a member or candidate to leave his or her employment. Members and candidates may take the following intermediate steps to dissociate from ethical violations of others when direct discussions with the person or persons committing the violation are unsuccessful. The first step should be to attempt to stop the behavior by bringing it to the attention of the employer through a supervisor or the firm’s compliance department. If this attempt is unsuccessful, then members and candidates have a responsibility to step away and dissociate from the activity. Dissociation practices will differ on the basis of the member’s or candidate’s role in the investment industry. It may include removing one’s name from written reports or recommendations, asking for a different assignment, or refusing to accept a new client or continue to advise a current client. Inaction combined with continuing association with those involved in illegal or unethical conduct may be construed as participation or assistance in the illegal or unethical conduct.
CFA Institute strongly encourages members and candidates to report potential violations of the Code and Standards committed by fellow members and candidates. Although a failure to report is less likely to be construed as a violation than a failure to dissociate from unethical conduct, the impact of inactivity on the integrity of capital markets can be significant. Although the Code and Standards do not compel members and candidates to report violations to their governmental or regulatory organizations unless such disclosure is mandatory under applicable law (voluntary reporting is often referred to as whistleblowing), such disclosure may be prudent under certain circumstances. Members and candidates should consult their legal and compliance advisers for guidance.
Additionally, CFA Institute encourages members, nonmembers, clients, and the investing public to report violations of the Code and Standards by CFA Institute members or CFA candidates by submitting a complaint in writing to the CFA Institute Professional Conduct Program via e-mail ([email protected]) or the CFA Institute website (www.cfainstitute.org).
Investment Products and Applicable Laws
Members and candidates involved in creating or maintaining investment services or investment products must be mindful of where these services or products will be sold and their places of origination. Those members or candidates who are responsible for providing the services or creating or providing investment products must understand and comply with applicable laws and regulations in all relevant jurisdictions. Members and candidates must undertake the necessary due diligence when transacting cross-border business to understand the multiple applicable laws and regulations.
Given the complexity that can arise with business transactions in global markets, there may be some uncertainty surrounding which laws or regulations are considered applicable when activities are being conducted in multiple jurisdictions. Members and candidates should seek the appropriate guidance, potentially including the firm’s compliance or legal departments and legal counsel outside the organization, to gain a reasonable understanding of their responsibilities and how to take appropriate measures to ensure compliance with applicable law.
Global Application of the Code and Standards
Members and candidates who practice in multiple jurisdictions may be subject to various laws and regulations. If applicable law is stricter than the requirements of the Code and Standards, members and candidates must adhere to applicable law; otherwise, they must adhere to the Code and Standards. Exhibit 1 provides illustrations involving a member who may be subject to the securities laws and regulations of three different types of countries:
NS: Country with no securities laws or regulations
LS: Country with less strict securities laws and regulations than the Code and Standards
MS: Country with more strict securities laws and regulations than the Code and Standards
Applicable Law |
Duties |
Explanation |
|---|---|---|
Member resides in NS country, does business in LS country; LS law applies. |
Member must adhere to the Code and Standards. |
Because applicable law is less strict than the Code and Standards, the member must adhere to the Code and Standards. |
Member resides in NS country, does business in MS country; MS law applies. |
Member must adhere to the law of MS country. |
Because applicable law is stricter than the Code and Standards, member must adhere to the stricter applicable law. |
Member resides in LS country, does business in NS country; LS law applies.Member resides in LS country, does business in NS country; LS law applies. |
Member must adhere to the Code and Standards. |
Because applicable law is less strict than the Code and Standards, member must adhere to the Code and Standards. |
Member resides in LS country, does business in MS country; MS law applies. |
Member must adhere to the law of MS country. |
Because applicable law is stricter than the Code and Standards, member must adhere to the stricter applicable law. |
Member resides in LS country, does business in NS country; LS law applies, but it states that law of locality where business is conducted governs. |
Member must adhere to the Code and Standards. |
Because applicable law states that the law of the locality where the business is conducted governs and there is no local law, the member must adhere to the Code and Standards. |
Member resides in LS country, does business in MS country; LS law applies, but it states that law of locality where business is conducted governs. |
Member must adhere to the law of MS country. |
Because applicable law of the locality where the business is conducted governs and local law is stricter than the Code and Standards, member must adhere to the stricter applicable law. |
Member resides in MS country, does business in LS country; MS law applies. |
Member must adhere to the law of MS country. |
Because applicable law is stricter than the Code and Standards, member must adhere to the stricter applicable law. |
Member resides in MS country, does business in LS country; MS law applies, but it states that law of locality where business is conducted governs. |
Member must adhere to the Code and Standards. |
Because applicable law states that the law of the locality where the business is conducted governs and local law is less strict than the Code and Standards, member must adhere to the Code and Standards. |
Member resides in MS country, does business in LS country with a client who is a citizen of LS country; MS law applies, but it states that the law of the client’s home country governs. |
Member must adhere to the Code and Standards. |
Because applicable law states that the law of the client’s home country governs (which is less strict than the Code and Standards), member must adhere to the Code and Standards. |
Member resides in MS country, does business in LS country with a client who is a citizen of MS country; MS law applies, but it states that the law of the client’s home country governs. |
Member must adhere to the law of MS country. |
Because applicable law states that the law of the client’s home country governs and the law of the client’s home country is stricter than the Code and Standards, the member must adhere to the stricter applicable law. |
Compliance Practices
- Stay informed: Members and candidates should establish practices and procedures to remain regularly informed about changes in applicable laws, rules, and regulations. In many instances, the employer’s compliance department or legal counsel can provide such information. Also, participation in an internal or external continuing education program is a practical method of staying current.
- Maintain current resources: Members and candidates should maintain or encourage their employers to maintain readily accessible current reference copies of applicable statutes, rules, and regulations, as well as important cases.
- Seek advice: When in doubt about the appropriate action to take, members and candidates should seek the advice of compliance personnel or legal counsel concerning legal requirements. If a potential violation is being committed by a fellow employee, it may also be prudent for the member or candidate to seek the advice of the firm’s compliance department or legal counsel.
- Dissociate from violations: When dissociating from an activity that violates the Code and Standards, members and candidates should document the violation.
Application of the Standard
Allen works for a brokerage firm and is responsible for an underwriting of securities. A senior manager for an issuing company gives Allen information indicating that the financial statements Allen filed with the regulator overstate the issuer’s earnings. Allen seeks the advice of the brokerage firm’s general counsel, who states that it would be difficult for the regulator to prove that Allen has been involved in any wrongdoing.
Outcome: Although it is recommended that members and candidates seek the advice of legal counsel, the reliance on such advice does not absolve a member or candidate from the requirement to comply with the law or regulation. Allen should report this situation to his supervisor, seek an independent legal opinion, and determine whether the regulator should be notified of the error.
Brown’s employer, an investment banking firm, is the principal underwriter for an issue of convertible debentures by the Courtney Company. Brown discovers that the Courtney Company concealed severe third-quarter losses in its foreign operations. The preliminary prospectus was already distributed.
Outcome: Knowing that the preliminary prospectus is misleading, Brown should report his findings to the appropriate supervisory persons in his firm. If the matter is not remedied and Brown’s employer does not dissociate from the underwriting, Brown must sever all his connections with the underwriting. Brown should also seek legal advice to determine whether additional reporting or other action should be taken.
Washington’s firm advertises its past performance record by showing the 10-year return of a composite of its client accounts. Washington discovers, however, that the composite omits the performance of accounts that left the firm during the 10-year period, whereas the description of the composite indicates the inclusion of all firm accounts. This omission led to an inflated performance figure. Washington is asked to use promotional material that includes the erroneous performance number when soliciting business for the firm.
Outcome: Misrepresenting performance is a violation of the Code and Standards. Although she did not calculate the performance herself, Washington will assist in violating Standard I(A) if she were to use the inflated performance number when soliciting clients. She must dissociate herself from the activity. If discussing the misleading number with the person responsible is not an option for correcting the problem, she must bring the situation to the attention of her supervisor or the compliance department at her firm. If her firm is unwilling to recalculate performance, she must refrain from using the misleading promotional material and should notify the firm of her reasons. If the firm insists that she use the material, she should consider whether her obligation to dissociate from the activity requires her to seek other employment.
Collins is an investment analyst for a major Wall Street brokerage firm. He works in a developing country with a rapidly modernizing economy and a growing capital market. Local securities laws are minimal—in form and content—and include no punitive prohibitions against insider trading.
Outcome: Collins must abide by the requirements of the Code and Standards, which are stricter than the rules of the developing country. In handling material nonpublic information that comes into his possession, he must follow Standard II(A) Material Nonpublic Information.
Jameson works for a multinational investment adviser based in the United States. Jameson lives and works as a registered investment adviser in the tiny but wealthy island nation of Karramba. Karramba’s securities laws state that no investment adviser registered and working in that country can participate in initial public offerings (IPOs). Jameson, believing that, as a US citizen working for a US-based company, she should comply only with US law, ignored this Karrambian law. In addition, Jameson believes that as a charterholder, as long as she adheres to the Code and Standards requirement that she disclose her participation in any IPO to her employer and clients when such ownership creates a conflict of interest, she is meeting the highest ethical requirements.
Outcome: Jameson is in violation of Standard I(A). As a registered investment adviser in Karramba, Jameson is prevented by Karrambian securities law from participating in IPOs regardless of the law of her home country. In addition, because the law of the country where she works is stricter than the Code and Standards, she must follow the stricter requirements of the local law rather than the requirements of the Code and Standards.
White communicates with clients and potential clients through social media. She posts investment information, including performance reports and investment opinions and recommendations, along with brief announcements and opinions (e.g., “Prospects for future growth of XYZ company look good! #makingmoney4U”). Prior to White’s use of social media, the local regulator issued new requirements and guidance governing online electronic communication. White’s communications conflict with the recent regulatory announcements.
Outcome: White is in violation of Standard I(A) because her communications do not comply with the existing applicable regulation governing use of social media. White must be aware of the evolving legal requirements pertaining to areas of the financial services industry that apply to her. She should seek guidance from appropriate, knowledgeable, and reliable sources, such as her firm’s compliance department, external service providers, or outside counsel, unless she diligently follows legal and regulatory trends affecting her professional responsibilities. Having appropriate knowledge of the laws directly applicable to her professional activities is also required by Standard I(E) Competence.
Scherzer is a portfolio manager for National Investment Advisors (NIA). He, along with many other NIA personnel, assists in preparing for the firm’s annual audit of financial reports required by local regulations. While gathering and preparing material to assist Strasberg, the firm’s chief financial officer (CFO), and her audit team in fulfilling the firm’s annual regulatory reporting requirements, Scherzer neglects to properly collect and disclose certain information required by the regulations.
Outcome: Although Scherzer occasionally assists with the firm’s financial audit, his primary professional responsibilities relate to portfolio management of client accounts. As such, Standard I(A) does not require Scherzer to have detailed knowledge of the financial audit regulations applicable to his firm. Strasberg, as the CFO and the person responsible for the internal audit team, would be required by Standard I(A) to understand and comply with the audit regulations. Scherzer can rely on Strasberg to understand what information is required by the regulations and give him advice on how to properly gather and disclose that information.
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