Level 1 CFA® Exam Ethics, Standard I (A)
We start with the knowledge of the law. It is important for you to know what legal provisions apply to your profession and how they may affect your professional activities.
The Code and Standards do not require you to become a law expert but it necessitates that you become aware of the legal reality you may find yourself in while working in finance. It is particularly important when you are involved in cross-border trading. You should become familiar with all relevant laws and regulations that may apply to the situation both in your own country and in the country you are trading with. You should understand them and follow those that are directly related to your work.
Here comes the most crucial bit.
Some countries may lack any regulations concerning – for example – the area of trading that you deal with. Some other countries may have lax trade regulations. What does it mean for you? What regulations should you follow? Are you allowed to act according to your intuition when no regulations apply?
The Rule of the Stricter Law
The answer is: you must always abide by some regulations and what is more – always by those that are the strictest!
So, if there are no relevant laws in the country you trade with or the law applicable in this country is less strict than, say, the law of your own country, you will have to follow the stricter law (in this case, the law of your home country).
Are the CFA Institute Code & Standards the Strictest?
Now, what happens if your home country's regulations are not as strict as the principles included in the Code and Standards?
It means that the requirements of the Code and Standards are stricter and that they should be used instead. Remember that CFA members and candidates are always required to follow the most strict regulations of all.
- If the source of the most strict regulations is the Code and Standards – you must follow the Code and Standards.
- If some laws and regulations applicable in your own country or some country you trade with are more strict than the Code and Standards – you are obliged to abide by the applicable law, whichever is stricter.
CFA candidates are required to follow the most strict regulations. In the absence of any regulations, always follow the Code and Standards.
Which of the following is most likely correct?
- a. Performing a legal activity may result in the violation of the Code and Standards.
- b. The Code and Standards are always the source of the most strict rules and regulations.
- c. Activities that are considered lawful are always in compliance with the Code and Standards.
Answer a is correct.
The fact that an activity is lawful and allowed under certain jurisdiction does not mean it is in compliance with the Code and Standards because some countries have less strict regulations than the rules included in the Code and Standards. Thus, performing a legal activity may sometimes lead to a breach of the Code and Standards.
It is not true, however, that the Code and Standards are always the source of the most strict rules and regulations. Some countries may have laws more strict than the provisions of the Code and Standards. In such a case, those stricter laws should be obeyed.
There are a few things that come as a result of what we have just mentioned:
- CFA members and candidates must not take part in any actions considered to be wrong by the Code and Standards even if under some jurisdiction they are thought to be legal. So, if you make a professional decision that is in accordance with the law of your home country or with the law of the country where you conduct your transactions but it is considered a violation under the Code and Standards, you must give up your decision, even if it is otherwise lawful. This is because in this case the Code and Standards set the most strict principles and you must abide by the most strict rules. If you carry out your decision, you’ll find yourself in violation of the Code and Standards.
CFA Institute sets rigorous and ambitious rules to follow.
The three points we’ve just mentioned are applied when participating or assisting in an unethical or illegal activity that takes place knowingly, i.e. when you know or can be expected to know that the activity is in breach of the Code and Standards or the applicable law.
So, you must stay informed and follow any changes and updates in the regulations, especially at the time when such changes are known or expected to take place. Also, when in doubt about what is considered a violation and what is not, you should seek guidance. Firms usually have their compliance officers and departments which you should turn to for advice.
What Does It Mean that You Must Abide by the Code and Standards?
It means that as a CFA candidate, or later as a CFA charterholder and/or member, you have to know and follow the Code of Ethics and the Standards of Professional Conduct. But it also means that any other rules and principles formulated by CFA Institute, such as the CFA Institute Articles of Incorporation or Bylaws, must be obeyed.
How to Stay in Compliance and Limit the Possibility of Violation?
As a CFA candidate, or later as a CFA charterholder and/or member, you should stay informed and keep track of any changes in the law that governs your professional activities. Also, you should always refer to written acts and statutes containing current laws and regulations or seek advice whenever you have any doubts.
Moreover, the creation and regular reassessment of your own compliance procedures can be helpful.
When a company adopts the Code and Standards, it should also regularly review and distribute its compliance procedures to employees. And if the company does not adopt the Code and Standards, it should devise its own code of ethics and revise it on a regular basis. The company should also have well-thought-out procedures for reporting violations. It is also a good idea that companies provide information on all relevant legal issues or organize training for their employees when necessary.
- Become aware of the legal reality you may find yourself in while working in finance.
- Always abide by the regulations that are the strictest!
- The source of the strictest regulations may be different depending on a situation: it may be your home country’s law, a foreign country’s law, or the CFA Institute Code and Standards.
- Stay informed and follow any changes and updates in the regulations.
- Always refer to written acts and statutes containing current laws and regulations.
- Best have your own compliance procedures and always follow the employer’s compliance procedures.
CFA Exam: Knowledge of the Law
- THE HIGHEST REQUIREMENTS: It is the main compliance challenge under Standard I (A) and it cannot be stressed enough – you need to follow the most strict regulations applicable to a given situation!
- EVOLVING LAW: The law is changing all the time. There are new areas it needs to account for. It is your responsibility to stay informed and check for relevant updates of both your country’s law and applicable regional regulations.
- SOCIAL MEDIA: It is an example of a new dynamically changing area that can have different local regulations. Always check for the local requirements and follow the regulatory trends that affect your professional responsibilities (not only those concerning social media).
- FAULTY GUIDANCE: When you lack knowledge, you can always seek the advice of legal counsel or check with some reliable sources. Be careful to whom you turn for advice. If you feel the advice is inaccurate or makes you compromise yourself, seek an independent legal opinion.
- CULTURAL or RELIGIOUS CHALLENGES: The global scope of the financial industry demands that you are aware of the requirements dictated by different governmental laws as well as cultural differences or religious tenets. Sometimes you may need to be proactive in identifying and preventing potential problems resulting from cultural or religious differences while serving your client.
- DISSOCIATING FROM VIOLATION: A violation may have different forms, from wrongdoing through misinterpretation to omission of action. When you notice a violation, you must dissociate from it, document the violation, and report it.
- REPORTING: You should report not only violations but also any potential unethical actions. Make sure to communicate your concerns clearly.