IV. DUTIES TO EMPLOYERS

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.

If you supervise large numbers of employees, you may not be able to evaluate the conduct of each employee. In this case, you may delegate supervisory duties; however, such delegation does not replace supervisory responsibilities.

A supervisory member should rely on reasonable procedures to detect and prevent violations. The presence of a compliance policy manual and/or compliance department, however, does not remove his or her supervisory responsibilities.

Procedures for compliance

A supervisor complies with Standard IV (C) by identifying situations in which legal violations or violation of the Code and Standards are likely to occur, and establishing and enforcing compliance procedures to prevent such violations.

If a firm does not have a compliance system, or the system is not adequate, members or candidates should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow them to adequately exercise such responsibility.

Adequate compliance procedures should:

• Be drafted so that the procedures are easy to understand.
• Designate a compliance officer and clearly define the officer's authority and responsibility.
• Outline the scope of the procedures.
• Outline permissible conduct.
• Delineate procedures for reporting violations and sanctions.

Once a compliance program is in place, a supervisor should:

• Disseminate the contents of the program to appropriate personnel.
• Periodically update procedures to ensure that the measures are adequate under the law.
• Continually educate personnel regarding the compliance procedures.
• Issue periodic reminders of the procedures to appropriate personnel.
• Incorporate a professional conduct evaluation as part of the employee's performance reviews.
• Review the actions of employees to ensure compliance and identify violators.
• Take the necessary steps to enforce procedures once a violation has occurred.

Once a violation is discovered, a supervisor should take the following actions:

• Respond promptly.
• Conduct a thorough investigation of the activities to determine the scope of the wrong-doing.
• Increase supervision or place appropriate limitations on the wrongdoer pending the outcome of the investigation.

If a supervisory member was unable to detect violations, he or she may not violate the standard if he or she takes steps to institute an effective compliance program AND adopts reasonable procedures to prevent and identify violations.

Example 1

A supervisor in an investment management firm concludes that since all five equity analysts working for her are CFA charterholders, she can trust them to refrain from violations of laws, regulations, and the Code and Standards. While she can trust them to refrain from such violations, this does not constitute reasonable supervision.

Example 2

You are offered a promotion to supervise all investment managers involved in discretionary trading. You are told that there have been instances of improper trading in some accounts and that at least one manager is likely performing additional investment services for several of his clients. However, the operation is highly profitable, so senior management has no immediate concern regarding these issues. You are responsible for prevention of violations of the Code and Standards. If there are known violations and little or no control over the investment process, you should decline the supervisory position until reasonable procedures can be established.

Example 3

A supervisor returns from a two-week vacation to find that one of his brokers has been making personal trades in advance of the release of analysts' reports to clients. If there are established reporting processes to monitor employee trading and a reasonable effort is made to evaluate the appropriateness of trades, then the supervisor has not violated this standard. However, if there is no reasonable monitoring process, the supervisor has violated this standard.

Example 4

A supervisor obtains a memo from an employee stating that all the portfolio managers should purchase a certain stock. He doesn't check the sources of the memo or anything else, disseminates the memo to all his portfolio managers and then leaves town. The price of the stock declines sharply. The supervisor is in contravention of this standard, since he was negligent and didn't check the memo prior to disseminating it.

Example 5

A supervisor/vice president of a large investment company changes her opinion on a specific stock from buy to sell. Prior to publishing the change of opinion, she informs all her colleagues (as is normal practice). Several of the employees sell the stock prior to the dissemination of the report to the public. The supervisor was negligent in the performance of her duties, as she should have ensured that there were procedures in place to ensure that no trading took place until the information was disseminated to the general public.