Standard IV(C) Responsibilities of Supervisors
Updated April 2024
CFA Institute
The Standard
Members and candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.
Guidance
Standard IV(C) states that members and candidates must promote actions by all employees under their supervision and authority to comply with applicable laws, rules, regulations, and firm policies and the Code and Standards.
Any investment professional who has employees subject to her or his control or influence—whether or not the employees are CFA Institute members, CFA® Charterholders, or candidates in the CFA® Program—exercises supervisory responsibility.
The conduct that constitutes reasonable supervision in a particular case depends on the number of employees supervised and the work performed by those employees. Members and candidates with oversight responsibilities for large numbers of employees may not be able to personally evaluate the conduct of these employees on a continuing basis. These members and candidates may delegate supervisory duties to subordinates who directly oversee the other employees. A member’s or candidate’s responsibilities under Standard IV(C) include instructing those subordinates to whom supervision is delegated about methods to promote compliance, including preventing and detecting violations of laws, rules, regulations, firm policies, and the Code and Standards.
At a minimum, Standard IV(C) requires that members and candidates with supervisory responsibility make reasonable efforts to prevent and detect violations by ensuring the establishment of effective compliance systems. An effective compliance system goes beyond enacting a code of ethics; it also includes establishing policies and procedures to achieve compliance with the code and applicable law and reviewing employee actions to determine whether they are following the rules.
To be effective supervisors, members and candidates should implement education and training programs on a recurring or regular basis for employees under their supervision. Such programs will assist the employees with meeting their professional obligations to practice in an ethical manner within the applicable legal system. Further, establishing incentives—monetary or otherwise—for employees not only to meet business goals but also to reward ethical behavior can be an effective method for encouraging employees to comply with their legal and ethical obligations.
Often, especially in large organizations, members and candidates may have supervisory responsibility but not the authority to establish or modify firm-wide compliance policies and procedures or incentive structures. Such limitations should not prevent members and candidates from working with their own superiors and within the firm structure to develop and implement effective compliance tools, including but not limited to a code of ethics,
- compliance policies and procedures,
- education and training programs,
- an incentive structure that rewards ethical conduct, and
- adoption of firm-wide best practice standards (e.g., the GIPS® standards and the CFA Institute Asset Manager Code of Professional Conduct).
A member or candidate with supervisory responsibility must bring an inadequate compliance system to the attention of the firm’s senior managers and recommend corrective action. If the member or candidate clearly cannot discharge supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system, the member or candidate should decline to accept supervisory responsibility until the firm adopts reasonable procedures to allow adequate exercise of supervisory responsibility.
System for Supervision
Members and candidates with supervisory responsibility must understand what constitutes an adequate compliance system for their firms and make reasonable efforts to see that appropriate compliance procedures are established, documented, communicated to covered personnel, and followed. “Adequate” procedures are those designed to meet industry standards, regulatory requirements, the requirements of the Code and Standards, and the circumstances of the firm. Once compliance procedures are established, the supervisor must also make reasonable efforts to ensure that the procedures are monitored and enforced.
To be effective, compliance procedures must be in place prior to the occurrence of a legal or ethical violation. Although compliance procedures cannot be designed to anticipate every potential violation, they should be designed to anticipate the activities most likely to result in misconduct. Compliance programs must be appropriate for the size and nature of the organization. The member or candidate should review model compliance procedures or other industry resources to ensure that the firm’s procedures are adequate.
Once a supervisor learns that an employee has violated or may have violated the law or engaged in unethical behavior, the supervisor must promptly initiate an assessment to determine the extent of the wrongdoing. Relying on an employee’s statements about the extent of the violation or assurances that the wrongdoing will not reoccur is not enough. Reporting the misconduct to the appropriate compliance and management personnel and warning the employee to cease the activity are also not enough. Pending the outcome of the investigation, a supervisor must take steps to ensure that the violation will not be repeated, such as placing limits on the employee’s activities or increasing the monitoring of the employee’s activities.
Supervision Includes Detection
Members and candidates with supervisory responsibility must also make reasonable efforts to detect violations of laws, rules, regulations, and firm policies as well as unethical behavior. Supervisors exercise reasonable supervision by establishing and implementing written compliance procedures and ensuring that those procedures are followed through periodic review. If a member or candidate has adopted reasonable procedures and taken steps to institute an effective compliance program, then the member or candidate may not be in violation of Standard IV(C) if he or she does not detect violations that occur despite these efforts. The fact that violations do occur may indicate, however, that the compliance procedures are inadequate. In addition, in some cases, merely enacting such procedures may not be sufficient to fulfill the duty required by Standard IV(C). Members and candidates may be in violation of Standard IV(C) if they know or should know that the procedures designed to promote compliance, including detecting and preventing violations, are not being followed.
Compliance Practices
Codes of Ethics or Compliance Procedures
Members and candidates are encouraged to recommend that their employers adopt a code of ethics. Adoption of a code of ethics is critical to establishing a strong ethical foundation for investment advisory firms and their employees. Codes of ethics formally emphasize and reinforce the client loyalty responsibilities of investment firm personnel, protect investing clients by deterring misconduct, and protect the firm’s reputation for integrity.
There is a distinction, however, between codes of ethics and the specific policies and procedures needed to ensure compliance with the codes and with securities laws and regulations. Although both are important, codes of ethics should consist of fundamental, principle-based ethical concepts that apply to all the firm’s employees. In this way, firms can effectively convey to employees and clients the ethical ideals that investment professionals strive to achieve. Supervisors implement these concepts through detailed, firm-wide compliance policies and procedures. Compliance procedures help employees fulfill the ethical responsibilities enumerated in the code of ethics and facilitate compliance with these principles in the day-to-day operation of the firm.
Standalone codes of ethics should be written in plain language and should address general ethical concepts. They should be unencumbered by numerous detailed procedures or boilerplate legal terminology. Codes presented in this way are the most effective in conveying to employees that they are in positions of trust and must act with integrity at all times. Mingling compliance procedures in the firm’s code of ethics is contrary to the goal of reinforcing the ethical obligations of employees in a simple, straightforward manner. To ensure a culture of ethics and integrity rather than one that merely focuses on following the rules, the principles in the code of ethics must be stated in a way that is accessible and easily understandable.
Members and candidates should encourage their employers to provide their codes of ethics to clients. A simple, straightforward code of ethics, unencumbered by compliance procedures, will be effective in conveying that the firm is committed to conducting business in an ethical manner and in the best interests of the clients.
Adequate Compliance Procedures
A supervisor complies with Standard IV(C) by identifying situations in which legal or ethical violations are likely to occur and by establishing and enforcing compliance procedures to prevent such violations. Adequate compliance procedures should,
- be contained in a clearly written and accessible resource that is tailored to the firm’s operations,
- be drafted so that the procedures are easy to understand,
- designate a compliance officer whose authority and responsibility are clearly defined and who has the necessary resources and authority to implement the firm’s compliance procedures and investigate potential legal and ethical violations,
- describe the hierarchy of supervision and assign duties among supervisors,
- implement a system of checks and balances,
- describe the scope of the procedures,
- include procedures to document the monitoring and testing of compliance procedures,
- detail permissible conduct, and
- 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,
- seek to periodically update the program to ensure that the compliance measures are relevant, effective, and legally adequate,
- continually educate personnel regarding the compliance procedures,
- issue periodic compliance reminders to appropriate personnel,
- incorporate a professional conduct evaluation as part of an employee’s performance review,
- monitor and review the actions of employees to ensure compliance and identify violators; and
- take the necessary steps to enforce the procedures once a violation has occurred.
Once a violation is discovered, a supervisor should,
- respond promptly,
- ensure a thorough investigation of the activities is conducted to determine the scope of the wrongdoing,
- increase supervision or place appropriate limitations on the alleged offender pending the outcome of the investigation, and
- review procedures for potential changes necessary to prevent future violations from occurring.
Implementation of Compliance Education and Training
Regular ethics and compliance training, in conjunction with adoption of a code of ethics, is critical to employers seeking to establish a strong culture of integrity and to provide an environment in which employees routinely engage in ethical conduct and comply with the law. Training and education assist individuals in both recognizing areas that are prone to ethical and legal pitfalls and identifying those circumstances and influences that can impair ethical judgment.
By implementing education programs, supervisors can train their subordinates to put into practice what the firm’s code of ethics requires. Education helps employees make the link between legal and ethical conduct and the long-term success of the business; a strong culture of compliance signals to clients and potential clients that the firm has embraced ethical conduct as fundamental to the firm’s mission to serve its clients.
Establish an Appropriate Incentive Structure
Even if individuals want to make the right choices and follow an ethical course of conduct and are aware of the obstacles that impair ethical conduct, they can still be influenced to act improperly by a corporate culture that embraces a “succeed at all costs” mentality, stresses results regardless of the methods used to achieve those results, and does not reward ethical behavior. Supervisors can reinforce an individual’s natural desire to act ethically by building a culture of integrity in the workplace.
Supervisors and firms must look closely at their incentive structure to determine whether the structure encourages profits and returns at the expense of ethically appropriate conduct. Problematic reward structures may not take into account how desired outcomes are achieved and encourage dysfunctional or counterproductive behavior. Employees will work to achieve a culture of integrity when compensation and incentives are tied to how outcomes are achieved rather than how much revenue is generated for the firm.
Application of the Standard
Want to learn more about Codes and Standards?
Explore the CFA Institute's Code of Ethics and Professional Conduct. Access essential guidance to maintain the highest standards in the financial industry.